PrivateEquityInvesting私募股权基金介绍.pptx

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1、1Private Equity InvestingMehmet I.BudakMehmet I.Budak2What is Private Equity?Investment strategy that involves the purchase of Investment strategy that involves the purchase of equity or equity linked securities in a companyequity or equity linked securities in a companyInvestment is made through a

2、negotiated processInvestment is made through a negotiated processBy sophisticated investors with financial and By sophisticated investors with financial and operating expertiseoperating expertiseThe goal is to acquire undervalued or“promising”The goal is to acquire undervalued or“promising”assets an

3、d realize profits in 3-5 years after the assets and realize profits in 3-5 years after the acquisitionacquisitionInformation asymmetry and inefficiencies are Information asymmetry and inefficiencies are important factorsimportant factors3Alternative Investments4Private Equity Investment StrategiesLe

4、veraged BuyoutsVenture Capital(early vs.late stage)Special Situations(i.e.distressed)MezzanineSecondary PurchasesFund of Funds5Leveraged BuyoutsEstablished firms with track records,stable Established firms with track records,stable cash flows and stable growth ratescash flows and stable growth rates

5、Annual revenues of$25-$500 millionAnnual revenues of$25-$500 millionTypically in basic retail,transportation and Typically in basic retail,transportation and manufacturing industriesmanufacturing industriesTypically have assets to borrow against and Typically have assets to borrow against and access

6、 to bank loansaccess to bank loansSeek private equity to effect a change in Seek private equity to effect a change in ownership,finance an expansion or ownership,finance an expansion or restructurerestructure6Venture Capital-Early Stage Firms with substantial risk of failure-business Firms with subs

7、tantial risk of failure-business models and marketing approach are yet to be provedmodels and marketing approach are yet to be provedSmall and illiquid investments with size of$500k-$2 Small and illiquid investments with size of$500k-$2 millionmillionThe smallest type is the entrepreneur who needs t

8、he The smallest type is the entrepreneur who needs the financing to conduct initial research and developmentfinancing to conduct initial research and developmentThe most mature type are those firms that are The most mature type are those firms that are starting to turn profits but need capital for e

9、xpansionstarting to turn profits but need capital for expansionAngel capital is an important source of fundingAngel capital is an important source of funding7Venture Capital-Late Stage Firms with more certain business modelsFirms with more certain business models Proven technology and marketProven t

10、echnology and market Profitable and need expansion capitalProfitable and need expansion capitalGeneral size of$2-$15 millionGeneral size of$2-$15 millionIPO or Sale expected/feasible in near termIPO or Sale expected/feasible in near termOriginal investors may achieve some liquidityOriginal investors

11、 may achieve some liquidityBecause the risk is generally lower and the Because the risk is generally lower and the liquidity higher,later-stage investments liquidity higher,later-stage investments require lower returns than early-stage require lower returns than early-stage investmentsinvestments8Le

12、veraged Buyouts vs.Venture CapitalBuyouts focus on mature companies with Buyouts focus on mature companies with stable or sustainable growth profilestable or sustainable growth profileBuyouts rely heavily on debt financing to Buyouts rely heavily on debt financing to finance most of the purchase pri

13、cefinance most of the purchase priceVenture Capital focus on high growth Venture Capital focus on high growth industries with riskier investment profile than industries with riskier investment profile than buyoutsbuyoutsVenture Capital relies heavily on equity Venture Capital relies heavily on equit

14、y financing and has higher return targets than financing and has higher return targets than buyoutsbuyouts9Special SituationsInvestment is supplied by specialized Investment is supplied by specialized Turnaround Funds(TF)for target firms that Turnaround Funds(TF)for target firms that have defaulted

15、on their outstanding loanshave defaulted on their outstanding loansTFs receive controlling interests,with former TFs receive controlling interests,with former owners making up the minority interestowners making up the minority interestTFs renegotiates terms with existing lenders,TFs renegotiates ter

16、ms with existing lenders,offering to restructure or pay off loans at a offering to restructure or pay off loans at a discountdiscountTFs also deliver expertise to find new markets TFs also deliver expertise to find new markets or partners for the firms products,cut costs,or partners for the firms pr

17、oducts,cut costs,change or improve the current managementchange or improve the current management10Fund of FundsInvesting directly in PE funds can be difficult Investing directly in PE funds can be difficult for individual investors and small institutionsfor individual investors and small institutio

