Private Capital Investing

The Handbook of Private Debt and Private Equity

Roberto Ippolito

• Publisher: Wiley
• Year: 2019
• ISBN:
  9781119526193
• Edition: 1
• Topic: Business
• Subtopic: Private Equity
• Index: Business

A step-by-step, comprehensive approach to private equity and private debt

Private Capital Investing: The Handbook of Private Debt and Private Equity is a practical manual on investing in the two of the most common alternative asset classes (private equity and private debt) and provides a unique insight on how principal investors analyze investment opportunities. Unlike other textbooks available in the market, Private Capital Investing covers the various phases that principal investors follow when analyzing a private investment opportunity.

The book combines academic rigor with the practical approach used by leading institutional investors. Chapters are filled with practical examples, Excel workbooks (downloadable from the book website), examples of legal clauses and contracts, and Q&A. Cases are referred at the end of every chapter to test the learning of the reader. Instructors will find referrals to both third-party cases or cases written by the author.

• Covers analytical tools
• Includes the most common methods used to structure a debt facility and a private equity transaction
• Looks at the main legal aspects of a transaction
• Walks readers through the different phases of a transaction from origination to closing

Bridging the gap between academic study and practical application, Private Capital Investing enables the reader to be able to start working in private equity or private debt without the need for any further training. It is intended for undergraduates and MBA students, practitioners in the investment banking, consulting and private equity business with prior academic background in corporate finance and accounting.

CHAPTER 1
Closed End Funds

A CLOSE UP ON PRIVATE EQUITY AND PRIVATE DEBT PARTNERSHIPS

A private equity fund is a collective investment scheme used for making minority or majority equity investments in private (i.e. non-listed) firms. A private debt fund is a collective investment scheme used for effecting loans or subscribing bonds in private firms.

At inception, investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund. A private equity (debt) fund is raised and managed by investment professionals (who find, analyse, invest, monitor, and implement value creation actions in private firms) of a specific private equity (debt) firm. The goal of managers is to maximise investors' returns from invested capital.¹

Institutional private equity funds are usually structured as limited partnerships (although funds that are intended for retail use often have other legal forms, such as listed vehicles) with a fixed term of up to ten years (often with annual extensions of the agreed upon investment period and fund life). A partnership has a fixed contractual term: therefore, the investment is illiquid during that time, unless the investor decides to sell the partnership on the secondary market. The main participants to a private equity (debt) partnership (see also Figure 1.1) are:

1. General partner (GP): the manager is called the general partner and has potentially unlimited liability for the actions of the fund. To put a cap on this potentially unlimited liability, GPs are limited companies or partnerships. The GP interest is the fund manager's participation of his capital in the fund. Technically, the fund manager invests in the general partner; however, in common usage, limited partners are investors and GPs are fund managers. GPs are compensated with an incentive allocation of capital appreciation, called carried interest. Loss carry-forwards in the partnership structure ensure that GPs do not receive their incentive allocation until all the losses of limited partners have been recovered. Similarly, claw-backs in the structure ensure that GPs do not receive an over-distribution of gains. Hurdle rates ensure that GPs do not receive an incentive allocation until investors recover their original investment and make a preferential rate of return on their investment. When the structure does not foresee a management company, the GP is entitled to also receive the management fee.

   

   FIGURE 1.1 A typical private equity (debt) fund structure.

2. Limited partner (LP): external investors are...