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Mastering Private Equity: Transformation via Venture Capital, Minority Investments and Buyouts
The definitive guide to private equity for investors and finance professionals
Mastering Private Equity was written with a professional audience in mind and provides a valuable and unique reference for investors, finance professionals, students and business owners looking to engage with private equity firms or invest in private equity funds. From deal sourcing to exit, LBOs to responsible investing, operational value creation to risk management, the book systematically distils the essence of private equity into core concepts and explains in detail the dynamics of venture capital, growth equity and buyout transactions.
With a foreword by Henry Kravis, Co-Chairman and Co-CEO of KKR, and special guest comments by senior PE professionals.
This book combines insights from leading academics and practitioners and was carefully structured to
A clear and concise reference for the industry expert A step-by-step guide for students and casual observers of the industry A theoretical companion to the INSEAD case book Private Equity in Case Studies from Developed and Emerging Markets Features guest comments by senior PE professionals from the firms listed
Abraaj • Adams Street Partners • Apax Partners • Baring PE Asia • Bridgepoint • The Carlyle Group • Coller Capital • Debevoise & Plimpton LLP • FMO • Foundry Group • Freshfields Bruckhaus Deringer • General Atlantic • ILPA • Intermediate Capital Group • KKR Capstone • LPEQ • Maxeda • Navis Capital • Northleaf Capital • Oaktree Capital • Partners Group • Permira • Terra Firma
Mastering Private Equity was written with a professional audience in mind and provides a valuable and unique reference for investors, finance professionals, students and business owners looking to engage with private equity firms or invest in private equity funds. From deal sourcing to exit, LBOs to responsible investing, operational value creation to risk management, the book systematically distils the essence of private equity into core concepts and explains in detail the dynamics of venture capital, growth equity and buyout transactions.
With a foreword by Henry Kravis, Co-Chairman and Co-CEO of KKR, and special guest comments by senior PE professionals.
This book combines insights from leading academics and practitioners and was carefully structured to
A clear and concise reference for the industry expert A step-by-step guide for students and casual observers of the industry A theoretical companion to the INSEAD case book Private Equity in Case Studies from Developed and Emerging Markets Features guest comments by senior PE professionals from the firms listed
Abraaj • Adams Street Partners • Apax Partners • Baring PE Asia • Bridgepoint • The Carlyle Group • Coller Capital • Debevoise & Plimpton LLP • FMO • Foundry Group • Freshfields Bruckhaus Deringer • General Atlantic • ILPA • Intermediate Capital Group • KKR Capstone • LPEQ • Maxeda • Navis Capital • Northleaf Capital • Oaktree Capital • Partners Group • Permira • Terra Firma
695 pages, Kindle Edition
Published July 7, 2017
352 people are currently reading
1611 people want to read
About the author
Claudia Zeisberger
11 books21 followersProfessor Claudia Zeisberger is one of the best networked figures in the private capital space, combining her academic expertise with over 35 years of experience in financial markets. As an advisor and angel investor, she partners with boards and leadership teams to drive growth and scale startups. A professor at INSEAD, a top-ranked business school with campuses in Singapore, France, the US, and the UAE, she is a global citizen, an award-winning author, and a trusted advisor to corporations, institutional investors, and governments. In her role as a "Professional Devil’s Advocate," she frequently provides independent perspectives on investment and risk-related decisions.
Professor Zeisberger is a founding member of KKR’s Sustainability Expert Advisory Council (SEAC) and serves on the advisory boards of Standard Chartered Ventures (SCV), Linzor Capital, and KaizenVest. She also works with select nonprofits as a volunteer board advisor and is the CEO of 5 Quadrants, a research and risk management advisory firm.
At INSEAD, she created and leads Managing Corporate Turnarounds, a highly regarded MBA elective featuring a bootcamp-style online simulation centered on an iconic car brand’s struggle with bankruptcy. She also teaches INSEAD’s Risk Management elective, a natural extension of her work in corporate restructuring and private capital. Recognized for her exceptional teaching, she has received INSEAD’s Best Teaching Award for her Private Equity elective for three consecutive years and has been honored with the Dean’s Commendation for Excellence in MBA Teaching annually since 2008.
Full CV: https://www.insead.edu/faculty-resear...
Personal Website: https://claudiazeisberger.com/
http://masteringprivateequity.com/)
Professor Zeisberger is a founding member of KKR’s Sustainability Expert Advisory Council (SEAC) and serves on the advisory boards of Standard Chartered Ventures (SCV), Linzor Capital, and KaizenVest. She also works with select nonprofits as a volunteer board advisor and is the CEO of 5 Quadrants, a research and risk management advisory firm.
