Introduction To Private Equity - Aventri
Introduction to Private EquityFebruary 2013
We will be looking at 1What is Private Equity?2Private Equity Strategies3Risk and Return4Why Do Pension Funds Invest in PE?
What is Private Equity? A comparisonPRIVATE EQUITYLISTED EQUITY Low liquidity Strong liquidity Long investment horizon Short or long term High active involvement Little active involvement Low market efficiency Higher market efficiency No published information Published information Low regulatory oversight Highly regulated
Stages of FundingCertainty of cash flowsSeedEarlyExpansionNandosDebtPrivate EquityVenture CapitalAngel InvestorBusiness MaturityLateConsolGlass
Why Do Companies Seek PE Funding?IncreaseWorkingCapital BaseBuy OutShareholderstoRestructureOwnership &ManagementPE vs. Debt Financing suits debt fundingTHE sion &Development Balance of debt andequity needed Experiencedprofessionals FinanceAcquisitionsof OtherBusinessesNot every businessDevelop NewProducts inOrder toGrow/RemainCompetitiveNon Monetary BenefitPolitical / corporateConnections GP’s have experiencein sector / stage ofbusiness
Structure and roles of LPs and GPsAdvisoryCommitteeGeneralpartnerBank und (limitedpartner)PE FoF(limitedpartner)PE FUNDAdvisorInvestmentCommitteeInvestment A (Company)Investment B(Company)Investment C(Company)
Commitments vs. DrawdownsInvestment PeriodRealisation Period
Understanding the J-curveCash flow istributionsCumulative cash flowReturns 0%-60%-80%-8%ReturnFee % of Drawn capitalFee % of draw downs7%60%
Where Does a Company’s Value Come From?Financial PerformanceCompany ValuationSales100EBITDACost of sales(60)EBITDA MultipleX6Enterprise value90Gross profit40Overheads(25)Operating profit (EBITDA)1515
Where Does the Value Go?DebtEquityLow debt (leverage)EnterpriseValueHigher debt 05025%Enterprise Value9010011%Enterprise Value9010011%
Debt and Equity Risk and Return ReturnRiskDebtReturn limited to interest rateLow riskAll equity must be eroded before anyloss for debtEquityUnlimited upsideMore risky than debtTakes the first losses of valueThe more debt there is, the more riskythe equityAs long as returns on debt taken on exceed the interest rate on the debt,equity returns are enhanced But there are limits – ratio of Debt : EBITDA is common (2-3 times is normal)
Fee StructureSingle FundFund of Funds2% advisory fee1% advisory feeAdvisory fee – an annual payment is made bythe fund to the Advisor to cover the costs of theprivate equity firm's investment operations (thefee is typically 1% to 2.5% of the aggregatecommitted capital of the fund)A participation inthe gains andsurpluses up to20%A participation inthe gains andsurpluses up to10%Gains and surpluses – a participation in thegains and surpluses of the fund (typically up to20%) is paid to the General Partner or Trustee asa performance return. The remaining 80% of thegains and surpluses is paid to the investors prorata to their capitalrate or preferred return – a minimum rate of return(normally 8% to 12%) earned by investors on their committedcapital must be achieved before the General Partner or Trusteecan receive its participation in the gains and surplusesHurdle
SA Private Equity has OutperformedSA private equity has largelyoutperformed the majorlisted indicesFINDI tests resources biasof JSESource: RisCura Fundamentals SA Private Equity Performance ReportSWIX tests market cap vs.tradability bias - less than 10years old
Vintage Year PerformanceOlder vintages haveperformed betterNewer vintages are largelyunrealisedSource: RisCura Fundamentals SA Private Equity Performance ReportAll vintages show positivereturns
What Are the Risks of Private Equity?LightlyRegulatedConflicts ofInterestLiquidityRISKSValuationConcentration
Ways to Invest in Private EquityINSTITUTIONAL INVESTORPORTFOLIO OF FUNDSPE FUND1 companyPE FUNDPE FUNDPE FUNDPE FUNDPE FUNDPE FUND8-10 companies80-120 companies
Building a Private Equity PortfolioRisk & ComplexityPortfolio of FundsDirect (PE Fund)Co-InvestmentDiversified portfolio ofinterestsInterests in funds with directcontrol over portfolio co.Investing directly into aprivate companyLowest level of due diligencerequiredLower level of due diligenceGreater Skill set requiredAdditional layer of feesManager SelectionKnowledge of local marketAccess through relationshipsSpecific industry expertiseand networksExposure
Asset Allocation DecisionIS PE THE RIGHT ASSETCLASS FOR YOU? Historic performance Risks may impact returns Micro/macroeconomic Regulation Diversification benefits Developmental impact
Why Do Pension Funds Invest in PE?“Long-term savings vehicles, such as pension funds, are uniquely positioned to manage thelong investment term and limited liquidity of private equity investment to capture whatappears to be a significant performance premium and diversification benefits.”- “Is Private Equity a suitable investment for South African Pension Funds?”released at the Convention of the Actuarial Society of South African in October 2006PORTFOLIO OPTIMISATIONDEVELOPMENTAL VEHICLE Performance premium to listed equity Facilitation ownership by company staff Low correlation to listed equity (although Provides finance and expertise tobecoming more correlated) Exposure to small and medium sizedcompaniesunlisted companies Improves governance
