Chapter 9

-Private

• investing in private companies or

• become private after investment

-Blackstone

-Carlyle

-KKR

-Family owned —> exchange listed

-PE bought Grohe & delisted

-Repayment to investors & sold to manufacturer

-Raise capital for taking equity stakes in companies

-leverage investments by putting certain amount of equity & borrowing rest

-Leverage is key to their returns

-Access to debt capital is essential

-Low interest rates are big help

-10 billion in size

-2 billion are paid in Fund

-8 billion are committed to be paid (agreed terms or when requiested)

-General Partner

-Limited Partners

Private Equity firm that sets up the fund

-Various institutional investors that invest in specific fund

• Pension funds

• Endowments

• Insurance companies

-Debt capital —> input of PE business

-Debt & interest payments are major costs for PE

-Expansionary monetary policy —> low interest rates —> big profits PE

-Investments used to be long-term

-Mid 2000s —> more short-term

-PE firms —> want to flip companies

-Diversify investments

-Rule of thumb: til 10% of fund capital in one deal

-PE funds 10-20% of deal

-Rest equity needs to be borrowed

-Economy weak: have to put up more equity

-Use of Leverage —> magnify their returns

-Capital Raising

-Good contacts with institutional investors —> give you equity capital

-Good contacts with banks —> loans for deals

-Central bank keeps low interest rates —> lower costs

-Deal Making

-Then flip it or sell it to buyer who pays more than what its worth

-Acquire target at price below value

-Extract value while owning

-Extract management fees

-Loading it up with debt

-Use debt to pay PE owners dividend

-Sell or flip

-PE —> look for established firms

-VC —> invest in companies with limited revenues

-Fixed (Management fees)

-Variable (Carried interest & Monitoring fees)

-Management fees —> % of capital invested

-Carried interest —> gains on transaction

-Monitoring fees —> charged for overseeing acquired company

-Sale to strategic or corporate buyer (Main Exit)

-Sale to another sponsor (PE)

-Sale via IPO

-Illustrate performance of PE investment

-Investment Period

• underperformance & value decreases —> due restructuring

-Haverst Period

• Company implements changes —> invesmtent pays off —> value increases

• Value increase —> surpass investment —> profit

-Average return similar to S&P 500

-Persistence of fund returns —> earn similar returns everytime

-Research on unexited investments of funds

-10 year age mark —> should have exited

-Cash flow not positive & value should be 0

-Underperformed by S&P 500

-Average Return: 12,5%

-Fees: 2% of total asset & 20% of profits

-Taxes

-Impact on Jobs

-Conflict of Interest

-PE firms buy, change, take money and sell company

-Tax on capital gains are lower than private income tax —> unfair

-Gains —> carried interest

-1 Year: Employee lvl same

-2&3 Year: Employee lvl drops

-PE firms make targets more efficient

-Skills of PE & IB are similar

-PE firms initiate deals & find targets

-PE doesn’t need advisory services like non PE buyers

-PE firms buy companies & sell them short after

-Selling:

• IPO (many gone wrong)

• Sale to another buyer (PE)

-Following buyout —> PE firms have target to borrow money

-Use money to pay PE Investors —> Dividend

-Average takeover premium paid significant lower from PE firms than from public buyers

-PE has bargaining behavior

-PE much more willingly to walk away when deal not liked

-Public companies are more liekly to stay for negotiations