By Matteo Ravera It goes without saying that the goal of a Private Equity firm is to sell an asset it previously invested in, make a very high IRR and eventually collect its carried interest. But what happens if PE firms sell that asset to themselves? It can sound strange but that’s exactly the case … Continue reading Continuation funds: how PEs are selling to themselves
Category: Fundamentals of Private Equity
By Erlend Brevik, Fabian Zähringer, and Thor Arne Höfs Sovereign Wealth Funds (SWFs) are state-owned institutional investors that own, invest, and manage a variety of assets – such as stocks, bonds, real estate, or other alternative investments – to achieve national objectives. Overall, objectives of SWFs can be grouped in several different categories: 1. Capital … Continue reading Sovereign Wealth Funds Investing in Private Equity
With a market share of 40%, China has positioned itself among the most influential players in Venture Capital worldwide, second only to Silicon Valley’s 44% market share (The Diplomat). Its position as an important global player is emphasized by the fact that by October 2019 China alone had produced around 45% of all the unicorns … Continue reading Equity controls in China
Last year was notoriously damaging to people’s way of life with lockdowns throughout the world greatly restricting mobility. Despite this, markets soared after the initial COVID-19 wave in March 2020 with the S&P 500 reaching record highs. Additionally, the number of private companies merging with ‘Special Purpose Acquisition Companies’ (SPACs) also rocketed with 248 SPAC … Continue reading A look inside SPACs and into the future
“This time around renewables is part of the recovery as a job creation strategy” – Pooja Goyal, Head of Renewable and Sustainable Energy, Carlyle Group Renewable energy has sparked a lot of interest in recent years. Due to the coronavirus pandemic, the energy transition has received even a further push, fastening the shift from fossil … Continue reading Private Equity investment shift from fossil fuels to renewable energy
Search funds are different from any other type of investment vehicles. They involve the acquisition of a small or medium enterprise by an entrepreneur, that may come from a diverse set of backgrounds from private equity to engineering, from investment banking to management consulting, backed in his search for a potential acquisition target by a … Continue reading A closer look at the financing structures of search funds
First and foremost, Private Debt is a form of financing for companies that need liquid assets. This form of financing can come across in a variety of forms; it includes any debt owned by or extended to privately held firms, but most generally it consists of non-bank institutions lending to private companies or buying loans … Continue reading The evolution of the Private Debt asset class: focus on private lending
Private equity has been widely accepted as the best-performing asset class over the past decade with returns in excess of 20%. PE falls within the category of alternative asset classes, which are investments that do not conform to the traditional asset classes of stocks, bonds, or certificates. Examples include among others hedge funds, PE, real … Continue reading Is PE the “ultimate asset class”?
Emily Dickinson once wrote that “Fortune befriends the bold”. But can secondary buyouts (SBOs) be considered a bold decision? This flight is going to take you over the SBOs of today in the hopes of giving you a good understanding of the concept and performance drivers of these transactions. This being said and without further ado, enjoy … Continue reading A flight over the secondary buyouts of today
Search Funds are a niche asset class based on high-potential entrepreneurs who locate, acquire, manage, and grow a privately held company. The investment vehicle is managed by an entrepreneur, called “the searcher”, who collects funds to finance the search and the acquisition of a single company, where they will have the opportunity to become equity-owning … Continue reading Search Funds: an asset class that relies on small-scale human interaction
by Filippo Rosaschino On behalf of BSPEC, I would like to thank you for accepting our informal invitation to this “Coffee Break with”. Would you present yourself with a brief overview of your professional and academic background? Sure. I qualified as an accountant in 1985 and spent 26 years in banking. 10 years with the … Continue reading Coffee break with Bob Wigley from UK Finance
7 min read By Matteo Ferraguto and Markus Maier Private Equity funds have made a name for themselves in the world of finance for consistently producing high returns, often outperforming benchmarks such as public markets. But how has this been achieved? Over the years, many measures such as certain financial engineering techniques, cost cutting strategies, … Continue reading Operational improvements: Are Private Equity funds building better companies?
6 min read By Dorina Barna and Boris Mihaylov LBO stands for Leveraged Buyout and refers to the purchase of a company while using a significant amount of debt to finance the transaction. Usually, the assets of the company being acquired and sometimes those of the acquiring company are used as collateral for the financing. … Continue reading Capital Structure of an LBO
By Konstantin Barakos Introduction What is Leveraged Finance? It’s actually fairly straightforward – the answer is right there in the name! Leveraged finance describes a corporate acquisition financed through leverage. End of story; roll credits. Ok, since I brought up the term credits, I should mention that Leveraged Finance participants (i.e. issuers and investors) have … Continue reading Overview of the Leveraged Finance business
By Nikolas Huber and Luca Politi Introduction Almost everyone, even when only distantly connected to the topic of shares and stock, has heard about IPOs. Summarized an IPO is a process for a private company to become a public one. But not every private company that wants to become a public company fulfils the requirements … Continue reading Reverse Merger – A true alternative to an IPO?
By Boris Mihaylov and Konstantin Barakos The world of private equity requires funds to react immediately to potential purchase opportunities. But what if an attractive opportunity arises during the draw down period and the funds required exceed the sum of collected commitments? Bridge loans (appropriately labeled yet also known as equity bridge facilities or subscription … Continue reading Bridge Loans in Private Equity
By Nikolas Huber and Filippo Rosaschino Levels of dry powder within private equity have skyrocketed in recent years as a result of an increasingly saturated market for suitable investment opportunities. Private equity funds are now searching for new methods and structures to invest their large capital stockpiles. But what if a very pragmatic solution has … Continue reading Club Deals – Ancient construct or comeback story?
