Private Equity
-Private
investing in private companies or
become private after investment
Biggest PE firms
-Blackstone
-Carlyle
-KKR
Grohe
-Family owned —> exchange listed
-PE bought Grohe & delisted
-Repayment to investors & sold to manufacturer
PE Firms
-Raise capital for taking equity stakes in companies
-leverage investments by putting certain amount of equity & borrowing rest
Characteristics of PE
-Leverage is key to their returns
-Access to debt capital is essential
-Low interest rates are big help
Private Equity Fund
-10 billion in size
-2 billion are paid in Fund
-8 billion are committed to be paid (agreed terms or when requiested)
Structure of Private Equity Fund
-General Partner
-Limited Partners
General Partner
Private Equity firm that sets up the fund
Limited Partners
-Various institutional investors that invest in specific fund
Pension funds
Endowments
Insurance companies
Federal Reserve & PE
-Debt capital —> input of PE business
-Debt & interest payments are major costs for PE
-Expansionary monetary policy —> low interest rates —> big profits PE
Time Horizon of PE Deals
-Investments used to be long-term
-Mid 2000s —> more short-term
-PE firms —> want to flip companies
Diversification & PE funds
-Diversify investments
-Rule of thumb: til 10% of fund capital in one deal
Use of Leverage in PE Takeover
-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
Business Model PE
-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
Private Equity Business
-Deal Making
-Then flip it or sell it to buyer who pays more than what its worth
Deal Making
-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 vs VC
-PE —> look for established firms
-VC —> invest in companies with limited revenues
Compensation of PE GPs
-Fixed (Management fees)
-Variable (Carried interest & Monitoring fees)
Explanation of Fees
-Management fees —> % of capital invested
-Carried interest —> gains on transaction
-Monitoring fees —> charged for overseeing acquired company
PE Exit Strategy
-Sale to strategic or corporate buyer (Main Exit)
-Sale to another sponsor (PE)
-Sale via IPO
J-Curve
-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
Kaplar & Schoard on PE Funds
-Average return similar to S&P 500
-Persistence of fund returns —> earn similar returns everytime
Phalippou & Gottschalg on PE Returns
-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
PE Fees & Returns
-Average Return: 12,5%
-Fees: 2% of total asset & 20% of profits
Miscellanous PE Issues
-Taxes
-Impact on Jobs
-Conflict of Interest
PE & Taxes
-PE firms buy, change, take money and sell company
-Tax on capital gains are lower than private income tax —> unfair
-Gains —> carried interest
PE Takeovers —> Impact on Jobs
-1 Year: Employee lvl same
-2&3 Year: Employee lvl drops
-PE firms make targets more efficient
PE Firms & Investment Banking
-Skills of PE & IB are similar
-PE firms initiate deals & find targets
-PE doesn’t need advisory services like non PE buyers
Reverse LBOs & PE Firms
-PE firms buy companies & sell them short after
-Selling:
IPO (many gone wrong)
Sale to another buyer (PE)
Dividend Recapitalizations & PE Firms
-Following buyout —> PE firms have target to borrow money
-Use money to pay PE Investors —> Dividend
PE Buyers pay less for Targets
-Average takeover premium paid significant lower from PE firms than from public buyers
PE Dealmaking
-PE has bargaining behavior
-PE much more willingly to walk away when deal not liked
-Public companies are more liekly to stay for negotiations
Last changed10 months ago