At INSEAD, she created and leads Managing Corporate Turnarounds, a highly regarded MBA elective featuring a bootcamp-style online simulation centered on an iconic car brand’s struggle with bankruptcy. She also teaches INSEAD’s Risk Management elective, a natural extension of her work in corporate restructuring and private capital. Recognized for her exceptional teaching, she has received INSEAD’s Best Teaching Award for her Private Equity elective for three consecutive years and has been honored with the Dean’s Commendation for Excellence in MBA Teaching annually since 2008.
Full CV: https://www.insead.edu/faculty-resear...
Personal Website: https://claudiazeisberger.com/
http://masteringprivateequity.com/)
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Displaying 1 - 23 of 23 reviews
April 14, 2020
Mastering Private Equity is one of the best books I have ever read. It provides detailed perspectives of the private equity world, and how private capital will be shaped. I wish I had read this book as part of my academic curriculum during my school tenure. I highly recommend the book to those interested in building a career in investment banking and PE.
May 25, 2019
The absolute guide for PE and how it works. A good reference for experts as well.
Read
August 31, 2024private equity is capital that is invested privately. Not on a public exchange. The capital typically comes from institutional or high-net worth investors who can contribute substantially and are able to withstand an average holding period of seven years.
After leaving Bear Stearns to start our own firm, we had $120,000 between the three of us
Why don't we go to eight individuals and ask them to put up $50,000 each for a five-year commitment and in return, we'd give them the ability to come into any of our deals. And if they did invest, we'd take 20 percent of the profits—what is known today as carried interest.
PE deals became associated with hostile takeovers at the time. Referring to PE as “corporate raiders” or “barbarians,” the public's reaction to the very same question I asked you—what is private equity?—was simply: an investment vehicle to acquire, strip and sell an asset for profit.
Investing alongside one's investors, or our limited partners (LPs)
Source: Preqin
Family businesses must honestly address succession planning
A fund’s uninvested committed capital is referred to as its “dry powder”; by extension, the total amount of uninvested committed capital across the industry is referred to as the industry’s “dry powder.”
Investors have traditionally allocated capital to PE due to its historical outperformance of more traditional asset classes such as public equity and fixed income.
The fee structure in PE is commonly referred to as “2 and 20”
“2%” refers to the management fee paid by the LPs per annum to a fund’s investment manager while the “20” represents the percentage of net fund profits—referred to as carried interest or “carry”—paid to its GP.
the return on capital generated by the fund net of management fees and carried interest—is the relevant metric for its investors and LPs
It is hard to imagine today, but we had no real data to evaluate the managers with and there were very few realized deals. Almost everyone was a first time fund and there were virtually no formal standards in place. Benchmarks, quartile rankings, written valuation guidelines, and placement agents did not exist. Neither did industry conferences and newsletters, with the exceptions of the National Venture Capital Association’s annual meeting and the Venture Capital Journal. The fax machine hadn’t yet been invented, but a new venture-backed company, Federal Express, helped us with overnight documents.
Back then, fundraising was exceptionally difficult. Most pension consultants did not follow or cover the asset class. We spent a lot of time doing educational presentations for trustees and their consultants at offsite retreats, board meetings and pension conferences.
Pioneered by KKR, CD&R and a handful of other firms, the use of leverage to buy and manage a company was a new idea. The development of the high yield bond market, led by Michael Milken of Drexel Burnham Lambert, made this practically possible on a much wider scale than previously thought.
the takeover of RJR Nabisco in 1989 by KKR (as told in a book and a movie, both called Barbarians at the Gate)
VC funds are minority investors betting on the future growth of early-stage companies—defined as pre-profit, often pre-revenue and at times even pre-product start-ups.
Deploying funding in stages allows a VC fund to assess the progress of the company against milestones and allocate follow-on capital to the best performing companies in its portfolio.
First-time entrepreneurs are well advised to carefully review the terms under negotiation before signing a term sheet, especially as earlier investment rounds set the ground rules for future fundraising, potentially complicating that process. Guidance from an experienced entrepreneur or a friendly venture partner can help overcome the knowledge gap
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). Many VCs will require an ESOP of 20% of the outstanding shares before closing a round.
ANTI-DILUTION: This provision protects earlier investors in the event of a “down-round”
DRAG-ALONG/TAG-ALONG PROVISIONS: A tag-along provision provides minority shareholders with the right to sell their shares in conjunction with the majority shareholder in a third-party transaction, participating in any liquidity event pro rata.
every venture firm has a very specific focus on verticals, technologies, geographies, and most important investment amounts or funding rounds. They are likely to pass on a great idea if it doesn’t fit their focus
entrepreneurs should ask for references from past investee companies before selecting a VC fund. Speaking with those founders will give them a clear idea of the day-to-day reality of working with and accepting funding from the respective VC.
Pg 75 chart
Their approaches and ideas are influenced by the individual’s historical experiences. Behavior—both in the moment and over time—varies widely.
Other firms wait until a company is in the market with a product that is starting to scale. Other VCs, often called growth investors, prefer to engage when a company is clearly succeeding and is now scaling. Still others like to be the last round investor prior to an IPO and are consequently called late-stage investors.
