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Private Equity

History, Governance, and Operations (Wiley Finance Series)

By Harry Cendrowski, Louis W. Petro, James P. Martin

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Format: Hardcover, 357 pages, 2nd Edition
Other Information: Illustrated
Published In: United States, 01 May 2012
An authoritative guide to understanding the world of private equity (PE) investing, governance structures, and operational assessments of PE portfolio companies An essential text for any business/finance professional's library, Private Equity: History, Governance, and Operations, Second Edition begins by presenting historical information regarding the asset class. This information includes historical fundraising and investment levels, returns, correlation of returns to public market indices, and harvest trends. The text subsequently analyzes PE fund and portfolio company governance structures. It also presents ways to improve existing governance structures of these entities. A specific focus on portfolio company operations, including due diligence assessments, concludes the text. * Seamlessly blends historical information with practical guidance based on risk management and fundamental accounting techniques * Assists the book's professional audience in maximizing returns of their PE investments * Highly conducive to advanced, graduate-level classroom use * Purchase of the text includes access to a website of teaching materials for instructional use Learn more about PE history, governance, and operations with the authoritative guidance found in Private Equity: History, Governance, and Operations, Second Edition.

Table of Contents

Preface xvii MODULE I The Private Equity Model and Historical Information CHAPTER 1 Introduction to Private Equity 3 Introduction 3 What Is Private Equity? 4 General Terms and Brief Overview 5 The Limited Partner Agreement and General Partner Incentives 12 Private Equity Firm Structure and Selected Regulations 15 Types of Private Equity Investment 20 The Private Equity Fundraising Process 22 Recent Fundraising Trends 25 General Partner Investment Restrictions 26 Conclusion 28 Notes 28 CHAPTER 2 Overview of Historical Trends 29 Introduction 29 A Brief History of Private Equity 29 Private Equity at the Turn of the Century 33 Venture Capital Investment and Returns by Fund Stage 39 Venture Capital and Buyout Returns by Fund Size 43 Secondary Funds 45 Conclusion 48 Notes 48 CHAPTER 3 Trends in Private Equity 51 Introduction 51 A Changing Tide 51 Overall Industry and Fundraising Trends 54 Selected Regulatory Changes and Proposals 60 Rise of Strategic Buyers 64 Conclusion 66 Notes 66 CHAPTER 4 Harvesting Private Equity Investments Through Initial Public Offering 69 Initial Public Offerings 69 Basics 69 Initial Steps in the ??Going Public?? Process 72 Role of the Securities and Exchange Commission and State Policing Bodies 75 Post-IPO Underwriter Responsibilities 77 Registration Documents 78 Historical Trends 79 Summary 83 Notes 83 CHAPTER 5 Legal Considerations in Initial Public Offerings 85 Introduction 85 Initial Public Offering 86 Introduction 86 Potential Advantages 87 Potential Disadvantages 89 Advance Planning Opportunities 91 Selection of Advisors 91 Securities Counsel 92 Accountants 92 Underwriters 93 Corporate Housekeeping Matters 93 Antitakeover Provisions 93 Management 94 The Initial Public Offering Process 94 Principal Parties 94 Principal Documents 96 Selling Security Holder Documents 98 The Registration Process 100 Possible Liabilities Faced by a Company and Its Directors and Officers 102 Liabilities under Federal Securities Laws 102 The Sarbanes-Oxley Act and Dodd-Frank Act 105 Public Company Filing Obligations 107 Initial Public Offering Alternative: Reverse Mergers 107 Advantages 107 Disadvantages 108 Conclusion 109 CHAPTER 6 Harvesting Investments Through Mergers and Acquisitions 111 Introduction 111 M&A Basics 111 Types of Takeovers 112 Reverse Takeovers 113 The Takeover Process and Financial Advisor Selection 114 Analyzing Potential Buyers 115 The Sale Process 116 The Bidding Process 118 Reaching an Agreement 119 Historical M&A Trends 120 Conclusion 122 CHAPTER 7 Legal Considerations in Sale Transactions 123 Introduction 123 Sale Transactions 124 Prior to the Sale Transaction 124 Use of an Investment Banker 124 Marketing Process 125 Due Diligence 125 Negotiations Phase 125 Key Deal Issues 126 Valuation and Pricing Issues 126 Special Issues in Sales of Private Equity Fund?Owned Businesses 132 Sale and Acquisition Structure 134 Merger 134 Asset Purchase 135 Stock Purchase 135 Employee Incentive Issues 135 Cash Retention Bonus 135 Stock Bonuses 136 Recapitalizations 137 The Sale Transaction Process 137 Letter of Intent 137 Disclosure of Acquisitions 138 Time and Responsibility Schedule 138 Definitive Agreements 139 Necessary Consents 140 Conclusion 142 CHAPTER 8 Intellectual Property and Private Equity 