Table of Contents

About the Author xi

Acknowledgements xiii

Introduction xv

1 What is Private Equity? 1

What is Private Equity? 2

Fund investing versus direct investing 3

Co-investment 4

Terminology 6

Different types of Private Equity investment 7

Summary 13

2. What are Private Equity Funds, and How do They Work? 15

Capital: Allocated, Committed, Drawn Down and Invested 17

How do Private Equity Funds Work? 18

Structure 18

Cash flow 20

Investment 22

Fundraising 23

Private Equity Funds Distinguished from Other Fund Types 25

Hedge funds 25

Infrastructure 27

Private (Equity) Real Estate 28

A Note on International Issues 28

Summary 29

3. Private Equity Returns – The Basics 31

Understanding the J-curve and Compound Returns 31

Upper Quartile Figures 37

Median Returns 38

Average Returns 39

Pooled Returns 41

Using Vintage Year Returns for Benchmarking Purposes 41

Time-weighted Returns 42

Summary 43

4 Private Equity Returns – Multiples and Muddles 45

Multiples 45

Distributed over paid in (DPI) 47

Paid in to committed capital (PICC) 47

Residual value to paid in (RVPI) 47

Total value to paid in (TVPI) 48

Use of multiples in industry research 48

Muddles, Muggles and Markowitz 51

Returns 52

Risk 54

Liquidity 56

Summary 58

5 Buyout 59

Types of Buyout Transaction 59

Mbo 59

Mbi 60

Bimbo 60

Lbo 60

Take Private (P2P) 61

Roll-up 62

Secondary Buyouts 62

Other ‘Buyout’ Activity 62

PIPEs 63

How do Buyouts Work? 63

Characteristics of Buyout 67

Established businesses 67

Debt 69

Earnings 70

Size 71

Control 74

Barriers to entry 75

Summary 77

6 How to Analyse Buyouts 79

Earnings 80

Ebit 81

Ebitda 82

Earnings Growth 83

Multiple 84

Multiple increase (sometimes called multiple arbitrage) 85

Leverage 88

Recapitalisation 89

Timing 89

Modelling and Analysing Buyout Funds 91

Enterprise value 91

Summary 94

7 Buyout Returns 97

US versus European Buyout 97

Buyout skill bases 100

Imperfect markets 100

Earnings multiples 101

Earnings growth 104

Leverage 105

Contribution of different drivers 106

Fund size 107

Summary 112

8 Venture Capital 113

What is Venture Capital? 113

Backing New Applications, Not New Technology 114

Classification by Sector 115

It 116

Telecoms 118

Life Science 120

Classification by Stage 123

Seed stage 124

Early stage 127

Mid and late stages 128

Summary 128

9 How to Analyse Venture 129

The Fundamentals (1) – Money Multiples 129

The Fundamentals (2) – Valuation 131

Valuation as an element of stated returns 131

Differences in valuation approach between Europe and the US 132

Variability of Venture valuations 133

Pre-money and post-money valuations 135

Share classes 136

The Fundamentals (3) – Cost and Value 136

IRRs and multiples 138

Going in equity (GI%) 139

Percentage of the holding within the fund 139

The Impact of Home Runs 139

Summary 142

10 Venture Returns 145

US Outperformance versus Europe 145

Money multiples drive IRRs 145

Home runs and the golden circle 147

Market conditions 149

European Venture – Is it as Bad as it Seems? 151

Returns and Fund Size 154

Venture returns by stage 158

What of the Future? 159

Summary 161

11. Growth and Development Capital 163

The PLC and the BCG Growth Matrix 164

Development Capital 166

Target companies 166

Money in deals 166

Money out deals 167

Objectives 167

Growth Capital 168

Target companies 168

Objectives 169

Growth capital and late-stage Venture 170

Common Issues 171

Minority protection 171

Exit protection 173

The Future 174

Summary 175

12. Secondary Private Equity Fund Investing 177

Why do People Buy Secondaries? 178

Time and the J-curve 178

Diversification by time 180

Diversification by geography and sector 181

Treasury and Portfolio Secondaries 181

Why do People Sell Secondaries? 182

Change of strategy/leaving the asset class 182

Overconcentration by time, sector or geography 183

Unexpected need for cash 183

Housekeeping 184

Dissatisfaction with the GP 184

Restrictions on Transfer 184

Stapled primaries 185

Secondary Methodology 186

Tails 187

Fees etc. 188

Secondary Buyouts – A Warning 189

Summary 189

13. Due Diligence 191

Buyout Funds 193

Venture Funds 194

Co-investors 196

Cross-fund Investing 197

Buyout Companies 198

Venture Companies 199

Funds of Funds 200

Growth and Development Capital 201

Monitoring Private Equity Funds 202

The Changing Nature of Due Diligence 204

Summary 204

14. Planning Your Investment Programme 207

Cash Flow Planning 207

Allocated, Committed and Invested Capital 208

Diversification by Time 209

Proper Commitment Levels 210

Diversification by Sector and Geography 212

Total Return 215

How to deal with uninvested capital 215

Towards a New World of Private Equity Programmes? 218

Summary 219

15. Trends and Issues 221

Financial Crisis 222

Credit 222

Valuation 224

Holding periods 225

Secondaries 227

Emerging Markets 228

Concluding Thoughts 229

Track record 230

Returns 230

Fee structures 231

Private Equity at a Crossroads? 232

Summary 233

Glossary of Private Equity Terms 235

Index 259

About the Author

GUY FRASER-SAMPSON has over twenty years' experience of theprivate equity industry, most notably having set up and run forseveral years the European operations of Horsley Bridge. As apartner in the firm, and Managing Director of Horsley BridgeInternational, he had a unique opportunity to interactsimultaneously with private equity managers from all over theworld, including famous golden circle venture firmsbased predominantly in California. He previously lived and workedin the Middle East as Investment Controller with the Abu DhabiInvestment Authority (ADIA). He has extensive experience of the evaluation of private equitymanagers, including having personally designed and developed acomputer model for the evaluation of buyout performance, but isequally recognised as an expert on venture capital. In addition tohis work with funds, he has also conducted direct, secondary andmezzanine transactions over the years. Guy teaches post-graduate modules on private equity and investmentstrategy at Cass Business School in the City of London, and is alsorecognised as an authority on all types of alternative assets. Heperforms consultancy and high level executive training assignmentsfor clients around the world, and is also in demand as a providerof keynote addresses at investment conferences. In addition tovarious professional qualifications, he holds an LLB with honoursfrom King's College London, and an MBA majoring in finance fromWarwick Business School. Guy writes for a number of finance and investment publications,including his influential monthly column in Real Deals. Heis the author of Multi-Asset Class Investment Strategy, alsopublished as part of the Wiley Finance series, which questionsaccepted views of risk and return, and sets out ways in whichinvestors could and should incorporate a wide range of so-calledalternative assets into their planned portfolios. He conductsregular investor workshops around the world based upon his books.