If you understand who you are talking to, what motivates them, and what they care about, you can both target them better as well as have a much more effective conversation with them.
Corporate venture capital (CVC) is created by business entities not usually engaged in financing and investing; INTEL Capital, Unilever Ventures and Google Ventures are among the most prominent.
Our team members put their own money into every deal that we do, creating the ultimate alignment of interests.
unlock value
optimize the amount of leverage applied in a transaction, thereby considering various downside scenarios and ways to reduce the risk in an investment.
Senior debt is typically issued by one or more banks. it is typically “secured” against specific company assets
Junior debt accounts for the remaining debt capital in a buyout; the most common forms are mezzanine financing raised in the private institutional market and high-yield bonds raised from the public bond markets. This layer of debt is unsecured and subordinated to senior debt in the event of bankruptcy.
running hard to stay still
buying assets at or below their intrinsic value, and finding opportunities where value creation can be engineered through the operation of multiple levers early in the life of an investment.
Publicly listed companies are often acquired in public-to-private (P2P) transactions, also known as takeprivates.
modus operandi
“Cash is king” in the world of turnaround investing: finding it, unlocking it, and driving cash flow improvement to remain solvent and operational are crucial.
debt holders will typically accept a small writedown (or “haircut”) to facilitate a smooth restructuring process
The US bankruptcy code (Chapter 11) is well-tested and allows for the continuation of operations and then an orderly exit as a going concern. Many, if not most, continental European bankruptcy laws are relatively new, untested, with limited precedents and less creditor-friendly. Furthermore, they do not necessarily allow for a business to continue operating as a going concern and, often, lead to significant value destruction through fire sales, liquidations, and the withdrawal of supplier and financing lines.
operational improvements (turnaround investing) or balance sheet optimization (distressed debt)
the rationale behind the frequent use of special purpose vehicles in PE investments when executing deals.
“reps and warranties,” covenants, subordination
Early-stage VCs may attend venture competitions at business schools and universities to gain early access to ideas.
global investment banks don’t like to get out of bed for fees of less than 5 million US dollars. This is good for private equity players because where there is inefficiency, there is the opportunity for alpha, that measure of value generation we all seek.
In emerging markets, valuable insight can be gained from understanding a country’s age and income characteristics combined with knowledge of the level of household or personal income that triggers demand for a particular item. Income distribution curves vary by country but they will typically have bulges of population on the verge of achieving income levels that stimulate consumption of something previously unaffordable. This can highlight products or services where supercharged growth can be anticipated. For example, substitution of a car for a motorcycle doesn’t happen at an even pace; auto ownership increases rapidly at the point where a large bulge of the population crosses the threshold level of income for auto ownership.
go or no-go.
sell-side advisor
Virtual data rooms, in which copies of all documents are stored electronically, have become the norm, but physical data rooms still exist.
Pg 169
VC investors are particularly concerned with so-called down rounds (when start-ups raise capital at a lower valuation than that of previous rounds) and regularly include protective provisions in their 5 term sheet to avoid being diluted.
multiple of money invested (MoM)
the true market value is determined by the price actually agreed between a willing buyer and a willing seller.
A common example is a seller’s wish for speed and transaction certainty. In this case a seller may prefer a fair offer delivered quickly over a higher competing offer which was, however, subject to multiple conditions and uncertain timing.
buy low–sell high
last 12 months (LTM) or, alternatively, the forward looking next 12 months (NTM)
investment bank (the sell-side advisor)
most companies today are affected by foreign exchange movements whether it be selling outside the home territory, sourcing from abroad or competitive advantage from where it operates.
public-to-private (P2P). P2Ps were particularly prevalent during—and a major driver of—the 2006/07 peak in buyout activity, accounting for 43% and 50% of the total capital invested in buyouts in each year
PE firms typically end up paying a premium to a company’s market capitalization in a P2P. meant to entice existing shareholders to tender/sell.
Senior debt provided by investment banks. In large buyouts, bank debt is typically provided by a consortium—a group of banks—when the required loans exceed a single lender’s capacity.
A lead arranger heads due diligence, structures and negotiates the commercial terms of the debt agreement, and represents the consortium throughout the investment and holding period; other banks are invited to participate in the offering on the same terms as co-arrangers. The arrangers might later decide to sell some of their exposure in a syndication process to other banks. Senior bank debt may also be securitized and sold on as individual leveraged loans or via collateralized loan obligations.
Senior debt typically consists of the following tranches, in order of seniority:
• Revolving credit facility (RCF)
• First lien term loan
• Second lien term loans
Junior debt consists of a range of unsecured, subordinated debt instruments and ranks second to senior debtholder claims in the event of bankruptcy.
