Private Equity Partnerships

10 Key excerpts on "Private Equity Partnerships"

• 

  eBook - ePub

  Private Equity 4.0

  Reinventing Value Creation

  • Benoît Leleux, Hans van Swaay, Esmeralda Megally(Authors)
  • 2015(Publication Date)
  • Wiley

    (Publisher)

  “Private equity is a highly efficient form of corporate ownership.” It creates and captures value in responses to temporary imbalances and arbitrage opportunities. Information asymmetries and other distortions, when identified, are immediately exploited by an industry which is flexible and can act quickly.

  The raison d’être of private equity funds

  Private equity funds pool capital from investors in search of entrepreneurial and smaller opportunities. Stock markets enable investment in larger and relatively transparent companies by clicking a mouse, whereas private equity funds enable investors to access transactions, which are privately negotiated by the fund managers.2

  Private equity and venture capital funds hold large stakes in companies, if not outright majorities (in most buyouts). They are, therefore, nearly always activist investors and insiders. The industry can and must create value, not only by buying low and selling high, but by being a responsible owner and actively supporting management to make companies better.

  Private equity funds usually have a finite lifetime, after which they must be liquidated and all proceeds must be returned (after fees) to investors. The legal structure is more often than not a so-called Limited Partnership (LP) managed by a General Partner (GP). The fund investors are referred to as “Limited Partners” (LPs) with limited liability and a passive role, whilst the “GP” has a very free hand in selecting and managing the investments (see Exhibit 2.1 ). The partnership is managed according to the terms of a Limited Partnership Agreement, covered extensively in Chapter 7.

  Exhibit 2.1

  Typical structure of a private equity partnership

  Source: Prequin

  Limited Partnerships are generally created for a period of about 10 years, with a 4–5 year investment period during which new investments may be made. In practice it often takes more than 10 years to completely liquidate a fund and sell the last remaining investment. A GP will first go through a “fundraising” period, to sell the new fund to LPs. Once a minimum amount of capital is raised, the GP may hold a first close to be able to start making investments and to start drawing management fees. Fundraising will continue until the “final” close. Investors coming in later will pay a small monetary penalty for that delay in entering the fund capital; at the same time, they may also benefit from investments made after the first close which have already grown in value. In favourable times, reputed GPs are able to raise a fund in only a few months; in inclement times, or for fund managers with less stellar track records, it can take up to a couple of years to arrive at a “final close”.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Introduction to Private Equity

  • Cyril Demaria(Author)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  Private equity has also influenced the way business is done. More specifically it contributed to create a true entrepreneurial ecosystem, with booms and busts, and a process of ‘creative destruction’. This process bears a certain risk and it is the role of professional private equity investors to manage this risk, mitigate it and generate a return which is commensurate to this risk. Chapter 2 will explore this question in more detail.

  CONCLUSION: AN ATTEMPT AT DEFINITION

  So far, Chapter 1 has identified the main elements which are necessary for the emergence of a private equity sector. In that respect, an investment in private equity could be defined as:

  (a) A negotiated investment in equity or quasi-equity

  Shareholders’ equity is the sum of the capital brought into the company by the shareholders and the undistributed profit left in the company (retained profits). Investment in capital may take the form of capital increases (venture capital, expansion capital), replacement (leveraged buy-out) and even reconstitution (turn-around capital) of the company’s capital.

  To address the increasing complexity of deal structuring and funding requirements; better master the risks inherent in their investments; and calibrate the anticipated returns, private equity investors innovate constantly. The underlying trend is to negotiate counterparts for their investments with company managers, such as:

  (i) Preferred returns and/or an increased control over decisions

  The risk that is taken by professional investors, as compared to other shareholders, increases with the average amount invested in a given business. Professional investors have therefore asked for preferential rights associated with their shares. These rights are negotiated in shareholders’ agreements and grant investors such rights as additional voting rights attached to their shares; priority dividends; and even preferential and guaranteed profit, to match a predefined multiple of their initial investment in the event that the business is sold.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Beyond the J Curve

  Managing a Portfolio of Venture Capital and Private Equity Funds

  • Thomas Meyer, Pierre-Yves Mathonet(Authors)
  • 2006(Publication Date)
  • Wiley

    (Publisher)

  Fund management companies—also referred to as “private equity firms”—set up these funds. Private equity funds are unregis- tered investment vehicles in which investors (the “limited partners”) pool money to invest in privately held companies. Investment professionals, such as venture capitalists or buyout investors (known as “general partners” or “fund managers”), manage these funds. Tax, legal and regulatory requirements drive the structuring of these investment vehicles with the objectives of transparency (i.e. investors are treated as investing directly in the underlying portfolio companies), low taxation and limited liability (i.e. investors liabilities are limited to the capital committed to the fund). While terms and conditions, and investor rights and obligations, were defined in specific non-standard partnership agreements, the Private Equity Market 11 Limited partner 1 Limited partner 2 Limited partner n Portfolio company 1 Portfolio company 2 Portfolio company m Private equity fund managed by general partner Figure 2.1 Private equity fund as pooled investment vehicle limited partnership structure—or comparable structures used in the various jurisdictions—has evolved over the last decades into a “quasi-standard”: • The fund usually has a contractually limited life of 7–10 years. The fund manager’s objective is to realise all investments before or at the liquidation of the partnership. Often there is a provision for an extension of 2–3 years. • Investors—mainly institutions such as pension funds, endowments, funds-of-funds, banks or insurance companies, or high net worth individuals or family offices—are the limited partners and commit a certain amount to the fund. There is little, if any, opportunity to redeem the investment before the end of the fund’s lifetime. • The main part of the capital is drawn down during the “investment period”, typically 4 or 5 years, where new opportunities are identified.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Introduction to Private Equity