By Vittorio Lavioso and Alexandre Burtonboy Disclaimer: the purpose of this article is to provide the reader with a basic framework to understand what a LPA is and how it works. This article is in no way to be considered as a legal opinion on the matter. As with many things in life, the underlying … Continue reading The Limited Partnership and LP Agreement Explained
By: Ana Cosniceru and Salma Abdellaoui IPO is a term embedded in the finance lexicon that frequently appears when deliberating the business world in general. Conversations about private equity are no exception; the acronym will surely be alluded to as well. But what is it exactly? This term refers to the "Initial Public Offering" or … Continue reading IPO process for Private Equity
By Gianluca Sonda Introduction Angel investing is a micro-finance practice which involves affluent individuals providing capital for business start-ups typically in exchange for convertible debt or ownership equity. The term “angel” was actually coined during the 70s describing the investors who financed the Broadway shows and other theatre productions back in the day. Angel investors … Continue reading Windfalls, Pitfalls and Angels
The Buy-and-Build (B&B) method has experienced burgeoning popularity over the last decade which continues into the present. From 20% in 2000, the share of PE deals with add-on acquisitions trended toward 53% in 2012.
Before the 70s, common stock was the only instrument available to GPs in PE and VC when investing in portfolio companies. This rigid capital structure limited minority investors by subordinating them and offering intermediate returns only in the form of dividends or share repurchases. Subsequently, the industry transformed...
Back in the '80s, some ambitious entrepreneurs designed a miniature model of the typical private equity fund. Forget about pools of cream-of-the-crop professionals: search funds are a businessperson’s stepping stones to achieving their pipe dream position as a CEO. Although it sounds like a solo trip to success, these operating managers are backed by capital from a group of advising investors.
“Everyone has access to information. We just know how to analyze it better.” This is the mantra of Billions protagonist Bobby Axelrod, a fictional hedge fund manager who’s ethically compromised fund breeds alpha like a wolf pack. Putting aside any insider trading and market manipulation though, is this also the mentality of the PE funds that acquire current portfolio companies from other PE funds?
With reputations and capital at stake, Private Equity and Venture Capital firms endeavor to make the best possible investment decisions. However, complete information is often impossible to obtain or takes too long to acquire resulting in opportunity costs from deferring investment. Given these structural challenges, how can decision making processes be structured to optimize outcomes?
Investors allocate capital with Private Equity Firms in order generate a high rate of return on their invested capital. However, when there are several investors and a separate manager, how much of the profits from investments are investors entitled to? PE firms address this issue by constructing unique and specific payout schemes, called distribution waterfalls, to attract and signal to various types of investors and to accumulate committed capital to enter investments. This article outlines the fee structuring of PE firms and explores the types of distribution waterfalls.
In the early 1980s there was a dramatic increase in private equity activity in the US when pension funds began to invest heavily in them following the clarification of the “prudent man” rule, declaring private equity a sufficiently safe investment. When the 90s tech frenzy came along, pension funds needed the extraordinary returns offered by VC firms to keep pension plans solvent as baby-boomers aged. However, due to structural problems, pension funds were fundamentally unattractive to VC firms as LPs, so they were going to need help to break in.
Financial sponsors tend to create value in LBO transactions in three different ways: operational improvements, debt expansion and multiple expansion.
No period in history better demonstrates the need for portfolio diversification than the late 90s Tech Bubble and the March 2000 crash. In the public markets and at the height of the bubble, speculators were in such a frenzy to get a hold of technology stocks that any newly listed stock with the word “tech” or “.com” in their name could shoot up over 100% in one day. Many of these companies had yet to properly develop their products and their financial health was often very uncertain, yet they commanded prices at very high price to earnings multiples. In private markets there was also a strong appetite among VC firms to invest in the technology sector and bring the burgeoning amount of tech startups to public markets in IPO exits.
The grim reality of venture capitalism is that most startups fail. Even with an innovative idea, a motivated team can easily fail to make a product or service that customers can find value in. Yet the romanticised stories of young and creative entrepreneurs building radically successful businesses from scratch persists.
he aim of this article is to briefly describe a principal transaction document for a Private Equity deal: the Sale and Purchase Contract. This is an extremely complex topic to which many articles would be needed to give a full understanding to the reader so rather the intention is to provide a brief introduction to an aspect which is irregularly discussed.
The complexity of LBO transactions determines the necessity of multiple players, each one of which carries out a specific role. The main players of an LBO transaction are financial sponsors, investment banks, banks, institutional lenders and target management.
Financial sponsors tend to create value in LBO transactions in three different ways: Operational improvements, Debt and Multiple Expansion. The first two forms assume improvements of the target financial and operational performance. The last value creation option refers to the sponsor features instead of the target. Indeed, it does not modify the financial and operational performance of the target and comes from sponsors’ broader knowledge and expertise. The literature tends to focus on the first to ways since future valuations are too uncertain. Indeed, even sponsors' financial models tend to concentrate on value enhancement coming from developments in the target operations and a better capital structure.
The conventional LBO transaction includes several steps, starting with "The Sourcing" and continuing with "The Screening". During the Screening, financial sponsors make research on potential targets trying to understand the one that deserves the investment. The goal is to find the ideal candidate.
Starting from last year, capital allocation schemes that are hybrids of direct investment and limited partnership, namely “Shadow Capital”, have become increasingly appealing among participants of the Private Equity industry. This way of investing allows the Limited Partners to employ their resources benefiting from the expertise and experience of PE funds and to gain a direct foothold in the private firms’ capital. Most notably, Shadow Capital accounted for 25.6% of total capital committed in PE investments in 2015, surging from the 17.5% average it accounted for in the period 2009-2014 (see table below).
