This document provides an overview of private equity as an asset class. It describes the history and development of private equity, which originated in the 1940s in the US. It discusses the industry structure, including institutional investors, funds of funds, private equity funds, and operating companies. It also covers the various forms of private equity like leveraged buyouts, growth/expansion capital, and venture capital. The document outlines the roles of associates within the investment cycle and profiles some major private equity firms and investment banks. It provides additional resources for further reading on private equity careers and funds.

1. An Introduction to Private Equity
Private Equity OBN – SBS MBA
Class of 2012

2. What is Private Equity
 An asset class consisting of securities
invested in operating companies with
a view to generating value
 Investment typically lasts between 3-7
years depending on the investment
focus of the company.

3. History and Development
 Originated in the US in the 40s with the
founding of two Venture Capital firms
American Research and Development
Corporation (ARDC) and J.H. Whitney &
Company.
 First Leveraged Buyout in 1955. LBO boom
in the 80s with the emergence of KKR.
 Purchase of RJR Nabisco for $31.1 billion
in 1989 standout LBO deal and subject of a
book (Barbarians at the Gates)

4. Industry Structure
Institutional Investors
Fund of
Funds
Direct
Investment
PE Fund PE Fund PE Fund PE Fund
Operating Companies

5. Industry Players
 Fund of Funds (Limited Partners)
◦ Pool funds together on behalf of institutional investors
to invest in PE funds
 Institutional Investors (Limited Partners)
◦ Insurance companies, Pension Funds, Family Offices
seeking portfolio diversification
 General Partners
◦ Private Equity Fund Managers
Comprehensive list of PE funds (including websites)
can be found here
http://www.venturechoice.com/vcdir.htm

6. Forms of Private Equity
 Leveraged Buyouts
 Growth / Expansion Capital
 Venture Capital
 Others
◦ Distressed Investments
◦ Management Buyouts

7. Leveraged Buyouts
 Companies are acquired using
Financial Leverage
 Leverage can account for between
50% and 90% of total transaction cost
 Target companies usually mature with
strong cash flows
 Cash flows generated by company
used to pay down debt.
 Value generated when debt portion is
paid down

8. Growth/Expansion Capital
 Company seeking expansion
 Typically profitable and able to
generate cash, but not enough to
finance expansion
 PE company approach is typically
more hands on.
 Value is generated via
◦ Good entry price
◦ Operational/Margin improvements
◦ Growth due to expansion

9. Venture Capital
 Funds buy partial stake in an early stage
company
 Early stage companies go through various
rounds of funding – Stage A, B, C, D, E, etc.
 Funds typically exit their investment with IPO
or buyout from subsequent funding rounds
 Funds usually go public after scaling
 Riskier than typical PE investment due to
business failure
 High return potentials e.g Google, Microsoft,
Facebook

10. Others
 Management Buyouts
◦ PE fund supports existing management to take over
company
◦ Reliance on management to derive value
◦ Inherent alignment of interest is invaluable
 Distressed Investments
◦ Investment in equity or debt securities of financially
stressed companies.
◦ Value is generated by turning around the business in
addition to the typically undervalued entry price
◦ PE funds typically have relevant industry experience

11. Sources of Value Creation in
PE
Financial Earnings External
Engineering Enhancement Factors
• Cheap Debt • Change in • Rising stock
• Varied sources management markets
of funding • Disposal of • Mergers &
unprofitable Acquisitions
businesses
• Cost cutting
• New products

12. Exit Routes in PE
 Sale via equity markets
 Self liquidating instruments
(redeemable preference shares,
convertible debt)
 Put option (Sale of shares to
management)
 Leveraged refinancing
 Secondary sale (To other PE firms)

13. Fund Economics
 Two major models
◦ GP/LP Model
◦ Bank Subsidiary Model
 Limited Partnerships usually last for 10 years*
 Successful PE firms (with GP/LP model) stay in business by
raising a fund every 3 to 5 years*
 Management Fees and Carried Interest are primary sources
of revenue
* (Metrick Yasuda 2010)

14. Fund Economics
Family KKR - Investor Base By Type*
Office/HNI
3% Corporate
Pension
Financial 3%
Institution
5%
Endownment/
Foundation
5%
Public
Insurance Pension/Sover
8% eign Wealth
Funds
62%
Fund of Funds
14%
*Official KKR Data

