PE types
1) VC
2) buyouts
3) Mezzanine debt
4) distressed debt
5) PIPEs
VC
relates to capital invested with entrepreneurs to fund their young and potentially fast-growing companies.
Buyout funds or buyout transactions or public-to-private transaction
are related to capital provided in the mix of debt and equity to acquire shares in an established business or one of its business units. In most cases buyout transactions involve the use of leverage, which leads one to refer to them as leveraged buyouts or LBOs.
Mezzanine debt
derives its name from its position in the capital structure of a firm: between the
ceilings of senior secured debt and the floor of equity.
Secondary market
facilitates trading among investors of previously existing securities.
Fund of funds
is a hedge fund or private equity fund with underlying investments that are predominantly investments in other hedge funds or private equity funds.
Evergreen funds
are unlisted open-end funds which allow investors to subscribe to or redeem from these funds on a regular basis.
Partnership agreement
is a formal written contract creating a partnership.
Private placement memorandum (PPM)
is used interchangeably with Offering Memorandum and seeks to accomplish four key functions such as limited partner education, risk disclosure, risk assignment, assignment of decision-making authority.
Distressed debt
is the outstanding debt of troubled companies, and is, therefore, subject to substantial risk.
PIPEs
private investment in public companies
PE structure
- The private equity fund manager (who’s the general partner), who generally manages pooled money in the private equity fund on behalf of the investors in the fund, although there has been a recent growth in managed accounts and direct investing.
- The private equity fund – a pooled investment fund that gains investments from limited partners, as well as the senior members of the private equity fund management company.
- The portfolio company, including both its shareholders and its management; and in the case of a leveraged buy-out, the bank proposing to lend money.
- Outside advisors, who are hired by the general partner to help with monitoring and management of the portfolio companies.
PE manager role
- Raise funds from investors. These funds are used to make investments, principally in businesses, which are, or will become, private companies.
- Source investment opportunities and make investments.
- Actively manage investments.
- Realizing returns, which come from income and dividends, as well as from exiting the investments through sales to strategic or financial buyers or to public markets in the form of an initial public offering (or IPO).
role of the buyout managers
Buyout managers look to leverage their expertise to turn around underperforming businesses, improve profitable businesses or to organize the company’s balance sheet and its finances.
Venture capitalists often play an active role in
the company’s operations by either sitting on the board of directors or becoming involved in the day-to-day management.
dry powder refers
to the amount of committed capital that has yet to be called by the general partner.
life cycle pf PE fund
stage-1: Organizing and Fundraising (1-2 years)
stage-2: Identifying Potential Investments (1-4 years)
stage-3: Allocation of Capital (1-4 years)
stag-4: Management of Portfolio (2-7 years)
stage-5: exit or harvesting (4 year and more)
PE fund source of income
1) management fee = 1-2% of the committed capital/raised fund
2) transaction fees paid by the portfolio company
3) deal fee/carried interest/incentive fee = a share in the profits of the fund;
hurdle rate
pre-agreed rate of return (8% per annum) alculated on the amounts actually invested.v
clawback provision
When a fund may perform very well in the first few years, and then investments may be unprofitable towards the end. In such cases, LPs could recover some of the incentive fees that were paid in earlier years
PE risks
1) manager selection
2)
performance measures
IRR (Internal Rate of Return)
TVPI (Total Value to Paid-In Ratio/total return)
DPI (Distribution to Paid-In Ratio/realized return)
RVPI (Residual Value to Paid-In /unrealized return).
Paid-in-Capital
Paid-in-Capital = the capital contributed by LPs to the fund. Paid-in-capital is also known as “contributed capital” or “called capital” or sometimes “drawn capital.” Note that Paid-in-Capital is different than Committed Capital. Recall that an investment in a private equity fund occurs over time. An investor in the fund, known as a limited partner or LP, agrees (commits) to invest a certain amount in a fund, say $10 million, as and when the manager of the fund, known as a general partner or GP, needs the capital. In this case, the $10 million is the LP’s commitment. As the GP asks for a portion of this commitment (known as a “call”), the amount paid by the LP to the fund is known as Paid-in-Capital, or PIC (this is also known as “called capital”).
Distributions
= the value of the cash and stock that the fund has given back (distributed) to the LPs. Distributions are typically low early in a fund’s life, ramping up over time as investments are exited.