Common forms of junior debt are:
• Mezzanine loans
• High yield bonds
Bridge loans are typically short-term, secured credit facilities
Vendor financing reduces the cash required to execute a transaction by rolling over or delaying full payment of transaction proceeds. This type of financing typically comes in two forms: vendor debt and earn-outs. The magnitude of an earn-out is typically subject to a company’s operating performance post-closing, and only strong performance will result in additional payments to the seller. Earn-outs are commonly employed when a vendor continues to manage the business post-closing.
Shareholder loans are the most junior form of debt and are provided by equity shareholders
——-
Preferred shares are a senior form of equity
Common equity is the most junior instrument
Guy Hands, Chairman and Chief Investment Officer, Terra Firma. What I have learned over three decades of investing is that it is essential to outline a realistic downside scenario for every business. You then must be confident that the capital structure you put in place is sufficiently robust to withstand this downside scenario, or indeed a broader downturn in financial markets. From these experiences, we learnt two valuable lessons. First, it is essential to keep control of a business throughout the economic cycle. Second, syndicating debt as widely as possible reduces the risk that a single lender will feel the need to seize a company midtransformation.
Pg 217 diagram
Material adverse change (MAC): A MAC clause provides a buyer with the right to terminate the SPA in case of a material event that impairs the value of the target company.
Pg 226 diagram
Corporate governance in private equity (PE) refers to the practices, processes and rules put in place to align the interests of owners, investors and management.
adding expertise but also increasing the number of chefs in the kitchen and the potential for conflict
proper checks and balances
the top two layers in the management team—and up to 20% of a company’s common equity is often set aside for them.
Mario Andretti encapsulated this beautifully: “If you think you are in control, you are not driving fast enough!”
excess cash can be used to repay debt or pay early distributions to the PE fund and improve an investment’s internal rate of return.
weave straw into gold, turning a bad company into a good company.
what to do and how best to do it
environmental, social and governance (ESG)
when raising follow-on funds; returning cash earlier than expected to the LPs helps them justify the decision to re-up in the next-generation fund.
installs a floor for the purchase price
PE firms might hire a sell-side advisor (usually an investment bank) to manage the sales process.
exit paths for buyouts—sale to a strategic, sale to a PE fund and IPO
IPOs have historically provided the highest returns relative to other exit strategies. IPOs are expensive relative to other exit strategies. Associated fixed costs include underwriters, legal and accounting fees, printing fees and listing costs, altogether ranging from 5 to 15% of capital raised.
Feeder funds aggregate commitments from one or more investors and invest directly into the primary fund as an LP.
Alternative investment vehicles (AIVs) are structured to accommodate one or more special investments made outside of the primary fund (and/or a parallel fund).
CO-INVESTMENT VEHICLE: These vehicles are set up by the GP to invest alongside the master and parallel funds in a portion of a single investment.
ALL CAPITAL FIRST VS. DEAL-BY-DEAL
Marketing to high-net worth and sophisticated investors is permitted in some jurisdictions, while any general public offering of the fund or marketing to retail investors is usually prohibited. GPs must therefore personally approach the appropriate investors and may not employ mass-communication methods to market a fund.
reverse solicitation is risky and closely scrutinized by the authorities, as it can be difficult to establish who initiated the conversation.
Given the historically strong linkage between past performance and future performance (“stickiness”) in PE, investors are particularly interested in the track record of the investment team and that of its individual members. 5 Best practice is to include all funds previously managed and all investments made to avoid selective disclosure.
the best way to convince LPs to invest in a first-time fund is to allay their concerns by presenting the new team as a well-experienced, institutional platform, i.e., not a first-time fund.
Common investors in first-time funds include endowments, family offices, specialist fund-of-funds and development finance institutions.
An LP’s capital commitment is drawn down gradually over a four- to five-year investment period; once called, the capital typically remains invested for three to seven years
Pg 378 chart
The performance of a PE fund is reported to its LPs on a quarterly basis.
a fund’s net asset value (NAV) plus its gross multiple of money invested (MoM) and its internal rate of return (IRR) as of the reporting date. make it comparable to that of other funds. Pg 399 for example.
Zombie funds are PE funds managed by a GP that is unable to raise a follow-on fund. Common reasons for the failure to raise a successor fund are poor performance
what became known as merchant banking— providing capital to companies in return for share ownership. Although the fund model came to dominate the investment industry over time, some players, notably family offices and some financial institutions, continued to invest directly in private, unlisted businesses.
passive co-investment (also known as syndication) and active co-investment (also called coleading).