  Venture, Growth, LBO and Turn-Around Capital

  • Cyril Demaria(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  Part II The Private Equity Ecosystem

  Private equity has to be seen as an ecosystem. It is built on the interaction of limited partners and general partners, the latter being in charge of deploying the capital in companies (see Chapter 3). Private equity covers the cycle of development of companies, and is providing solutions for all their activities (including in difficult times and even after they have disappeared, see Chapter 4). At the core of private equity, there are human relationships and trust. The process of investing is based on building this trust and these human relationships, notably in dealing with information asymmetries (Chapter 5).

  Passage contains an image 3 Private Equity

  A Business System Perspective

  We are all investors in private equity (see section 3.1), even though not necessarily directly and consciously. Financial institutions collect money from each individual through various channels such as, for example, insurance premiums or pension savings (Davidoff, 2012b). They redistribute this capital inflow in the financial system, and notably to non-listed companies.

  Non-institutional investors are high net worth individuals (HNWI). These individuals, because of their personal wealth, are considered as informed and aware of the risks borne by the selection of private equity funds. They can delegate the management of their assets partially or in total to private banks or family offices. These groups select funds for them. For the purpose of this book, we will focus on institutional investors (i.e., insurance groups, pension funds and banks) that we will call ‘limited partners’, and fund managers that we will call ‘general partners’.

  The expectations of private equity investors with regard to the risk and return of their commitments vary according to their industry of origin; the source of the money they invest; and their economic and regulatory constraints. For that reason, financial institutions are themselves not necessarily investing directly in private equity. They have delegated the management of their non-listed investments to private equity professionals (agents), on their account (principals). Evaluating the performance of these fund managers can be tricky and sometimes corresponds more to a leap of faith than a scientific risk-return calculation (see section 3.2).

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  The Future of Finance

  How Private Equity and Venture Capital Will Shape the Global Economy

  • Dan Schwartz(Author)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  No general partner ever goes into a deal knowing it will fail. But, inevitably, many do. Some of the reasons: good people leave, unforeseen lawsuits occur, a better product is introduced, or market whims change. Fund managers must then decide the best course of action: close down the company, salvage valuable parts, sell it, or invest additional capital in the hope of better times to come. Bad deals are never a sunny day, but there's always tomorrow.

  Limited Partners (LPs)

  Limited partners are the customers of the private equity and venture funds. They invest large sums of money in the partnership that are locked up for 10 years; in return, they expect above-market returns. They have certain rights, spelled out in the partnership agreement. Limited partners are generally sophisticated investors and have a financial rather than a strategic role; that is, their intent is to generate a financial return rather than to operate a business. Among them are pension funds, insurance companies, endowments, high-net-worth individuals, and sovereign wealth funds. There are, however, strategic venture companies—such as Intel, Cisco, Nokia (Helsinki), and Jarir (Riyadh)—whose priorities and programs are more strategically oriented.

  Limited partners make up a multi-trillion dollar universe. According to the 2008 Institutional Investment Report, in the United States alone, the latest available year-end 2006 data show that total institutional investors— defined as pension funds, investment companies, insurance companies, banks, and foundations—controlled assets totaling $27.1 trillion, up from $24.4 trillion in 2005. Their 2006 level represents a tenfold increase from $2.7 trillion in 1980, and an increase from $7.6 trillion in 1990 and $19.7 trillion in 2000. Pension funds represent the largest single category in 2006, with $10.4 trillion in assets. Much more will be said in the next chapter about limited partners and the issues they are currently facing.

  Debt Providers

  Traditional private equity has relied on vast amounts of debt to earn the returns promised to investors. Providers of debt include banks, insurance companies, mezzanine funds, and even hedge funds. But it is mainly the commercial banks that fund the purchases.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Investment Banks, Hedge Funds, and Private Equity

  • David P. Stowell(Author)
  • 2012(Publication Date)
  • Academic Press

    (Publisher)

  2. Investment banks: Investment banks (a) introduce potential acquisition targets to private equity firms; (b) help negotiate the acquisition price; (c) often provide loans (as a participant in a syndicated bank loan facility) and/or underwrite high-yield bond offerings; (d) occasionally assist in recapitalizations by underwriting debt or providing loans that fund the distribution of a large dividend to the private equity owner; and (e) assist in the eventual sale of the company through either an M&A-related sale or an IPO transaction. As a result, private equity funds represent a significant source of revenue for investment banks. Several large private equity firms paid more than $500 million in fees to investment bankers during 2006 at the height of the private equity boom.