18、nsRelatively high investment minimums may Relatively high investment minimums may disqualify some of the small investorsdisqualify some of the small investorsInformation on PE managers is difficult to Information on PE managers is difficult to locatelocateGaining access to top PE funds can be diffic

19、ult Gaining access to top PE funds can be difficult due to high investor demanddue to high investor demandFund of Funds co-mingles the investments of Fund of Funds co-mingles the investments of small investors into a single pool and then small investors into a single pool and then assembles a portfo

20、lio of PE fundsassembles a portfolio of PE funds11How are PE Funds Structured?Private limited partnershipsPrivate limited partnershipsIndividual managers are the General Partner(GP)Individual managers are the General Partner(GP)Providers of capital(pensions,insurance companies,Providers of capital(p

21、ensions,insurance companies,wealthy people)are Limited Partners(LPs)wealthy people)are Limited Partners(LPs)Partnerships have 10-year life with+1+1 extensionPartnerships have 10-year life with+1+1 extension4-6 year investment period4-6 year investment period1-2%annual management fee1-2%annual manage

22、ment feeProfits split 80-20,after reaching“hurdle”return level Profits split 80-20,after reaching“hurdle”return level for LPsfor LPsLPs need to fund within 2-3 weeks of“capital call”LPs need to fund within 2-3 weeks of“capital call”Penalties for failure to fund by LPsPenalties for failure to fund by

23、 LPsIRRs depend on when money is transferred by LPsIRRs depend on when money is transferred by LPs12General Partners Key ActivitiesSelecting investmentsSelecting investments Obtaining access to high quality deal flowObtaining access to high quality deal flow Sorting and evaluating large amount of So

24、rting and evaluating large amount of informationinformationStructuring investmentsStructuring investments Designing transactionsDesigning transactionsMonitoring investmentsMonitoring investments Providing strategic,operational and financial Providing strategic,operational and financial assistance to

25、 portfolio companiesassistance to portfolio companiesExiting investmentsExiting investments IPO,Sale or RecapitalizationIPO,Sale or Recapitalization13Private Equity Partnerships and Fundraising14Private Equity Market-InvestorsPublic and corporate pension funds,Public and corporate pension funds,endo

26、wments,foundations,wealthy families,endowments,foundations,wealthy families,insurance companies,foreign investors and insurance companies,foreign investors and othersothersInvestors expect to receive higher risk-Investors expect to receive higher risk-adjusted returns on private equity than other ad

27、justed returns on private equity than other investmentsinvestmentsPotential benefits of diversificationPotential benefits of diversificationAdvantage of economies of scope between Advantage of economies of scope between private equity investing and investors other private equity investing and invest

28、ors other activitiesactivities15Private Equity Market-Intermediaries 80%of PE investments flow through 80%of PE investments flow through specialized intermediaries,which are limited specialized intermediaries,which are limited partnershipspartnershipsIntermediaries provide expertise in selecting,Int

29、ermediaries provide expertise in selecting,structuring,and managing private equity structuring,and managing private equity investmentsinvestmentsIntermediaries not organized as LPs play a Intermediaries not organized as LPs play a less significant role today in the private equity less significant ro

30、le today in the private equity marketmarketSBICs owned by banks and VC subsidiaries of SBICs owned by banks and VC subsidiaries of non-financial corporations mostly invest their non-financial corporations mostly invest their corporate parents capitalcorporate parents capital16Private Equity Market-I

31、ssuersVary in size and their reasons for raising Vary in size and their reasons for raising capitalcapital Young firms that are developing innovative Young firms that are developing innovative technologiestechnologies Middle market companies that are stable,Middle market companies that are stable,pr

32、ofitable and need private equity to expand or profitable and need private equity to expand or restructurerestructureGoing private transactions for public Going private transactions for public companiescompaniesPIPE(Private Investment in Public Equity)PIPE(Private Investment in Public Equity)provides

33、 financing without registration costs/provides financing without registration costs/disclosures associated with public offeringsdisclosures associated with public offerings17How are PE Funds Structured?Limited Partners Investors with moneyLimited Partners Investors with money Insurance companies,pen