Investors are looking to enhance returns or at least reduce the riskiness of their co-investment portfolio through deal selection. While this by definition requires selection skills, LPs argue that they can achieve this by avoiding certain types of investments, such as larger or riskier deals, or deals outside the fund managers’ historical expertise.
can round out a portfolio by adding exposure to a certain geography, market, industry sector
speed in their decision-making process
performance-linked compensation
Crawl, Walk, Run
(IPOs) of the likes of Blackstone (2007), KKR (2010), Apollo (2011) and Carlyle (2012) not only attracted the attention of a broad retail investor base
Listed private equity funds (“LFs”) are an ideal way for private individuals, or small institutions, to invest in private equity (“PE”)
LFs, at the time of writing, are trading at a discount of around 19% 5 to net asset value, while many private secondary market transactions are completing at close to par, or even a premium.
therefore not have as far to fall
legal disclaimers, that “past performance is not a guide to the future”
“key person risk”
for the sake of simplicity, we determine that our $100m asset is 50% exposed to a depreciation of the local currency, i.e. for every 10% fall in the currency, the asset loses 5% of its value in base currency terms. The next question: what is an appropriate hedge size? Is it the simple $50m exposure? Or should we hedge in advance 50% of the underwritten exit multiple—or perhaps something in between?
quasi-permanent
1989 publication of Barbarians at the Gate, a tale of greed, subversion and conspiracy that chronicled the largest leveraged buyout of its time in the early days of PE.
1940s and ’50s when the likes of ARDC and 3i were set up by their respective governments to stimulate postwar economies?
reveal the secret sauce that makes top-quartile funds so successful
“irrational exuberance”
create value through profit growth
After leaving Bear Stearns to start our own firm, we had $120,000 between the three of us
Why don't we go to eight individuals and ask them to put up $50,000 each for a five-year commitment and in return, we'd give them the ability to come into any of our deals. And if they did invest, we'd take 20 percent of the profits—what is known today as carried interest.
PE deals became associated with hostile takeovers at the time. Referring to PE as “corporate raiders” or “barbarians,” the public's reaction to the very same question I asked you—what is private equity?—was simply: an investment vehicle to acquire, strip and sell an asset for profit.
Investing alongside one's investors, or our limited partners (LPs)
Source: Preqin
Family businesses must honestly address succession planning
A fund’s uninvested committed capital is referred to as its “dry powder”; by extension, the total amount of uninvested committed capital across the industry is referred to as the industry’s “dry powder.”
Investors have traditionally allocated capital to PE due to its historical outperformance of more traditional asset classes such as public equity and fixed income.
The fee structure in PE is commonly referred to as “2 and 20”
“2%” refers to the management fee paid by the LPs per annum to a fund’s investment manager while the “20” represents the percentage of net fund profits—referred to as carried interest or “carry”—paid to its GP.
the return on capital generated by the fund net of management fees and carried interest—is the relevant metric for its investors and LPs
It is hard to imagine today, but we had no real data to evaluate the managers with and there were very few realized deals. Almost everyone was a first time fund and there were virtually no formal standards in place. Benchmarks, quartile rankings, written valuation guidelines, and placement agents did not exist. Neither did industry conferences and newsletters, with the exceptions of the National Venture Capital Association’s annual meeting and the Venture Capital Journal. The fax machine hadn’t yet been invented, but a new venture-backed company, Federal Express, helped us with overnight documents.
Back then, fundraising was exceptionally difficult. Most pension consultants did not follow or cover the asset class. We spent a lot of time doing educational presentations for trustees and their consultants at offsite retreats, board meetings and pension conferences.
Pioneered by KKR, CD&R and a handful of other firms, the use of leverage to buy and manage a company was a new idea. The development of the high yield bond market, led by Michael Milken of Drexel Burnham Lambert, made this practically possible on a much wider scale than previously thought.
the takeover of RJR Nabisco in 1989 by KKR (as told in a book and a movie, both called Barbarians at the Gate)
VC funds are minority investors betting on the future growth of early-stage companies—defined as pre-profit, often pre-revenue and at times even pre-product start-ups.
Deploying funding in stages allows a VC fund to assess the progress of the company against milestones and allocate follow-on capital to the best performing companies in its portfolio.
First-time entrepreneurs are well advised to carefully review the terms under negotiation before signing a term sheet, especially as earlier investment rounds set the ground rules for future fundraising, potentially complicating that process. Guidance from an experienced entrepreneur or a friendly venture partner can help overcome the knowledge gap
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). Many VCs will require an ESOP of 20% of the outstanding shares before closing a round.
ANTI-DILUTION: This provision protects earlier investors in the event of a “down-round”
DRAG-ALONG/TAG-ALONG PROVISIONS: A tag-along provision provides minority shareholders with the right to sell their shares in conjunction with the majority shareholder in a third-party transaction, participating in any liquidity event pro rata.
every venture firm has a very specific focus on verticals, technologies, geographies, and most important investment amounts or funding rounds. They are likely to pass on a great idea if it doesn’t fit their focus
entrepreneurs should ask for references from past investee companies before selecting a VC fund. Speaking with those founders will give them a clear idea of the day-to-day reality of working with and accepting funding from the respective VC.
Pg 75 chart
Their approaches and ideas are influenced by the individual’s historical experiences. Behavior—both in the moment and over time—varies widely.
