Private Equity as an Asset Class

by Guy Fraser-Sampson

• ISBN13: 9780470066454
• ISBN10: 0470066458
• eBook ISBN(s): 9780470665060
• Format: Hardcover
• Copyright: 2007-04-01
• Publisher: WILEY
• More Book Details
• Purchase Benefits

Summary

This book provides a full description of all types of private equity activity, how returns should be viewed, and how each sub-asset class should be modeled and evaluated. Existing and forthcoming books look at (1) how to model private equity returns within an existing traditional risk model; (2) specific case studies, or (3) the 'how' of (a) negotiating with private equity managers (GPs), placement agents, etc, and (b) cash flow liquidity modeling. Private Equity as an Asset Class assumes no prior knowledge whatever of the asset class. It is aimed at someone who understands investment but is approaching private equity for the first time. It focuses on the 'what', describing each section of private equity in detail. Where the 'how' is addressed, it will be specific practical advice such as how to model and evaluate a venture fund. The author has agreement from Thomson Financial to make their industry returns available once again. Thus the book will contain a full analysis not just of how private equity returns work, but also of how to look at detailed specifics, eg, paid in/paid out/committed, and so on. There is also a chapter on due diligence

Author Biography

GUY FRASER-SAMPSON has twenty years’ experience of the private equity industry, most notably having set up and run for several years the European operations of Horsley Bridge. As a partner in the firm, and Managing Director of Horsley Bridge International, he had a perhaps unique opportunity to interact simultaneously with private equity managers in both Europe and the US, including famous “golden circle” venture firms based predominantly in California. He previously lived and worked in the Middle East as Investment Controller with the Abu Dhabi Investment Authority (“ADIA”).

He has extensive experience of the evaluation of private equity managers, including having personally designed and developed a computer model for the evaluation of buyout performance, but is equally recognised as an authority on venture capital. In addition to his work with fund managers (“GPs”), he has also been involved in direct, secondary and mezzanine transactions over the years, as well as planning and monitoring private equity programmes from the investor (“LP”) perspective.

Guy is a well-known figure on the conference circuit both as a speaker and, increasingly, as a provider of keynote addresses. He has written for private equity publications for many years, and is perhaps best known for his regular monthly column in Real Deals. In addition to various professional qualifications, he has an LLB with honours from King’s College London and an MBA majoring in finance from Warwick Business School.

In recent years, Guy has also become acknowledged as an expert on pension fund investment and asset allocation generally, and he has written for all of Europe’s English language pension publications. His first book, Multi Asset Class Investment Strategy, published as part of the Wiley Finance series last year to what Global Pensions described as “rave reviews from the UK pension industry” has been hailed as a major contribution to modern portfolio theory. It went into the Amazon “Hot 100” six weeks after its launch, and has been featured in newspapers and financial periodicals around the world.

Table of Contents

Introduction	p. xiii
Acknowledgements	p. xxiii
What is Private Equity?	p. 1
Fund investing versus direct investing	p. 2
Terminology	p. 4
Primary versus secondary fund investing	p. 6
A broad delineation: buyout and venture	p. 7
Capital: allocated, committed, drawn down and invested	p. 9
How do private equity funds work?	p. 11
Structure	p. 11
Cashflow	p. 13
Investment	p. 15
Fundraising	p. 16
Summary	p. 20
Private Equity Returns - The Basics	p. 23
Understanding the J-curve and compound returns	p. 23
Upper quartile figures	p. 29
Median returns	p. 30
Average returns	p. 31
Pooled returns	p. 34
Multiples	p. 34
Distributed over Paid In (DPI)	p. 37
Paid In to Committed Capital (PICC)	p. 38
Residual Value to Paid In (RVPI)	p. 38
Total Value to Paid In (TVPI)	p. 38
Valuation	p. 39
Fees	p. 40
Time-weighted returns	p. 41
Summary	p. 42
Buyout	p. 45
Types of buyout transactions	p. 45
MBO	p. 45
MBI	p. 46
BIMBO	p. 46
LBO	p. 47
Take private	p. 47
Roll-up	p. 48
Other "buyout" activity	p. 48
Established businesses	p. 50
Debt	p. 52
Earnings	p. 54
Size	p. 55
Control	p. 58
Barriers to entry	p. 61
Summary	p. 64
How to Analyse Buyouts	p. 67
Earnings	p. 68
EBIT	p. 70
EBITDA	p. 71
Earnings growth	p. 72
Multiple	p. 74
Multiple increase in an imperfect market	p. 74
Multiple increase in a perfect market	p. 77
Leverage	p. 78
Recapitalisation	p. 79
Timing	p. 80
Modelling and analysing buyout funds	p. 82
Summary	p. 87
Buyout Returns	p. 89
US versus European buyout	p. 89
Buyout skill bases	p. 91
Imperfect markets	p. 92
Earnings multiples	p. 94
Earnings growth	p. 97
Leverage	p. 100
Fund size	p. 101
What can we expect from buyout returns in future?	p. 107
Recent fundraising levels	p. 109
Some conclusions and predictions	p. 111
Summary	p. 113
Venture Capital	p. 115
What is venture capital?	p. 115
Backing new applications, not new technology	p. 116
Classification by sector	p. 118
IT	p. 118
Telecoms	p. 121
Life Science	p. 124
Classification by stage	p. 128
Seed	p. 129
The US model	p. 131
Seed stage focus	p. 131
Home run mentality	p. 133
"Value add"	p. 133
The US model comes to Europe	p. 134
Why European venture capital firms have avoided the seed stage	p. 134
Classification by stage, continued	p. 135
Early stage investing	p. 135
Mid- and late stage investing	p. 135
Summary	p. 135
How to Analyse Venture	p. 137
The fundamentals	p. 137
Money multiples	p. 137
Valuation	p. 140
Cost and value	p. 147
IRRs and multiples	p. 149
Going In Equity (GI%)	p. 150
Percentage of the holding within the fund	p. 151
The impact of home runs	p. 151
Summary	p. 155
Venture Returns	p. 157
US out-performance versus Europe	p. 157
Money multiples drive IRRs	p. 159
Home runs and the golden circle	p. 160
Market conditions	p. 163
European venture - is it as bad as it seems?	p. 165
Returns and fund size	p. 170
Venture returns by stage	p. 175
What of the future?	p. 177
Summary	p. 180
Due Diligence	p. 183
Buyout funds	p. 186
Venture funds	p. 188
Co-investors	p. 191
Cross-fund investing	p. 192
Buyout companies	p. 192
Venture companies	p. 194
Fund of Funds	p. 196
Monitoring private equity funds	p. 198
Summary	p. 201
Planning your Investment Programme	p. 203
Cashflow planning	p. 203
Allocated, committed and invested capital	p. 205
Diversification by time	p. 206
Proper commitment levels	p. 208
Diversification by sector and geography	p. 209
Total Return	p. 213
How to deal with uninvested capital	p. 214
Secondaries	p. 216
Mezzanine	p. 219
Private equity proxies	p. 219
Towards a new world of private equity programmes	p. 220
Summary	p. 222
Glossary	p. 225
Index	p. 253
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