34、sion funds,banks,and Insurance companies,pension funds,banks,and high net worth individualshigh net worth individuals Investors commit a certain amount to the fundInvestors commit a certain amount to the fund They have no other active role in the fund and no They have no other active role in the fun

35、d and no liability beyond their commitmentsliability beyond their commitmentsOne General Partner Managers of moneyOne General Partner Managers of money Manages the investments via a management Manages the investments via a management companycompany Receives management fee(typically 2%)on Receives ma

36、nagement fee(typically 2%)on commitmentscommitments Receives“carried interest”in the profitsReceives“carried interest”in the profits18How are PE Funds Structured?Contractually fixed lifetime(10-12 years)Contractually fixed lifetime(10-12 years)Capital is invested during the first 4-6 yearsCapital is

37、 invested during the first 4-6 yearsThereafter,investments are managed and liquidatedThereafter,investments are managed and liquidatedDistributions are made to the limited partners in the Distributions are made to the limited partners in the forms of cash or securitiesforms of cash or securitiesGene

38、ral Partner typically raises a new fund when the General Partner typically raises a new fund when the investment phase for the existing fund has been investment phase for the existing fund has been completed(=80%)completed(=80%)Each fund partnership is legally separate and is Each fund partnership i

39、s legally separate and is managed independently of other fund partnerships managed independently of other fund partnerships(i.e KKR I vs.KKR II)(i.e KKR I vs.KKR II)19Partnership Terms-ExampleTarget Fund Size$1 billionMinimum Commitment$10 millionGross Target Return25%Management Fee2%Carried Interes

40、t80%-20%Commitment Period5 yearsFund Term10 years+1+120Relationship Between LPs and GPsLPs delegate significant responsibilities to GPsLPs delegate significant responsibilities to GPsResolution of potential conflict of interests lies Resolution of potential conflict of interests lies in the structur

41、e of the partnership agreementin the structure of the partnership agreementPartnerships have finite livesPartnerships have finite livesTo remain in business,GPs regularly raise new To remain in business,GPs regularly raise new funds-easier for reputable firms with good funds-easier for reputable fir

42、ms with good recordrecordGP compensation is closely linked to the fund GP compensation is closely linked to the fund returnsreturns21Partnership CovenantsThe objective is to limit excessive risk taking by GPsThe objective is to limit excessive risk taking by GPsCovenants usually set limits on the%of

43、 the Covenants usually set limits on the%of the partnerships capital that may be invested in a single partnerships capital that may be invested in a single firmfirmCovenants may preclude investments in publicly Covenants may preclude investments in publicly traded and foreign securities,derivatives

44、and other traded and foreign securities,derivatives and other private equity funds,etcprivate equity funds,etcCovenants usually require that cash from sale of Covenants usually require that cash from sale of portfolio assets be immediately distributed to LPsportfolio assets be immediately distribute

45、d to LPsLPs usually limit such deal fees or require that deal LPs usually limit such deal fees or require that deal fees be offset against management feesfees be offset against management feesReturn hurdle rates for LPsReturn hurdle rates for LPs22Evaluating General PartnersTrack record,relevancy of

46、 past experienceTrack record,relevancy of past experienceGeneration of adequate deal flowGeneration of adequate deal flowSound investment decision-making processesSound investment decision-making processesAbility to achieve successful exits/liquidityAbility to achieve successful exits/liquidityAdvan

47、tages vs.similarly focused fundsAdvantages vs.similarly focused fundsSufficiency of resourcesSufficiency of resourcesMeaningful commitment of timeMeaningful commitment of timeCohesiveness and sustainability of teamCohesiveness and sustainability of teamSuccession planningSuccession planning23Co-inve

48、stment By LPsCo-investments are direct investments in portfolio Co-investments are direct investments in portfolio companies by LPs alongside private equity companies by LPs alongside private equity partnershipspartnershipsUsually,LPs acquire the securities on the same terms Usually,LPs acquire the

49、securities on the same terms as the partnership but pay no management fee or as the partnership but pay no management fee or carried interestcarried interestCo-investment opportunities arise when GPs need Co-investment opportunities arise when GPs need additional equity financing to close a dealaddi

50、tional equity financing to close a dealSome institutional investors see co-investing as an Some institutional investors see co-investing as an opportunity to acquire expertise in private equity opportunity to acquire expertise in private equity investinginvestingFor GPs,LPs that stand ready to co-in