143 Introduction 143 Intellectual Property Rights and Remedies 143 Patents 144 Trademarks 146 Copyrights 147 Trade Secrets 148 Pre-Acquisition Due Diligence 149 Established Barriers to Entry?Evaluating Investment Value 149 Freedom to Practice?Assessing Risk of Proposed Acquisition 151 Creating Intellectual Property Value During Management 152 Leveraging and Monetizing Patent Rights 153 Bolstering Technological Advantages 153 Boosting Brand Development Efforts 154 Preserving Knowledge-Based Resources of the Workforce 155 Positioning the Exit?Reverse Due Diligence 156 Minimizing Exposure of Representations and Warranties 158 Notes 159 MODULE II Governance Structures in Private Equity CHAPTER 9 The Private Equity Governance Model 163 Introduction 163 A New Model for Corporate Governance 163 An Analogy to Physics 167 Corporate Governance and the Management of Crisis 168 Public Corporations and the Private Equity Model 171 The Magic of the Private Equity Governance Model 173 Conclusion 175 Notes 176 CHAPTER 10 Value of Internal Control 177 Introduction 177 Introduction to COSO and Internal Control 178 COSO Background 178 Internal Control Defined 178 Components of Internal Control 179 Control Environment 179 Risk Assessment 182 Enterprise Risk Management 183 Control Activities 184 Information and Communication 186 Monitoring 186 Limitations of Internal Control 188 Control Objectives and Control Components 189 Effectiveness of Internal Control 190 Internal Control and the Private Equity Firm 191 Value of Internal Control for Private Equity Fund Operations 191 Value and the Control Environment 193 Value and Risk 194 Value and Control Activities 194 Value and Information and Communication 195 Value and Monitoring 195 Value of Internal Control for Target Companies 195 Operational Value 196 Financial Reporting Value 197 Compliance Value 197 Conclusion 198 Notes 198 CHAPTER 11 Internal Control Evaluation 201 Introduction 201 PCAOB Auditing Standard No. 5 203 Phase 1: Planning the Audit 204 Risk Assessment 206 Scaling the Audit 206 Fraud Risk 206 Using the Work of Others 207 Materiality 207 Phase 2: Using a Top-Down Approach 208 Identifying Entry-Level Controls 208 Control Environment 209 Period-End Financial Reporting Process 209 Identifying Significant Accounts and Disclosures and Their Related Assertions 210 Understanding Likely Sources of Misstatement 211 Selecting Controls to Test 211 Phase 3: Testing Controls 211 Testing Design Effectiveness 212 Testing Operating Effectiveness 212 Relationship of Risk to the Evidence to Be Obtained 212 Special Considerations for Subsequent Yearly Audits 213 Phase 4: Evaluating Identified Deficiencies 213 Phase 5: Wrapping Up 215 Forming an Opinion 215 Obtaining Written Representations 215 Communicating Certain Matters 216 Phase 6: Reporting on Internal Controls 217 Conclusion 218 Notes 218 CHAPTER 12 Financial Statement Fraud and the Investment Decision 219 Introduction 219 Money Laundering 219 Categories of Fraud 221 What Is Fraud? 222 The Required Elements of Fraud 223 Financial Statement Attestation 225 Tax Return Preparation 225 Compilation 226 Review 226 Audit 226 Recommendations 227 Do Not Rely Solely on Financial Statements 227 Pay Attention to Details 228 Follow Up on Unexpected or Interesting Items 229 Maintain Professional Skepticism 229 Explanations Should Be Rational, Reasonable, and Verifiable 230 What Do the Financial Statements Say about the Entity?s Ability to Meet Its Objectives? 230 Fraud and Due Diligence Procedures 231 Background Investigation of Key Employees 231 Testing of Journal Transactions 232 Check File Metadata 232 Conclusion 233 Notes 234 CHAPTER 13 Professional Standards 235 Introduction 235 Federal Trade Commission 235 Federal Antitrust Legislation 235 Sherman Antitrust Act (1890) 236 Clayton Antitrust Act (1914) 236 Federal Trade Commission Act (1914) 236 Robinson-Patman Act (1936) 237 Celler-Kefauver Antimerger Act (1950) 237 Hart-Scott-Rodino Antitrust Improvement Act (1976) 237 Federal Consumer Protection Legislation 238 Securities and Exchange Commission 239 Securities Act (1933) 239 Securities Exchange Act (1934) 240 Public Utility Holding Company Act (1935) 241 Trust Indenture Act (1939) 241 Investment Company Act (1940) 242 Investment Advisers Act (1940) 242 Foreign Corrupt Practices Act (1977) 243 Sarbanes-Oxley Act (2002) 244 Public Company Accounting Oversight Board 244 Auditor Independence 245 Corporate Governance 246 CEO/CFO Certifications 247 Enhanced Financial Disclosure 247 Civil and Criminal Penalties 247 ??Private?? Equity Going Public 248 Introduction to Public Standards 248 Public Company Accounting Oversight Board Standards 249 PCAOB Auditing Standard No. 1 249 PCAOB Auditing Standard No. 2 249 PCAOB Auditing Standard No. 3 250 PCAOB Auditing Standard No. 4 250 PCAOB Auditing Standard No. 5 250 The Standard Is Less Prescriptive 251 Scalable Audits 251 Audit Focus 251 Using the Work of Others 252 PCAOB Auditing Standard No. 6 252 PCAOB Auditing Standard No. 7 252 PCAOB Auditing Standard No. 8 252 PCAOB Auditing Standard No. 9 253 PCAOB Auditing Standard No. 10 253 PCAOB Auditing Standard No. 11 253 PCAOB Auditing Standard No. 12 253 PCAOB Auditing Standard No. 13 254 PCAOB Auditing Standard No. 14 254 PCAOB Auditing Standard No. 15 255 American Institute of Certified Public Accountants Auditing Standards 255 SAS 99, ??Consideration of Fraud in a Financial Statement Audit?? 