Private Equity

Agenda

• What is private equity?

• Private equity Lifecycle
• Why Private equity?
• Advantages/Disadvantages of PE
• Industry trends
• Real time example
• Private equity terms and definitions.
• References (Source of information)
 What is Private Equity?

Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that
make investments directly into private companies or conduct buyouts of public companies that result in a
delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be
used to fund new technologies, expand working capital within an owned company, make acquisitions, or to
strengthen a balance sheet.
Private equity, in a nutshell, is the investment of equity capital in private companies.

Limited Partnership
Limited Partners

$ Inflows $ Outflows
Investment
Investor Fund • Commitments
• Commitments • Maintain G/L • Capital Calls
• Capital Calls • Expense accruals • Valuations (PCAP’s)
• Remaining Commitment $ Call & Dist. • Financial Statements $ Call & Dist. • Distributions & DIK’s
• Distributions • Valuations • Investment Type
• Allocations • IRR’s • Co-Investments
• IRR’s • IRR’s

General Partner Cash Administration

$ Outflows $ Inflows

Portfolio Company
(5% testing)

Mgmt. fees Carried Int. Interest Expense Investee Partnerships

Direct Deals
Co-Investments
Calculate & Facilitate Daily
pay to GP process reconciliation
Private equity life cycle

Capital Calls Deal Flow

Capital Raising Deal Tracking

Fund
Formation Treasury

Treasury Portfolio
Analysis

Distributions Fund Valuation

Client
Realizations
Reporting
Characteristics of Private Equity?

• PE funds (venture capital) invest in non-public and public companies: Stock & Debt instruments.
• Typical investments: technology, industry, real-estate, bio-technology, medical, etc.
• Investors subscribe through commitments over a period of time. Investment is made for the life of
the fund: about 8-12 years.
• General Partner initiates capital call to fund investments, usually with ten days notice to LPs.
• Typical commitment is $500,000 or $1,000,000.
• Investors can only redeem by assigning / selling their commitment to someone else.
• Typically quarterly reporting.
Advantage of investing in Private Equity

• Investments that achieves investors desired mix of capital growth and income yield
• Asset allocation of those portfolios that are seeking capital gains through higher risk/higher return
investments
• benefit from being able to use the capital committed but not drawn down for other investments
until the cash is required by the private equity fund.
Private Equity Terms and Definitions

• Commitment — an obligation, typically the maximum amount that a limited partner agrees to invest
in a fund.
• Remaining Commitment – portion of the commitment still pending payment to the fund. Formula:
Commitment – Contribution + Recallable Distributions
• Capital call — when a private equity fund manager (usually a "general partner" in a partnership)
requests that an investor in the fund (a "limited partner") provide additional capital. Usually a
limited partner will agree to a commitment and the general partner will make a series of capital calls
over time to the limited partner as opportunities arise to finance startups and buyouts.
• Distribution — the transfer of cash or securities to a limited partner resulting from the sale,
liquidation or IPO of one or more portfolio companies in which a general partner chose to invest.
• Distribution in Kind (DIK’S) — when an underlying investment distributes stock to the fund
• Deal Flow - opportunities to make investments
• Deal Tracking - Research and due diligence
• Carried Interest – After returns to the external partners, this is the 20% amount holdback for
partners of Private equity firm, from the profit on Sell (Exits) of investments .
• PCAP – Partners Capital
Private Equity Terms and Definitions

• Co-investment — either a) the right of a limited partner to invest with a general partner in portfolio
companies, or b) the act of investing by two or more entities in the same target company (also
known as a Club deal).
• Management fee — a fee charged to the limited partners in a fund by the general partner.
Management fees in a private equity fund typically range from 0.75% to 3% of capital under
management, depending on the type and size of fund.
• General partner (GP) — a class of partner in a partnership. The general partner retains liability for
the actions of the partnership. In the private equity world, the GP is the fund manager while the
limited partners (LPs) are the institutional and high net worth investors in the partnership. The GP
earns a management fee and a percentage of profits
• Limited partner (LP) — an investor in a limited partnership. The general partner is liable for the
actions of the partnership while the limited partners are generally protected from legal actions and
any losses beyond their original investment. The limited partner receives income, capital gains and
tax benefits. LPs include public and corporate pension plans, banks, insurance companies, sovereign
investment funds, endowments, foundations, funds of funds (more about these below) and the
professionally managed investment offices of wealthy families
• DIK — a distribution to limited partners of a private equity fund that is in the form of publicly traded
shares rather than cash.
Private Equity Terms and Definitions

ADR Terms and Investment Terms:

• Amount Funded - Represents investments made to partnership plus expenses less any reductions for
recallable returns of capital. Portions of the funded amount may not reduce remaining
commitment.
• Remaining Commitment - Represents commitment less investments, less capitalized expenses
(inside) plus recallable distributions.
• Fair Value - Represents the fair value as reported by the partnership investment manager net of
carry, adjusted for cash flows through quarter-end, where applicable.
• Distributions - Represents total proceeds received from the partnership investment (includes non-
recallable returns of capital, interest, dividends and gains).
• Total Value – Fair value plus distributions.
• IRR’s - Calculated using all cash flows to and from the partnership investment, including cash flows
for investments, expenses and terminal value is equal to the partnership investment as of quarter
end.
• Net Multiple - Calculated using total value divided by funded amount.