Many Other Benefits to Private EquityEfficient MarketsConceptAlignment ofIncentives &Risk: PE FundManagersRewarded AfterInvestorsRealise ReturnBridges the GapBetweenMedium-sizedCompanies &the ement &EnhanceCorporateGovernanceA Source ofGrowth forListed MarketsBenefits ofActiveManagementMaximise Value& CorrectPerformance
What is Happening in Developed Markets?LARGE US PENSION FUNDS’ ALLOCATIONS TO PE
How to Manage Risk as an Investor into PE1ST ASSET ALLOCATION DECISION Should an allocation be made to PE?Historic performanceRiskRegulationDiversificationGeography Local Regional Global3RD FUND SELECTION What is the fund going to invest in?Legal & tax structuringFee structure – alignment of interestsQuality of advisorsReporting requirementsMandate fitWho are the other investors?Essentially a due diligence process2ND MANAGER SELECTION DECISION Has the manager run a previous successful fund?Manager reputationManager networkRisk management processes4TH ONGOING MONITORING Performance analysis Independent valuation Regular interaction with managers
Thank you
About RisCura FundamentalsThe leading provider of independentvaluation, risk and performance analysisservices to investors in unlisted instruments inAfrica.We work in partnership with our clients todeliver the transparency and accountabilitythat increasingly is demanded by investors.Our clients include private equity funds,pension funds, credit funds, banks andother investors in Africa, and cover industriesas diverse as agriculture, retail, manufacturingand the extractive industries.Email fundamentals@riscura.comPROJECTS COVERING MANYAFRICAN COUNTRIES
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Debt and Equity Risk and Return Return Risk Debt Return limited to interest rate Low risk All equity must be eroded before any loss for debt Equity Unlimited upside More risky than debt Takes the first losses of value The more debt there is, the more risky the equity As long as returns on debt taken on exceed the interest rate on the debt,
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All contiguous periods from 1996 to 2015 show a private equity PME 1 except for 2006 to 2015 Kaplan: " Phalippou's definition of private equity is too broad" Phalippou's private equity universe includes real assets, real estate, infrastructure and energy. When private equity is defined just as buyout, growth equity and venture capital
2. Private equity in South Africa Private equity is an asset class which differs in nature from most other assets, including listed equity. Typically, private equity fund investments show low correlation to quoted equity markets and are relatively illiquid, particularly in the early years. Private equity will normally show a drop in net asset value
9.2.1. Real estate private equity definition 33 9.2.2. Electricity generation private equity definition 33 9.2.3. Relevant criteria 33 9.2.4. SDA for real estate private equity investments 34 9.2.5. SDA for electricity generation private equity investments 34 9.3. Asset classes: private equity direct investments including buyout, growth capital and
Employment Levels at Private Equity and Private Debt Firms There are currently over 7,400 firms actively managing private equity and private debt funds worldwide (i.e. currently raising funds or that have raised a fund in the past 10 years). In the case of private equity, when private equity firms that do not raise or
U.S. Private Equity Index and Selected Benchmark Statistics The Cambridge Associates LLC U.S. Private Equity Index is an end-to-end calculation based on data compiled from 1,199 U.S. private equity funds (buyout, growth equity, private equity energy and mezzanine funds), including fully liquidated partnerships, formed between 1986 and 2014.
The Private Equity Conundrum: Reconciling Private and Public Equity Risk/Return Profiles Private equity (PE) seems to contradict the investment maxim that greater reward only comes with increased risk. On an observed basis, private equity has higher returns and lower volatility than public equities, as shown in the chart below: Benchmark Annualized Return Annualized Volatility State Street .
ANSI A300 (Part 1)-2001 Pruning Glossary of Terms . I. Executive Summary Trees within Macon State College grounds were inventoried to assist in managing tree health and safety. 500 trees or tree groupings were identified of 40 different species. Trees inventoried were 6 inches at DBH or greater. The attributes that were collected include tree Latitude and Longitude, and a visual assessment of .
