Introduction to Private Equity

by Cyril Demaria

Overview

Introduction to Private Equity is a critical yet grounded guide to the private equity industry. Far more than just another introductory guide, the book blends academic rigour with practical experience to provide a critical perspective of the industry from a professional who has worked at many levels within the industry, including insurance, funds of funds, funds and portfolio companies.

The book looks at private equity from the point of view of the individual or the business. How is a private business valued? How is the acquisition transaction processed? What are the due diligence issues that should be considered before moving ahead? A valuable insight to a rather opaque market.

Introduction to Private Equity covers the private equity industry as a whole, highlighting its historical development in order to put its recent development into perspective. The book covers its organization, governance and function, then details the various segments within the industry, including LBO, Venture Capital, Mezzanine Financing, Growth Capital and beyond. Finally, it offers a framework to anticipate and understand its future developments.

It provides a balanced perspective on the current corporate governance challenges which are affecting the industry and draws perspective to understand the evolution of the sector, following one of its major crises.

Product Details

ISBN-13:	9780470711880
Publisher:	Wiley
Publication date:	03/30/2010
Series:	The Wiley Finance Series , #506
Sold by:	JOHN WILEY & SONS
Format:	eBook
Pages:	244
Sales rank:	786,548
File size:	5 MB

About the Author

CYRIL DEMARIA is a Partner at Tiaré Investment Management AG, Zurich and Manager of Pilot Fish, a small business angels fund. Previously, he was a Portfolio Manager at Maaf Gestion, where he managed private equity assets in excess of $60 million, and Head of Corporate Development at Externall in Paris. Cyril began his career at Pyramid Technology Ventures, a hybrid venture capital and fund of funds firm dedicated to IT and software investments. He is also Associate Professor of Finance at ESSCA, where he lectures on private equity, LBO, money and finance and international finance, and Lecturer at EADA and ZHAW. He regularly consults as an expert for the Swiss, European and French private equity and venture capital associations and provides training in private equity topics to the Association Française des Investisseurs en Capital (AFIC) and the Institut d'Analyse Financière. Cyril holds a BA in Political Sciences, a Masters in Geopolitics applied to Money and Finance, a Masters in European Business Law, and a Diploma from HEC. He is currently a doctoral candidate at the University Sankt-Gallen.

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Table of Contents

Foreword xi

Acknowledgements xiii

About the Author xv

Introduction xvii

A moving target xviii

A consubstantial lack of information xviii

Benign neglect, malign consequences xix

Knowing the devil to circumvent it xx

Part I What is Private Equity? 1

1 Private Equity as an Economic Driver: An Historical Perspective 3

1 Polling interests to identify and exploit sources of wealth 5

a Identify, control and exploit resources 6

b Leverage public policies and a favourable business environment 8

2 Championing entrepreneurship 9

a No private equity without entrepreneurs 10

b Convert ventures into business successes 12

c Entrepreneurship and private equity form a specific ecosystem 14

Conclusion: an attempt at definition 15

a A negotiated investment in equity or quasi-equity 15

b A fixed maximum term 16

c Implying specific risks 16

d With high expected returns 16

e Undertaken on behalf of qualified investors 16

2 Modern Private Equity - A French Invention? 19

1 USA: the foundry of modern private equity 20

The strict separation of public policies and public financing 20

The separation of public endeavours and private efforts; the subsequent support of the former for the latter 20

a Governmental input: SBA, DARPA and ERISA 21

b Universities, defence and disruptive innovation 22

c Challenges 23

2 Europe: adapting a successful model or creating its own? 24

a Governmental input: legal changes, tax rebates, infrastructures and EU market 25

b National champions, information technologies and incremental innovation 28

c Challenges 33

Conclusion: Emerging markets, building castles on sand? 38

Part II The Private Equity Ecosystem 41

3 Private Equity: A Business System Perspective 43

1 We are all investors in private equity 43

a Sources of capital 43

b Private equity investment rationale 47

2 Organisation and governance of private equity funds 53

a Private equity fund managers are financial intermediaries 53

b Incentives and fees 54

c Conflicts of interest 57

d Power, checks and balances 60

3 Measuring performance, managing risks and optimising returns 61

a Measuring performance in an uncertain context 61

b Managing risks and optimising returns 66

4 Pitfalls and challenges 71

Conclusion 74

4 The Universe of Investment 75

1 Venture capital: financing company creation 77

a Venture capital investment targets 78

b Actors and structures 78

c Operational activities 80

d Challenges 81

e Limits 84

2 Growth capital: financing companies' expansion 84

a Growth capital investment targets 84

b Actors and structures 85

c Operational activities 86

d Challenges 86

e Limits 87

3 Leveraged buy-out: financing companies' transmissions 87

a LBO investment targets 87

b Actors 87

c Operational activities 89

d Challenges 90

e Limits 92

4 Other interventions in private equity 95

a Targeting the stock exchange 96

b Turn-around capital and special situations 99

c Distressed debt 99

d Quasi-equity instruments (mezzanine) and second lien debt 105

e Merchant banking, investment banking and private equity house intervention 117

f Secondary market 118

g Real estate, infrastructure and exotic assets 120

Conclusion 122

5 The Process of Investment: A Matter of Trust and Mutual Interest 125

1 Step 1: Preliminary analysis 126

2 Step 2: Valuation 126

3 Step 3: Negotiating 127

4 Step 4: Structuring 129

5 Step 5: Complementary due diligences 131

6 Step 6: Transaction 131

7 Step 7: Monitoring and exit 132

Conclusion 133

Part III Private Equity in Teenage Time: Trend Setting, Fads and Responsibilities 135

6 Private Equity Evolution: Trends or Buzzes? 137

1 Is private equity going mainstream? 137

2 Is private equity (still) creating value? 140

3 Private equity: between bubbles and crashes 144

Conclusion 148

There is no such thing as 'capital overhang' 149

7 Private Equity and Ethics: A Culture Clash 153

1 Greed 153

2 Destruction 157

3 Philanthropy 162

4 Transparency 163

5 Confidentiality and self-regulation 164

Conclusion 167

General Conclusion - Private Equity Today and Tomorrow 169

1 Core target: manage the volatility of performance 169

2 The only valid leitmotiv: long-term thinking 172

3 The impact of the fair market value 174

4 A long-term trend: the attractiveness of private equity 176

5 Private equity: future victim of its own success? 179

6 The impact of a better knowledge of private equity 184

a Understanding the risk and managing the J-Curve 184

b Innovating through structuring 185

c Private equity and universal owners 186

d Change or die: the pressure on general partners 188

e Regulation: Damocles' sword looming over private equity 189

Glossary 193

Bibliography 203

Index 207