256 SAS 1 Amendments 257 SAS 85 Amendments 257 SAS 82 Replacements 257 Descriptions and Characteristics of Fraud 258 Professional Skepticism 258 Engagement Team Discussions 258 Fraud Risks 259 Identifying Risks 259 Assessing Risks 259 Responding to the Risk Assessment 260 Evaluating Audit Evidence 261 Auditor Communication 263 Audit Documentation 263 SAS 104, ??Amendment to Statement on Auditing Standards No.1, ?Codification of Auditing Standards And Procedures (??Due Professional Care in the Performance of Work??)? ?? 264 SAS 105, ??Amendment to Statement on Auditing Standards No. 95, Generally Accepted Auditing Standards?? 265 SAS 106, ??Audit Evidence?? 265 SAS 107, ??Audit Risk and Materiality in Conducting the Audit?? 265 SAS 108, ??Planning and Supervision?? 266 SAS 109, ??Understanding the Entity and Its Environment and the Risks of Material Misstatement?? 266 SAS 110, ??Performing Audit Procedures in Response to Assessed Risks and Evaluation of the Audit Evidence Obtained?? 267 SAS 111, ??Amendment to Statement on Auditing Standards No. 39, ?Audit Sampling? ?? 267 SAS 112, ??Communicating Internal Control Related Matters Identified in an Audit?? 267 SAS 113, ??Omnibus Statement on Auditing Standards?? 268 SAS 114, ??The Auditor?s Communication With Those Charged With Governance?? 269 SAS 116, ??Interim Financial Information?? 270 American Institute of Certified Public Accountants Accounting and Review Standards 270 SSARS 10 271 SSARS 12 271 Institute of Internal Auditors Standards 272 Information Systems Audit and Control Association 272 Conclusion 273 Notes 273 MODULE III Understanding Operations CHAPTER 14 Contemporary Business and Competitive Intelligence 277 Introduction 277 Contemporary Business Intelligence 278 Sources of Information 278 Public Records Searches 278 News Archives 279 Legal Proceedings 279 Patent Awards and Applications 280 Social Networking 280 Employees 280 Competitive Intelligence and the External Environment 281 Normalizing Performance 282 Cost of Capital and the Option to Invest 285 Developing Unique Intelligence 287 An Economic View of Quality 289 Developing Relationships and Navigating Crises 290 Application to Private Equity 291 Investment Decision 291 Strategic Management of Portfolio Companies 291 Exit Strategy 292 Conclusion 292 Notes 292 CHAPTER 15 Organizations as Humans 293 Introduction 293 Purpose of the Organization 294 Genesis 295 Development and Specialization 296 Parts of theWhole and Maturation 297 Environmental Adaptation 299 Environmental Influence and Interaction 302 Maturity Creates ??TheMachine?? 303 Death of the Organization and Rebirth 304 Strengths and Weaknesses of the Organizations as Humans Metaphor 305 Conclusion 307 Notes 307 CHAPTER 16 Beginning the Lean Transformation 309 Introduction 309 The Origins of Lean Operations: Lean Manufacturing 310 Potential Pitfalls of Lean 311 Organizational Development 312 Discipline Building 315 What Private Equity Means for Lean 317 Conclusion 318 Note 318 CHAPTER 17 Performing Manufacturing Due Diligence Assessments 319 Introduction 319 Performing the Assessment 319 Employee Satisfaction 320 Customer Satisfaction and Perceived Quality 322 Corporate Vision and Mission 323 Equipment and Facility Maintenance 324 Visual Management 326 Inventory Management and Product Flow 327 Operational Data and Cost of Sales 328 Conclusion 333 Notes 333 About the Authors 335 Glossary 339 Index 345

About the Author

Harry Cendrowski is a 30-year veteran consultant to and investor in private equity and venture capital funds. He is cofounder and Managing Director of Cendrowski Corporate Advisors, a midwest financial and operations consulting firm based in Chicago, Illinois, and Bloomfield Hills, Michigan. Louis W. Petro has contributed to Wiley business publications and has written both books and journal articles. He is a professor at the University of Windsor and a CPA. James P. Martin is Managing Director of Cendrowski Corporate Advisors. He is a seasoned enterprise risk management professional who has performed engagements for private equity funds and their portfolio companies as well as publicly traded organizations. Adam A. Wadecki is Manager of Operations for Cendrowski Corporate Advisors and a lecturer at the University of Michigan, Ann Arbor.

EAN: 9781118138502
ISBN: 1118138503
Publisher: John Wiley & Sons
Dimensions: 23.65 x 16.33 x 3.07 centimeters (0.59 kg)
Age Range: 15+ years
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