Private Equity Funds Flashcards
The GP / LP relationship / Structure of funds
Limited partners: investors, including pension funds, banks, insurance companies
General partners: fund manager
Liabilities of LPs limited to capital commitment to fund
GP partner unlimited liability (but set up separate limited company to act as GP)
Fixed life – 10 years
Types of capital
Allocated - Total amount of capital which investor would like to have invested at any one time
Committed - LP legally agrees to provide
Drawndown - Committed capital drawn down
Invested - Drawndown capital invested in companies
Pros of investing in PE as an asset class
- Returns outperform markets
- Diversification
- Investment expertise of manager
- Developing markets
- Inside information
- Access to entrepreneurial talent
Cons of investing in PE as an asset class
- Illiquid; long-term
- Needs specialist expertise / reliance on fund manager
- Blind pool investing
- Fees paid to managers
- Returns not so superior if risk adjusted
Asset allocation
0 – 5%: little impact (typical for Europe)
5% - 10%: building portfolio
> 10%: needs - specialist investor expertise, - long-term viewpoint,
- access to best performing GPs
Allocation based on considerations such as: - absolute size
- relative size
- composition of existing portfolio
Fund Strategy
Stage of investments
Sector focus
Geographic focus
Fund size
Investment size
Target portfolio size (# of investments)
Management approach
Institutional quality funds vs. first-time funds; first time teams
Market timing - vintage years
No of funds
General partner attributes
Fund differentiators (USPs)
First time funds vs institutional quality funds
Institutional quality funds: financially strong, established brand name, star investment managers, only works with high-quality LPs, clear strategy, competitive strengths, shared responsibilities, manages succession, track record, top-tier performance, managed multiple funds, high quality deals (e.g. Sequoia – Apple, Yahoo, Google, 3Com, Cisco).
First-time funds – run by experienced fund managers, maybe in niche industry sectors
Ideal Fund Characteristics
Clear strategy and exit plan
Medium to long-term, easier to overcome market volatility
The fund raising process: fund timeline
Step 1: Agree strategy; identify investors; pre-marketing
Step 2: Prepare Offering Memorandum (Private Placement Memo)
Step 3: Presentation to potential LPs
Step 4: LPs due diligence process
Step 5: Limited Partnership Agreement negotiated
-1 year: Fund Strategy and management team finalised (LP: Information Exchange)
Marketing (LP: Roadshows, Private Placement Memorandum)
0 year: First Close (LP: Commitment)
1 - 5 year: Investment Period (LP: Give funds)
5 - 10 year: Realisation Period (LP: Funds returned)
Private Placement Memorandum - contents
Document setting out the principal features of the investment proposition – “private” as available only to selected, qualified investors.
Subsequent contractual document is Limited Partnership Agreement signed separately by each investor at step 5. Making a false or misleading statement in the OM could lead to criminal charges. Supported by mass of research, documentation and stats, prior fund performance analysis, IRRs, fund cash flows, portfolio company management accounts
Gatekeepers and placement agents
Gatekeepers - A professional advisor or intermediary operating in the private equity market on behalf of clients, such as institutional investors
Placement agents - Vetting potential investors’ track records, investment preferences, risk tolerance, and financial capabilities.
Measuring PE returns (IRR and multiple)
IRR - shows the percentage rate of return on each dollar invested for each investment period
Multiples - the equity multiple illustrates how much cash an investor will receive for the equity invested
