Private_Equity-苏黎世大学

Eleonora CalzavaraThe Global Financial System and the Credit Crisis Zurich, 1stApril 2009University of ZurichPrivate EquityAgenda:1.What is Private Equity?2.History of Private Equity3.Charts4.Investments in Private Equity5.Structure of a generic Private Equity Fund6.Private Equity Investments6.1Leveraged Buyout6.2Venture Capital6.3Growth Capital6.4Distressed and Special Situations6.5Mezzanine Capital6.6Secondaries7.Other Strategies8.Liquidity in the Private Equity Market9.Typical Risks10.Private Equity FirmsWhat is Private Equity?Private Equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.Investments in Private Equity can be investment of capital into an operating company or the acquisition of the company.Capitals for Private Equity are given for a large part from Institutional Investors.This kind of investments need a long time-horizon, usually 10-15 years.There a lot of type of Private Equity and the term Private Equity has different type of connotations among different counties. Usually returns in the first years are very low because there will bea liquidity return later when the company that is the objective ofthe investment will be sold.History of Private Equity(1)The beginning of Private Equity rises again in 1946 with two venture capital firms in the USA:⏹American Research and Development Corporation (ARDC)⏹J.H. Whitney & CompanyARDC was founded by Georges Doriot with capital raised from institutional investors to encourage private sector investments in businesses run by soldiers who were returning from World War II. The investment in Digital Equipment Corporation (DEC) is its most important investment because the initial price was70.000$ in 1957 and in 1968 after the company’s initial pubblicoffering it was valued at over $355 million.History of Private Equity(2)J.H. Whitney & Company was founded by John Whitney in 1946 after the World War II to finance entrepreneurs with business plans who were unwelcome at banks. Its most important investment was in Florida Foods Corporation which developed an innovative method for delivering nutrition to American soldiers that was called Minute Maid orange juice and was sold to the Coca-Cola Company in 1960.Chart on European PrivateEquityThis chart describes the development of Private Equity in Europe:Source: CMBOREurope=Austria, Belgium, Denmark, France, Finland, Germany, Ireland (Eire), Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, UK.The last column regards the first half of 2008.Investments in Private Equity(1)Institutional Investors provide private equity capital because they hope to achieve risk adjust returns that are higher that the possible that they can obtained in the public equity markets. Most institutional investors don’t invest directly in privately held companies but they invest through a private equity fund. In some cases the institutional investors develop a Private Equity Fund.Investments in Private Equity(2)Usually Private Equity Firms receive a return in one of this way:⏹Initial Public Offering (IPO): when shares are offered to themarket the financial sponsor as the public market have animmediately return.⏹Merger or Acquisition: the company is sold for either cash orshares in another company.⏹Recapitalization: cash is distributed to the shareholders and itsprivate equity funds either from cash flow generated by thecompany or through raising debt or other securities to fund the distribution.Structure of a generic Private Equity Fund:Private Equity Investments(1)Private Equity Investments can be:⏹Leveraged Buyout⏹Venture Capital⏹Growth Capital⏹Distressed and Special Situations⏹Mezzanine Capital⏹SecondariesLeveraged Buyout(1):It is a strategy of making Equity Investments as part of a transaction in which a company, business unit or business asset is acquired from the current shareholders typically with the use of financial leverage. Usually, the companies involved in these transactions are typically mature and generate operating cash flows.There is usually a financial sponsor agreeing to an acquisition without itself committing all the capital required for the acquisition. Acquisition debt in a LBO is often non-recourse to the financial sponsor and has no claim on other investment managed by the financial sponsor; an LBO is attractive to a fund’s limited partners allowing them the benefits of leverage but greatly limiting the degree of recourse of that leverage.Leveraged Buyout(2):This kind of financing structure leverage benefits to an LBO‘s financial sponsor in two ways:(1)the investor itself only need to provide a fraction of thecapital for the acquisition(2)the returns to the investor will be enhanced (as long as thereturn on asset exceeds the cost of the debt).Venture CapitalVenture Capital are investments made in less mature companies for the launch, early development or expansion of a business. It is made in the most often cases of application of new technology, new marketing concepts and new products that have to be proven.Usually it is sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth-capital that is often used to fund expansion of existing business that are generating return but may not be profitable or generating cash flow to fund future growth.Venture capital is most suitable for businesses with large up-front capital requirements which cannot be financed by cheaper alternatives such as debt.Growth CapitalThis strategy is referred to equity investments that in this case are minority investments in relatively mature companies that need capital to expand, restructure operations, enter in new markets or finance a major acquisition without a change of control of the business.Usually companies that use this kind of capital want to finance a transformation in their lifecycle.Another typical target for the use of