Other firms wait until a company is in the market with a product that is starting to scale. Other VCs, often called growth investors, prefer to engage when a company is clearly succeeding and is now scaling. Still others like to be the last round investor prior to an IPO and are consequently called late-stage investors.
If you understand who you are talking to, what motivates them, and what they care about, you can both target them better as well as have a much more effective conversation with them.
Corporate venture capital (CVC) is created by business entities not usually engaged in financing and investing; INTEL Capital, Unilever Ventures and Google Ventures are among the most prominent.
Our team members put their own money into every deal that we do, creating the ultimate alignment of interests.
unlock value
optimize the amount of leverage applied in a transaction, thereby considering various downside scenarios and ways to reduce the risk in an investment.
Senior debt is typically issued by one or more banks. it is typically “secured” against specific company assets
Junior debt accounts for the remaining debt capital in a buyout; the most common forms are mezzanine financing raised in the private institutional market and high-yield bonds raised from the public bond markets. This layer of debt is unsecured and subordinated to senior debt in the event of bankruptcy.
running hard to stay still
buying assets at or below their intrinsic value, and finding opportunities where value creation can be engineered through the operation of multiple levers early in the life of an investment.
Publicly listed companies are often acquired in public-to-private (P2P) transactions, also known as takeprivates.
modus operandi
“Cash is king” in the world of turnaround investing: finding it, unlocking it, and driving cash flow improvement to remain solvent and operational are crucial.
debt holders will typically accept a small writedown (or “haircut”) to facilitate a smooth restructuring process
The US bankruptcy code (Chapter 11) is well-tested and allows for the continuation of operations and then an orderly exit as a going concern. Many, if not most, continental European bankruptcy laws are relatively new, untested, with limited precedents and less creditor-friendly. Furthermore, they do not necessarily allow for a business to continue operating as a going concern and, often, lead to significant value destruction through fire sales, liquidations, and the withdrawal of supplier and financing lines.
operational improvements (turnaround investing) or balance sheet optimization (distressed debt)
the rationale behind the frequent use of special purpose vehicles in PE investments when executing deals.
“reps and warranties,” covenants, subordination
Early-stage VCs may attend venture competitions at business schools and universities to gain early access to ideas.
global investment banks don’t like to get out of bed for fees of less than 5 million US dollars. This is good for private equity players because where there is inefficiency, there is the opportunity for alpha, that measure of value generation we all seek.
In emerging markets, valuable insight can be gained from understanding a country’s age and income characteristics combined with knowledge of the level of household or personal income that triggers demand for a particular item. Income distribution curves vary by country but they will typically have bulges of population on the verge of achieving income levels that stimulate consumption of something previously unaffordable. This can highlight products or services where supercharged growth can be anticipated. For example, substitution of a car for a motorcycle doesn’t happen at an even pace; auto ownership increases rapidly at the point where a large bulge of the population crosses the threshold level of income for auto ownership.
go or no-go.
sell-side advisor
Virtual data rooms, in which copies of all documents are stored electronically, have become the norm, but physical data rooms still exist.
Pg 169
VC investors are particularly concerned with so-called down rounds (when start-ups raise capital at a lower valuation than that of previous rounds) and regularly include protective provisions in their 5 term sheet to avoid being diluted.
multiple of money invested (MoM)
the true market value is determined by the price actually agreed between a willing buyer and a willing seller.
A common example is a seller’s wish for speed and transaction certainty. In this case a seller may prefer a fair offer delivered quickly over a higher competing offer which was, however, subject to multiple conditions and uncertain timing.
buy low–sell high
last 12 months (LTM) or, alternatively, the forward looking next 12 months (NTM)
investment bank (the sell-side advisor)
most companies today are affected by foreign exchange movements whether it be selling outside the home territory, sourcing from abroad or competitive advantage from where it operates.
public-to-private (P2P). P2Ps were particularly prevalent during—and a major driver of—the 2006/07 peak in buyout activity, accounting for 43% and 50% of the total capital invested in buyouts in each year
PE firms typically end up paying a premium to a company’s market capitalization in a P2P. meant to entice existing shareholders to tender/sell.
Senior debt provided by investment banks. In large buyouts, bank debt is typically provided by a consortium—a group of banks—when the required loans exceed a single lender’s capacity.
A lead arranger heads due diligence, structures and negotiates the commercial terms of the debt agreement, and represents the consortium throughout the investment and holding period; other banks are invited to participate in the offering on the same terms as co-arrangers. The arrangers might later decide to sell some of their exposure in a syndication process to other banks. Senior bank debt may also be securitized and sold on as individual leveraged loans or via collateralized loan obligations.
Senior debt typically consists of the following tranches, in order of seniority:
• Revolving credit facility (RCF)
• First lien term loan
• Second lien term loans
Junior debt consists of a range of unsecured, subordinated debt instruments and ranks second to senior debtholder claims in the event of bankruptcy.
