Private Equity as an Asset Class

About the authorGUY FRASER-SAMPSON has over 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 unique opportunity to interact simultaneously with private equity managers from all over the world, 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 expert on venture capital. In addition to his work with funds, he has also conducted direct, secondary and mezzanine transactions over the years. Guy teaches post-graduate modules on private equity and investment strategy at Cass Business School in the City of London, and is also recognised as an authority on all types of alternative assets. He performs consultancy and high level executive training assignments for clients around the world, and is also in demand as a provider of keynote addresses at investment conferences. He conducts regular investor workshops around the world based upon his books.

• About the Author xiAcknowledgements xiiiIntroduction xv1 What is Private Equity? 1What is Private Equity? 2Fund investing versus direct investing 3Co-investment 4Terminology 6Different types of Private Equity investment 7Summary 132. What are Private Equity Funds, and How do They Work? 15Capital: Allocated, Committed, Drawn Down and Invested 17How do Private Equity Funds Work? 18Structure 18Cash flow 20Investment 22Fundraising 23Private Equity Funds Distinguished from Other Fund Types 25Hedge funds 25Infrastructure 27Private (Equity) Real Estate 28A Note on International Issues 28Summary 293. Private Equity Returns – The Basics 31Understanding the J-curve and Compound Returns 31Upper Quartile Figures 37Median Returns 38Average Returns 39Pooled Returns 41Using Vintage Year Returns for Benchmarking Purposes 41Time-weighted Returns 42Summary 434 Private Equity Returns – Multiples and Muddles 45Multiples 45Distributed over paid in (DPI) 47Paid in to committed capital (PICC) 47Residual value to paid in (RVPI) 47Total value to paid in (TVPI) 48Use of multiples in industry research 48Muddles, Muggles and Markowitz 51Returns 52Risk 54Liquidity 56Summary 585 Buyout 59Types of Buyout Transaction 59Mbo 59Mbi 60Bimbo 60Lbo 60Take Private (P2P) 61Roll-up 62Secondary Buyouts 62Other ‘Buyout’ Activity 62PIPEs 63How do Buyouts Work? 63Characteristics of Buyout 67Established businesses 67Debt 69Earnings 70Size 71Control 74Barriers to entry 75Summary 776 How to Analyse Buyouts 79Earnings 80Ebit 81Ebitda 82Earnings Growth 83Multiple 84Multiple increase (sometimes called multiple arbitrage) 85Leverage 88Recapitalisation 89Timing 89Modelling and Analysing Buyout Funds 91Enterprise value 91Summary 947 Buyout Returns 97US versus European Buyout 97Buyout skill bases 100Imperfect markets 100Earnings multiples 101Earnings growth 104Leverage 105Contribution of different drivers 106Fund size 107Summary 1128 Venture Capital 113What is Venture Capital? 113Backing New Applications, Not New Technology 114Classification by Sector 115It 116Telecoms 118Life Science 120Classification by Stage 123Seed stage 124Early stage 127Mid and late stages 128Summary 1289 How to Analyse Venture 129The Fundamentals (1) – Money Multiples 129The Fundamentals (2) – Valuation 131Valuation as an element of stated returns 131Differences in valuation approach between Europe and the US 132Variability of Venture valuations 133Pre-money and post-money valuations 135Share classes 136The Fundamentals (3) – Cost and Value 136IRRs and multiples 138Going in equity (GI%) 139Percentage of the holding within the fund 139The Impact of Home Runs 139Summary 14210 Venture Returns 145US Outperformance versus Europe 145Money multiples drive IRRs 145Home runs and the golden circle 147Market conditions 149European Venture – Is it as Bad as it Seems? 151Returns and Fund Size 154Venture returns by stage 158What of the Future? 159Summary 16111. Growth and Development Capital 163The PLC and the BCG Growth Matrix 164Development Capital 166Target companies 166Money in deals 166Money out deals 167Objectives 167Growth Capital 168Target companies 168Objectives 169Growth capital and late-stage Venture 170Common Issues 171Minority protection 171Exit protection 173The Future 174Summary 17512. Secondary Private Equity Fund Investing 177Why do People Buy Secondaries? 178Time and the J-curve 178Diversification by time 180Diversification by geography and sector 181Treasury and Portfolio Secondaries 181Why do People Sell Secondaries? 182Change of strategy/leaving the asset class 182Overconcentration by time, sector or geography 183Unexpected need for cash 183Housekeeping 184Dissatisfaction with the GP 184Restrictions on Transfer 184Stapled primaries 185Secondary Methodology 186Tails 187Fees etc. 188Secondary Buyouts – A Warning 189Summary 18913. Due Diligence 191Buyout Funds 193Venture Funds 194Co-investors 196Cross-fund Investing 197Buyout Companies 198Venture Companies 199Funds of Funds 200Growth and Development Capital 201Monitoring Private Equity Funds 202The Changing Nature of Due Diligence 204Summary 20414. Planning Your Investment Programme 207Cash Flow Planning 207Allocated, Committed and Invested Capital 208Diversification by Time 209Proper Commitment Levels 210Diversification by Sector and Geography 212Total Return 215How to deal with uninvested capital 215Towards a New World of Private Equity Programmes? 218Summary 21915. Trends and Issues 221Financial Crisis 222Credit 222Valuation 224Holding periods 225Secondaries 227Emerging Markets 228Concluding Thoughts 229Track record 230Returns 230Fee structures 231Private Equity at a Crossroads? 232Summary 233Glossary of Private Equity Terms 235Index 259