Private equity+ Flashcards
what is private equity? (standard definition)
It’s the investment in equity of unlisted firms to boost growth (from here the name private equity)
Usually in young firms, with good management and good economic prospects
what is PE? (alternative definition)
investment in equity, with active involvement of the investor and a defined exit way.
what instruments does PE actually entail?
common equity (and other similar instruments EG convertible preferred in VC)
Mezzanine capital
and even Debt, namely special situation/distress debt via debt to equity swap. the strategy is called Debt-to-own.
how can active involvement be exercised by PE investors?
-by acquiring a majority in equity (hands-on)
-minority investments (hands-off)
what are possible exit ways?
-IPO
-strategic trade sale
-financial trade sale
-Liquidation (write off)
what is replacement? which strategy does it involve?
-i buy a majority in the equity of an undervalued and underperforming public company. (money to shareholders, not the company itself)
-i de list it and restructure it
-i then release the company in the public markets reaping the benefits.
the strategy is called PIPE. replacement now represents the largest segment of the PE market.
what are segments within the PE business
VC
growth capital/ expansion
replacement and LBOs
distress debt/equity. restructuring.
market trends in the PE market
-first year in which PE did not experience growth in AUM signalling that the market might have reached stability and will be growing at a lower rate in the following years.
-in terms of funds closed and amounts raised the last years were disastrous following general market problems that impacted PE even more than the standard. this was mainly due to increasing rates (more costly buyouts and competitive bond market) and denominator effect.
-same for deal flow, as it became harder to raise funds the market became less liquid and deal flow sharply fell.
-finally trade sale exits, which had been concentrating in the hands of financial buyers due to cheap liquidity–> increasing premiums, started to shift back in the hands of strategic buyers as interest rates rose. Currently the premium trend is back to normal, with strategic buyers paying more than financial ones.
-finally, given similar trends in fundraising and investment flow, dry powder is maintaining a stable level.
what are the metrics i can look at to asses the health of the PE sector?
AUM
fundraising
Investment flow
dry powder (uninvested funds)
what are typical investment vehicles?
-LPs
-CEFs
how does a LP work?
a single vehicle that receives the large part of its funds from limited partners, on the other hand general partners provide about 2% of funds and manage the vehicle selecting and following investments.
what’s payment for LPs? what about GPs?
LPs receive the notional amount invested, hurdle rate and capital gain net of carried interest at the end of the life of the fund.
GPs are paid through management fees and carried interest as a % of capital gain at the end of the period.
how can Limited partnerships invest funds?
-direct investment
-co-investment
-invest in funds of funds
