Unfairly reviled, and much misunderstood, private equity differs from all other asset classes in various important respects, not least the way in which its fund mechanisms operate, and the way in which its returns are recorded and analysed. Sadly, high level asset allocation decisions are frequently made on the basis of prejudice and misinformation, rather than a proper appreciation of the facts. Guy Fraser-Sampson draws upon more than twenty years of experience of the private equity industry to provide a practical guide to mastering the intricacies of this highly specialist asset class. Aimed equally at investors, professionals and business school students, it starts with such fundamental questions as ’what is private equity?’ and progresses to detailed consideration of different types of private equity activity such as venture capital and buyout. Rapid and significant changes in the environment during the recent financial crisis have prompted the need for a new edition. Separate chapters have been added on growth and development capital, as well as secondary investing. Newly emergent issues are considered, such as lengthening holding periods and the possible threat of declining returns. Particular problems, such as the need to distinguish between private equity and hedge funds, are addressed. The glossary has also been expanded. In short, readers will find that this new edition takes their understanding of the asset class to new heights. Key points include: A glossary of private equity terms Venture capital Buyout Growth capital Development capital Secondary investing Understanding private equity returns Analysing funds and returns How to plan a fund investment programme Detailed discussion of industry performance figures

Table of Contents:
About the Author xi Acknowledgements xiii Introduction xv 1 What is Private Equity? 1 What is Private Equity? 2 Fund investing versus direct investing 3 Co-investment 4 Terminology 6 Different types of Private Equity investment 7 Summary 13 2. What are Private Equity Funds, and How do They Work? 15 Capital: Allocated, Committed, Drawn Down and Invested 17 How do Private Equity Funds Work? 18 Structure 18 Cash flow 20 Investment 22 Fundraising 23 Private Equity Funds Distinguished from Other Fund Types 25 Hedge funds 25 Infrastructure 27 Private (Equity) Real Estate 28 A Note on International Issues 28 Summary 29 3. Private Equity Returns – The Basics 31 Understanding the J-curve and Compound Returns 31 Upper Quartile Figures 37 Median Returns 38 Average Returns 39 Pooled Returns 41 Using Vintage Year Returns for Benchmarking Purposes 41 Time-weighted Returns 42 Summary 43 4 Private Equity Returns – Multiples and Muddles 45 Multiples 45 Distributed over paid in (DPI) 47 Paid in to committed capital (PICC) 47 Residual value to paid in (RVPI) 47 Total value to paid in (TVPI) 48 Use of multiples in industry research 48 Muddles, Muggles and Markowitz 51 Returns 52 Risk 54 Liquidity 56 Summary 58 5 Buyout 59 Types of Buyout Transaction 59 Mbo 59 Mbi 60 Bimbo 60 Lbo 60 Take Private (P2P) 61 Roll-up 62 Secondary Buyouts 62 Other ‘Buyout’ Activity 62 PIPEs 63 How do Buyouts Work? 63 Characteristics of Buyout 67 Established businesses 67 Debt 69 Earnings 70 Size 71 Control 74 Barriers to entry 75 Summary 77 6 How to Analyse Buyouts 79 Earnings 80 Ebit 81 Ebitda 82 Earnings Growth 83 Multiple 84 Multiple increase (sometimes called multiple arbitrage) 85 Leverage 88 Recapitalisation 89 Timing 89 Modelling and Analysing Buyout Funds 91 Enterprise value 91 Summary 94 7 Buyout Returns 97 US versus European Buyout 97 Buyout skill bases 100 Imperfect markets 100 Earnings multiples 101 Earnings growth 104 Leverage 105 Contribution of different drivers 106 Fund size 107 Summary 112 8 Venture Capital 113 What is Venture Capital? 113 Backing New Applications, Not New Technology 114 Classification by Sector 115 It 116 Telecoms 118 Life Science 120 Classification by Stage 123 Seed stage 124 Early stage 127 Mid and late stages 128 Summary 128 9 How to Analyse Venture 129 The Fundamentals (1) – Money Multiples 129 The Fundamentals (2) – Valuation 131 Valuation as an element of stated returns 131 Differences in valuation approach between Europe and the US 132 Variability of Venture valuations 133 Pre-money and post-money valuations 135 Share classes 136 The Fundamentals (3) – Cost and Value 136 IRRs and multiples 138 Going in equity (GI%) 139 Percentage of the holding within the fund 139 The Impact of Home Runs 139 Summary 142 10 Venture Returns 145 US Outperformance versus Europe 145 Money multiples drive IRRs 145 Home runs and the golden circle 147 Market conditions 149 European Venture – Is it as Bad as it Seems? 151 Returns and Fund Size 154 Venture returns by stage 158 What of the Future? 159 Summary 161 11. Growth and Development Capital 163 The PLC and the BCG Growth Matrix 164 Development Capital 166 Target companies 166 Money in deals 166 Money out deals 167 Objectives 167 Growth Capital 168 Target companies 168 Objectives 169 Growth capital and late-stage Venture 170 Common Issues 171 Minority protection 171 Exit protection 173 The Future 174 Summary 175 12. Secondary Private Equity Fund Investing 177 Why do People Buy Secondaries? 178 Time and the J-curve 178 Diversification by time 180 Diversification by geography and sector 181 Treasury and Portfolio Secondaries 181 Why do People Sell Secondaries? 182 Change of strategy/leaving the asset class 182 Overconcentration by time, sector or geography 183 Unexpected need for cash 183 Housekeeping 184 Dissatisfaction with the GP 184 Restrictions on Transfer 184 Stapled primaries 185 Secondary Methodology 186 Tails 187 Fees etc. 188 Secondary Buyouts – A Warning 189 Summary 189 13. Due Diligence 191 Buyout Funds 193 Venture Funds 194 Co-investors 196 Cross-fund Investing 197 Buyout Companies 198 Venture Companies 199 Funds of Funds 200 Growth and Development Capital 201 Monitoring Private Equity Funds 202 The Changing Nature of Due Diligence 204 Summary 204 14. Planning Your Investment Programme 207 Cash Flow Planning 207 Allocated, Committed and Invested Capital 208 Diversification by Time 209 Proper Commitment Levels 210 Diversification by Sector and Geography 212 Total Return 215 How to deal with uninvested capital 215 Towards a New World of Private Equity Programmes? 218 Summary 219 15. Trends and Issues 221 Financial Crisis 222 Credit 222 Valuation 224 Holding periods 225 Secondaries 227 Emerging Markets 228 Concluding Thoughts 229 Track record 230 Returns 230 Fee structures 231 Private Equity at a Crossroads? 232 Summary 233 Glossary of Private Equity Terms 235 Index 259