  3. Investors: Institutional and high-net-worth investors become limited partners in a fund organized by a private equity firm, as opposed to investing directly in the firm. Funds of funds are also limited partners based on their significant investing capacity. Investors sign investment contracts that lock up their money for as long as 10 to 12 years. Typically, however, distributions are made to investors as soon as investments are turned into cash through completion of an exit strategy such as an IPO or sale of the company. Limited partners commit to provide capital over time rather than in a single amount up front. The general partner’s draw on this capital depends on when investment opportunities are identified (both to acquire companies and to expand company operations through acquisitions or product extensions). As a result, it may be a number of years after the original commitment of capital before all of the limited partner funds are drawn down.

  4. Management: Management of companies coinvest with the private equity fund in the new equity of the acquired company, which aligns management’s interests with the interests of the fund. In addition, management usually receive stock options. This effectively eliminates agency issues and provides the incentive to work hard and create significant value. The end result is wealth creation for management if they are successful in managing the company until a successful exit is completed (usually three to seven years after acquisition). If problems develop during the holding period or if exits are significantly delayed, management will not only forego significant exit-related compensation but may also lose their job.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Venture Capital, Private Equity, and the Financing of Entrepreneurship

  • Josh Lerner, Ann Leamon(Authors)
  • 2023(Publication Date)
  • Wiley

    (Publisher)

  Some partnership agreements restrict other actions by the GPs. Because outside activities are likely to reduce the attention paid to investments, private equity investors may be restricted to spending “substantially all” (or some other fraction) of their time managing the partnership’s investments. These limitations are often confined to the first years of the partnership, or until a set percent of the fund’s capital is invested, when the need for GP attention is presumed to be the largest. A fifth class of covenant relates to the addition of new GPs. By hiring less-experienced GPs, private equity investors may reduce the burden on themselves, but the cost of bringing on new partners, in terms of introducing the firm’s culture to the new hires, can be considerable. Moreo- ver, the LPs have usually signed on to have their money managed by the specific individuals noted in the initial prospectus. As a result, many funds require that the advisory board or a set percentage of the LPs approve the addition of any new GPs. In many cases, rather than run the risk of upset- ting the partnership, new hires will come on as “venture partners” until a new fund is raised, and only then become full-fledged GPs. For more on this, see Chapter 11. Types of Investments LPs are also concerned about the types of investments the GPs pursue. The first reason is that GPs are paid substantial amounts to invest in specialized areas. Should they choose to, say, invest 106 Dan Primack, “Private Equity Giant TPG Files for an IPO,” Axios Pro Rata, December 16, 2021, https://www.axios.com/ 2021/12/16/tpg-private-equity-ipo. 107 U.S. Securities and Exchange Commission, Form S-1 for TPG Partners, https://shareholders.tpg.com/node/6736/html; and Michael J. de la Merced, “TPG, a Private Equity Firm, Goes Public in the Year’s First Big Stock Market Debut,” New York Times, January 13, 2022, https://www.nytimes.com/2022/01/13/business/tpg-ipo.html.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Private Equity and Venture Capital in Europe

  Markets, Techniques, and Deals

  • Stefano Caselli, Giulia Negri(Authors)
  • 2018(Publication Date)
  • Academic Press

    (Publisher)

  Family and friends are the most common source of seed money and probably the easiest way to raise funds, but are also the most likely to cause problems. If the business fails, the financial troubles of the parties involved may be dwarfed by the emotional consequences. Nonetheless, many of America's successful companies have been created from this type of financing.
• 2.  
  Private placement funds are subscribed by private “amateur” investors instead of professional investors. There are big risks when playing such an important role in the development of major innovative firms.
• 3.  Private pool of funds are partnerships between different shareholders who decide to invest part of their own assets.
• 4.  Corporate funds are funds and financial resources managed by venture capital with the intention of financing companies in the development stage.
• 5.  Mutual investment funds are financial vehicles that provide capital by issuing and placing participation quota with investors.
• 6.  Bank financial intermediaries, in particular merchant banks, are entities most oriented to long-term investments and are prepared to sustain risk levels.
REMEMBER: Do you remember how each of this financier is associated to each private equity cluster?

11.4.2 Investing

To reach financial and competitive goals, a private equity investor creates value through the scouting and screening of available investments. The type of investment is chosen through the use of debt, because the private equity management team is involved in the governance of the venture-backed companies financed.

There are different practical types of investment: investment in a private equity fund, in a private equity fund of funds, or the direct investment in equity or the construction of a private equity fund and the involvement of the private equity fund in the firm-financed shareholders under the control of a single entrepreneur. The first two types of equity investment follow a logical financial strategy, whereas the last two follow an industrial strategy and the third one (direct investment in equity) has both a financial and industrial logic.