What are the various types of private equity investments?
- Buyouts
- Venture Capital
- Mezzanine Financing
- Private Investments in Public Equity (PIPEs)
- Fund of funds (FoF)
What is Private Equity?
A medium to long-term investments in non publicly traded equity. (book) -asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. (class)
What are the two categories of PE investment?
- funding investing - capital in funds
- direct investing - capital in portfolio companies
What is the usual organizational form of a PE fund?
limited partnerships - GPs fund managers, and LPs investors.
What are some advantages of a limited partnership?
pass-thru tax entity, a finite lifetime, investors loss is equal to their capital investment.
What are the four stages of a PE fund?
1-Organizaing & Funding 2-Investment 3-Management 4-Harvest
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What are evergreen funds?
Funds which are not limited life entites.
What are gatekeepers?
organizations that assist investors (LPs) in allocating their PE capital (i.e. Cambridge Associates)
Ususally compensated with a % of annual committed capital.
What are capital calls?
GP’s formal request to LPs for pledged capital. Draw down schedule varies based on funds LPA.
What are club deals?
Club deals aka syndication investments allow GPs from coopearting firms to:
- Cultivate Relationships
- Ensure a portfolio company has enough dry powder/reserve capital
- Diversify Risk
- Provide potenital exit opportunites for an initial investor
What are the three most common exit strategies?
1-Outright Sale
2-Initial Public Offering
3-Mergers
What is carried interest?
The profit particpation of the GPs, calculated after expenses often including a guaranteed normative return (preferred return).
What is IRR?
Internal rate of return - a function of the cash on cash return
What is the American waterall model?
Distribution of proceeds on a deal-by-deal basis:
- LPs receive return of commited Capital
- LPs receive a hurdle rate of committed capital
- return on capital profits allcoated to LPs and GPs
What is the European waterfall model?
Proceeds are distributed at the time of fund liquidation. “All contributions plus preferred return back first compensation model.”
What is an LPA?
limited partner agreement - legal document specifes legal terms such as lifteime of the firm, the split of profits, amangement fees, and expense reimbursements.
What is a follow on fund?
A fund that is raised subsequent to one currently run by a GP.
What is a clawback provision?
Found in the American waterfall model, a provision which protects the LPs from a GP which has had early success in harvests, and less success in late harvests.
What is a preferred return?
Annual return LPs are entiteld to receive on their invested capital before GPs can receive carried interest.
What do private equity transactions involve?
- provides liquidity to privately held companies not publicy traded
- providing liquidity to family owned companies
- taking publicly traded companies delisting
- venture vapital segment: provide capital for start-ups to reach critical mass (non traditional companies)
What is an FoF?
Partnership that invests capital in multiple PE funds, a go beteween fund from investor to larger PE funds. FoF managers may have access to PE funds not open to all.
What is a breakpoint?
Fund sizes in excess of which management fee rate drops.
How is carried interest taxed in the US?
capital gains @ 15%
instead of ordinary income @ 35%