growth capital is restructuring of a company’s balance sheet in order to reduce the amount the leverage.Distressed and SpecialSituationsThis kind of investment is a big category referring to investments in equity or debt securities of financially stressed companies.The distressed category encompasses also these two sub-strategy:⏹“Distressed-to-Control" or "Loan-to-Own" strategies where theinvestor acquires debt securities in the hopes of emerging from a corporate restructuring in control of the company's equity ⏹"Special Situations" or "Turnaround" strategies where an investorwill provide debt and equity investments, often "rescue financings"to companies undergoing operational or financial challenges.Mezzanine CapitalMezzanine capital refers to subordinated debt or preferred equity securities that often represent the most junior portion of a company's capital structure that is senior to the company's common equity.SecondariesSecondary investments refer to investments made in existing private equity assets including private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors.Other Strategies(1):There are other strategies that can be considered Private Equity or a close adjacent market:⏹Infrastructure⏹Energy and Power⏹Merchant BankingOther Strategies(2):Infrastructure:investments in various public works that are made typically as part of a privatization initiative on the part of a government entity.Energy and Power:investments in a big variety of companies engaged in the production and sale of energy, fuel extraction, manufacturing, refining and distribution.Merchant Banking:negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies.Market(1)The private equity secondary market (also often called private equity secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors. For the vast majority of private equity investments, there is no listed public market.Market(2)Secondary transactions can be generally split into two basic categories:⏹Sale of Limited Partnership Interests: this categoryincludes the sale of an investor's interest in a private equity fund or portfolio of interests in various funds through the transfer of the investor's limited partnership interest in the fund.Nearly all types of private equity funds (e.g., including buyout, growth equity, venture capital, mezzanine, distressed and real estate) can be sold in the secondary market. The transfer of the limited partnership interest typically will allow the investor to receive some liquidity for the funded investments as well as a release from any remaining unfunded obligations to the fund.⏹Sale of Direct Interests: this category refers to the sale ofportfolios of direct investments in operating companies, rather than limited partnership interests in investment funds. These portfolios historically have originated from either corporate development programs or large financial institutions.Typical Risks(1)⏹Excessive Leverage: the amount of credit that lenders arewilling to extend on private equity transactions has risensubstantially. This lending may not be entirely prudent. Given current leverage levels and recent developments in the credit cycle, the default of a large private equity backed company seems inevitable.⏹Unclear ownership of the economic risk: the duration andpotential impact of any credit event may be exacerbated by operational issues which make it difficult to identify whoultimately owns the economic risk associated with a leveraged buyout and how these owners will react in a crisis.Typical Risks(2)⏹Reduction in overall capital market efficiency:the quality, sizeand depth of the public markets may be damaged by the expansion of the private equity market. An increasing proportion of companies with growth potential are being taken private and fewer private companies are going public.⏹Market Abuse:the significant flow of price sensitive informationin relation to private equity transactions creates considerable potential for market abuse. The involvement of participants in both public and private markets and the development of related products traded in different markets, e.g. CDS (Credit Default Swaps) on leveraged loans, increases the potential for abuse.Typical Risks(3)⏹Conflicts of Interest:material conflicts arise in private equityfund management between the responsibilities the fund manager has to itself (including its owners/staff), the investors in the separate funds/share classes it manages and the companies owned by the funds.⏹Market Access Constraints:retail investors currently only havelimited access to the private market via venture capital trusts (which offer access to arguably the riskiest part of the market) and a small number of private equity investment trusts. This enhances the perceived complexity and reduces the internal rate of return associated with private equity investing.Typical Risks(4)Market Opacity:although transparency to existing investors is extensive, transparency to the wider market is limited and is subject to significant variation in methodology (e.g. for valuation, fee disclosure etc) and format. This makes relative performance assessment and comparison complex, which may deter investment by various professional investors who may not be comfortable interpreting the information.Private Equity Firms:According to an updated 2008 ranking created by industry magazine Private Equity International, the largest private equity firm in the world today is The Carlyle Group, based on the amount of private equity direct-investment capital raised over a five-year window. As ranked in this article, the 10 largest private equity firms in the world are:⏹The Carlyle Group⏹Goldman Sachs Principal Investment Area⏹TPG⏹Kohlberg Kravis Roberts⏹CVC Capital Partners⏹Apollo Management⏹Bain Capital⏹Permira⏹Apax PartnersThe Blackstone Group。