3. Private equity
d. describe hedge funds, private equity, real estate, commodities, infrastructure, and other alternative investments, including, as applicable, strategies, sub-categories, potential benefits and risks, fee structures, and due diligence;
e. describe, calculate, and interpret management and incentive fees and net-of-fees returns to hedge funds;
f. describe issues in valuing and calculating returns on hedge funds, private equity, real estate, commodities, and infrastructure;
What is the primary purpose of a private equity firm?
Private equity firms generally buy companies, repair them, enhance them, and sell them on.
What is the traditional structure of a private equity firm?
A private equity firm is typically made up of limited partners (LPs) and one general partner (GP).
What role do LPs play in private equity?
LPs are the outside investors who provide the capital. They are called limited partners in the sense that their liability extends only to the capital they contribute.
What role do GPs play in private equity?
GPs are the professional investors who manage the private equity firm and deploy the pool of capital. They are responsible for all parts of the investment cycle including deal sourcing and origination, investment decision-making and transaction structuring, portfolio management (the act of overseeing the investments that they have made) and exit strategies.
What is the traditional management fee structure for private equity?
Generally, after the LPs have recovered 100% of their invested capital, the remaining proceeds are split between the LPs and the GP with 80% going to LPs and 20% to the GP.
What is a clawback provision?
The clawback provision gives the LPs the right to reclaim a portion of the GP's carried interest in the event that losses from later investments cause the GP to withhold too much carried interest.
What is the leveraged buyout (LBO) strategy?
The leveraged buyout (LBO) is a strategy of equity investment whereby a company is acquired from the current shareholders, typically with the use of financial leverage. A buyout fund seeks companies that are undervalued with high predictable cash flow, low leverage and operating inefficiencies. If it can improve the business, it can sell the company or its parts, or it can pay itself a nice dividend or pay down some company debt to deleverage.
What is a management buyout (MBO)?
In a management buyout (MBO), the current management team is involved in the acquisition.
What is Venture capital?
Venture capital is financing for privately held companies, typically in the form of equity and/or long-term debt. It becomes available when financing from banks and public debt or equity markets is either unavailable or inappropriate.
What is Development capital?
Development capital (minority equity investments) earns profits from funding business growth or restructuring.
What is Distressed investing in private equity?
A distressed opportunity typically arises when a company, unable to meet all its debts, files for Chapter 11 (reorganization) or Chapter 7 (liquidation) bankruptcy.
What are some common exit strategies for private equity acquisitions?
Common exit strategies include trade sale, IPO, recapitalization, secondary sales, and write off or liquidation.