PE Guest Lecture Flashcards
What is private equity?
Private equity is a global industry that invests in companies through negotiated transactions, resulting in the private ownership of businesses
- Provides long-term, committed capital, to help companies grow and succeed
- Can range from the financing of start-up entities, to infusing growth equity into an expanding company, to buying out mature public or private enterprises
- Often acquires a large or significant ownership stake in the company through a highly structured and negotiated transaction
- Involves taking an active role in monitoring and advising portfolio companies, seeking to create value and enhance returns by directly influencing a company’s strategy and performance
Three types of alternatives
Global real estate, global PE, global liquid alternatives
Largest PE firms
Advent, CG, KKR, Apollo, Cinven, N|B, Bain Capital, CVC, TPG, Blackstone, EQT, WarburgPincus
What is a typical PE fund structure
Limited partnerships as investors, invests in PE firm which is a general partner, PE fund is limited partnership
How does PE firm create value?
EBITDA growth (revenue or operational improvement) + leverage + multiple expansion
Different types of debt to equity
Bank debt, high yield / mezzanine debt, quasi equity, common equity
Key features of bank debt
- 4%-8% expected returns
- Low financing cost, lowest default risk
- Asset based or first lien cash flow based
- Restrictive maintenance covenants
- Upside: none
Key features of high yield /mezzanine debt
- 8%-14% expected returns
- Usually unsecured but can have 2nd lien
- Prepayable penalties (initial years)
- Limited flexibility to raise additional debt
- Upside: warrants
Key features of quasi equity
- 15%-20% expected returns
- Debt & equity features
- Downside protection (debt like) with upside
- Upside: conversion & preferred rights