15. Roles within PE firms*
Job Title Yrs of Compensation Partner Comments
Post MBA Track?
exp
Associate 0-1 Salary, Bonus, Sometimes
(Carry)**
Senior Associate 2+ Salary, Bonus, Yes
(Carry)**
VP 3+ Salary, Bonus, Yes
Carry
CFO/COO 5+ Salary, Bonus, Yes Often have a
Carry CPA
Partner 5+ Salary, Bonus, -
Carry
General Partner 7+ Salary, Bonus, - Receive
Carry significant
carried
interest
* Note on Private Equity Careers – Tuck (2003)
** Carried interest – Share of profits

16. What roles do Associates play
within the Investment Cycle?
•Liaise with fundraising consultants
Fund •Participate in road shows
Raising
•Help define Investment Strategy
•Review submitted business plans
Deal •Work on Pitch books for prospective deals
Sourcing
•Work with Due Diligence Consultants (Financial, Legal, Commercial, Technical)
•Work on Transaction Documents (Investment Proposal, Financial Model, Offer Letters, Term
Sheets, Legal Agreements)
Deal •Make presentations to Investment Committee
Execution •Manage disbursement process
•Review weekly/monthly/quarterly performance reports
•Work with management to redefine business and corporate strategy
•Act as consultant where necessary. E.g 2 month on-site placement to help resolve working capital
Deal management issues
Monitoring •Work with investment bankers to handle IPOs/Trade Sales/Rights Issues etc

17. Company Profiles – General
Partners
Name Website AUM*
TPG http://tpg.com $48 billion
KKR www.kkr.com $40 billion
The Carlyle http://www.carlyle.com $40 billion
Group
Blackstone http://www.blackstone.c $36 billion
om
Apollo www.agm.com $33 billion
Management
Bain Capital www.baincapital.com $29 billion
* Assets under management - Wikipedia

18. Company Profiles – Bank
Funds
Name Website Investment Focus
Standard http://www.standardcharte Emerging Markets
Chartered red.com/careers/associat
es/mba/oxford_said_busi
ness_school/roles.html
Barclays Capital http://www.bpe.com/ Europe
Citibank https://www.citicapitaladvi Europe/North
sors.com/metalmarkOver America/Asia
view.do
HSBC http://www.hsbcnet.com/p North America / Middle
i East

19. Additional Resources
 A note on Private Equity Careers
http://mba.tuck.dartmouth.edu/pages/clubs/peclub/pdfs/Private_Equity_Care
ers.pdf
 Private Equity as an Asset Class (The Wiley Finance Series) by Guy Fraser-
Sampson http://www.amazon.co.uk/Private-Equity-Asset-Class-
Finance/dp/0470661380/ref=sr_1_1?s=books&ie=UTF8&qid=1317551407&s
r=1-1
 Getting a Job in Private Equity: Behind the Scenes Insight into How Private
Equity Funds Hire http://www.amazon.co.uk/Getting-Job-Private-Equity-
Insight/dp/0470292628/ref=sr_1_6?s=books&ie=UTF8&qid=1317551407&sr
=1-6
 King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve
Schwarzman and Blackstone http://www.amazon.co.uk/King-Capital-
Remarkable-Schwarzman-
Blackstone/dp/0307452999/ref=sr_1_13?s=books&ie=UTF8&qid=131755169
6&sr=1-13
 The British Private Equity and Venture Capital Association (BVCA)
http://www.bvca.co.uk/PEVCExplained
 Emerging Markets Private Equity Association
http://www.empea.net/

20. Additional Resources
 Barbarians At The Gate: The Fall of RJR Nabisco
http://www.amazon.co.uk/Barbarians-At-Gate-Fall-
Nabisco/dp/0099469154/ref=sr_1_2?s=books&ie=UTF8&qid=1317551848&s
r=1-2
 National Venture Capital Association
http://www.nvca.org/
 European Venture Capital Association
http://www.evca.eu/default.aspx
 Guide to Private Equity Fund of Fund Managers
http://www.privateequityonline.com/books/productimages/Media/000/165/752
/Sample-3.pdf

21. Thank You…..