Common forms of junior debt are:
• Mezzanine loans
• High yield bonds
Bridge loans are typically short-term, secured credit facilities
Vendor financing reduces the cash required to execute a transaction by rolling over or delaying full payment of transaction proceeds. This type of financing typically comes in two forms: vendor debt and earn-outs. The magnitude of an earn-out is typically subject to a company’s operating performance post-closing, and only strong performance will result in additional payments to the seller. Earn-outs are commonly employed when a vendor continues to manage the business post-closing.
Shareholder loans are the most junior form of debt and are provided by equity shareholders
——-
Preferred shares are a senior form of equity
Common equity is the most junior instrument
Guy Hands, Chairman and Chief Investment Officer, Terra Firma. What I have learned over three decades of investing is that it is essential to outline a realistic downside scenario for every business. You then must be confident that the capital structure you put in place is sufficiently robust to withstand this downside scenario, or indeed a broader downturn in financial markets. From these experiences, we learnt two valuable lessons. First, it is essential to keep control of a business throughout the economic cycle. Second, syndicating debt as widely as possible reduces the risk that a single lender will feel the need to seize a company midtransformation.
Pg 217 diagram
Material adverse change (MAC): A MAC clause provides a buyer with the right to terminate the SPA in case of a material event that impairs the value of the target company.
Pg 226 diagram
Corporate governance in private equity (PE) refers to the practices, processes and rules put in place to align the interests of owners, investors and management.
adding expertise but also increasing the number of chefs in the kitchen and the potential for conflict
proper checks and balances
the top two layers in the management team—and up to 20% of a company’s common equity is often set aside for them.
Mario Andretti encapsulated this beautifully: “If you think you are in control, you are not driving fast enough!”
excess cash can be used to repay debt or pay early distributions to the PE fund and improve an investment’s internal rate of return.
weave straw into gold, turning a bad company into a good company.
what to do and how best to do it
environmental, social and governance (ESG)
when raising follow-on funds; returning cash earlier than expected to the LPs helps them justify the decision to re-up in the next-generation fund.
installs a floor for the purchase price
PE firms might hire a sell-side advisor (usually an investment bank) to manage the sales process.
exit paths for buyouts—sale to a strategic, sale to a PE fund and IPO
IPOs have historically provided the highest returns relative to other exit strategies. IPOs are expensive relative to other exit strategies. Associated fixed costs include underwriters, legal and accounting fees, printing fees and listing costs, altogether ranging from 5 to 15% of capital raised.
Feeder funds aggregate commitments from one or more investors and invest directly into the primary fund as an LP.
Alternative investment vehicles (AIVs) are structured to accommodate one or more special investments made outside of the primary fund (and/or a parallel fund).
CO-INVESTMENT VEHICLE: These vehicles are set up by the GP to invest alongside the master and parallel funds in a portion of a single investment.
ALL CAPITAL FIRST VS. DEAL-BY-DEAL
Marketing to high-net worth and sophisticated investors is permitted in some jurisdictions, while any general public offering of the fund or marketing to retail investors is usually prohibited. GPs must therefore personally approach the appropriate investors and may not employ mass-communication methods to market a fund.
reverse solicitation is risky and closely scrutinized by the authorities, as it can be difficult to establish who initiated the conversation.
Given the historically strong linkage between past performance and future performance (“stickiness”) in PE, investors are particularly interested in the track record of the investment team and that of its individual members. 5 Best practice is to include all funds previously managed and all investments made to avoid selective disclosure.
the best way to convince LPs to invest in a first-time fund is to allay their concerns by presenting the new team as a well-experienced, institutional platform, i.e., not a first-time fund.
Common investors in first-time funds include endowments, family offices, specialist fund-of-funds and development finance institutions.
An LP’s capital commitment is drawn down gradually over a four- to five-year investment period; once called, the capital typically remains invested for three to seven years
Pg 378 chart
The performance of a PE fund is reported to its LPs on a quarterly basis.
a fund’s net asset value (NAV) plus its gross multiple of money invested (MoM) and its internal rate of return (IRR) as of the reporting date. make it comparable to that of other funds. Pg 399 for example.
Zombie funds are PE funds managed by a GP that is unable to raise a follow-on fund. Common reasons for the failure to raise a successor fund are poor performance
what became known as merchant banking— providing capital to companies in return for share ownership. Although the fund model came to dominate the investment industry over time, some players, notably family offices and some financial institutions, continued to invest directly in private, unlisted businesses.
passive co-investment (also known as syndication) and active co-investment (also called coleading).
Investors are looking to enhance returns or at least reduce the riskiness of their co-investment portfolio through deal selection. While this by definition requires selection skills, LPs argue that they can achieve this by avoiding certain types of investments, such as larger or riskier deals, or deals outside the fund managers’ historical expertise.
can round out a portfolio by adding exposure to a certain geography, market, industry sector
speed in their decision-making process
performance-linked compensation
Crawl, Walk, Run
(IPOs) of the likes of Blackstone (2007), KKR (2010), Apollo (2011) and Carlyle (2012) not only attracted the attention of a broad retail investor base
Listed private equity funds (“LFs”) are an ideal way for private individuals, or small institutions, to invest in private equity (“PE”)
LFs, at the time of writing, are trading at a discount of around 19% 5 to net asset value, while many private secondary market transactions are completing at close to par, or even a premium.
therefore not have as far to fall
legal disclaimers, that “past performance is not a guide to the future”
“key person risk”
for the sake of simplicity, we determine that our $100m asset is 50% exposed to a depreciation of the local currency, i.e. for every 10% fall in the currency, the asset loses 5% of its value in base currency terms. The next question: what is an appropriate hedge size? Is it the simple $50m exposure? Or should we hedge in advance 50% of the underwritten exit multiple—or perhaps something in between?
quasi-permanent
1989 publication of Barbarians at the Gate, a tale of greed, subversion and conspiracy that chronicled the largest leveraged buyout of its time in the early days of PE.
1940s and ’50s when the likes of ARDC and 3i were set up by their respective governments to stimulate postwar economies?
reveal the secret sauce that makes top-quartile funds so successful
“irrational exuberance”
create value through profit growth
December 3, 2017
Definitely one of most comprehensive books in private equity, I ever encountered. Introductory chapters and more sophisticated ones are equally brilliant and easy-to-read. A lot of useful concepts and insights to how the business is done. It is good for starters and more demanding readers, full of useful references to industry materials, articles, books and studies.
May 27, 2025
This book is a super helpful and comprehensive resource for understanding the private equity world, whether you're newer to the space or looking to sharpen your knowledge. It covers a wide range of topics, from venture capital to buyouts, with clear explanations and real-world examples that bring the concepts to life.
My one complaint is that many of the case studies and examples are focused on the 2008 financial crisis. While still relevant in some ways, it would be great to see an updated edition that incorporates more recent trends and events, especially given how much the landscape has evolved.
Overall, the fundamentals are rock solid, and I learned a lot. Definitely worth reading if you’re looking to deepen your understanding of the industry.
My one complaint is that many of the case studies and examples are focused on the 2008 financial crisis. While still relevant in some ways, it would be great to see an updated edition that incorporates more recent trends and events, especially given how much the landscape has evolved.
Overall, the fundamentals are rock solid, and I learned a lot. Definitely worth reading if you’re looking to deepen your understanding of the industry.
October 1, 2025
I don’t know who thinks this is a good book, but it’s just a bunch of acronyms spelled out for you. He goes into a little bit of detail around what private equity is, but it’s so simple. It’s hard to enjoy the book. He should’ve just written a list of acronyms and what they mean, and that would have been more interesting. He also dives into E.S.G. investing, and he’s all for it, which says a lot about the author.
February 19, 2025
Want to know the basics of private equity? Look no further. Book is as riveting as unseasoned chicken breast most of the time, but you’ll finish it smarter than when you picked it up for the first time.
May 1, 2025
good book in term of breadth. Too focused on breadth at time though. Important area such as value creation and deal pricing and valuation could be better with more example, although I suspect a lot of these examples can be found in the recommended additional reading at the end of the chapters
June 12, 2019
Well structured and detailed guide in PE/VC world.
December 7, 2019
Massively lacks depth.
February 2, 2020
Really love the book, up to date and new perspectives
June 2, 2020
Excellent high level overview of PE/VC & strategies/tactics used in both. Great starting point for any beginner.
July 23, 2022
Very interesting read, good for someone breaking into or planning to break into PE. I expect to revert to this book quite often over the next few months.
January 8, 2023
Easily the best book I have read about PE/VC.
February 23, 2023
Best introduction to the industry. A bit dated but helpful nonetheless
December 13, 2023
i've never really read books on investment / VC before but i think this does a very good job of explaining what the field does concisely
February 10, 2024
Good book for you to know about the private equity industry, if you are a finance professional it can be of great value.
May 13, 2024
Great book for beginners into the PE field. I read to familiarize myself with the overall terminology and concepts.
December 9, 2024
comprehensive in subject matter but superfluous in style, could do with 25% less words
February 13, 2025
Mastered
Read
April 16, 2025I don’t recommend this on audiobook due to the amount of pictures and case studies mentioned throughout the audiobook.
August 11, 2023
Wonderfully structured. Clearly lays out major components to PE and the ecosystem as a whole. Unbelievably succinct and easy to follow. A total goldmine
Really liked the forward by Henry Kravis. Lots of wisdom in "people do business with those they like and trust."
Really liked the forward by Henry Kravis. Lots of wisdom in "people do business with those they like and trust."
December 27, 2022
Mastering Private Equity is a must-read must-have reference guide for every entrepreneur and investment capital professional.
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