Mastering Private Equity. Prahl Michael
of students keen to dive deeper into a variety of niche topics that cannot be addressed within the time constraints of an MBA course. To satisfy those questions and to complement my classes, I started to write “Private Equity Primers” – short, concise class notes that focused on topics that deserved more detailed coverage.
The book you are about to explore started as a collection of those primers, often written in response to conversations with industry players at conferences to shed light on areas of PE that are, by their nature, not easy to understand. The notes have been fine-tuned over many years of class use.
Supporting this book with a selection of INSEAD case studies (published in Private Equity in Action – Case Studies from Developed and Emerging Markets) was an easy decision. They add context to the theoretical concepts, and allow the reader to consider the potential conflicts, controversies and challenges those PE funds face when deploying capital to deserving firms in both developed and emerging markets.
News coverage of the PE industry, often embellished for dramatic effect, does a good job of fueling the imagination of anyone from laymen to seasoned financial professionals. PE, with its wide variety of colorful characters and at times unconventional strategies, is often portrayed as the boogeyman of the financial services industry – deservedly or not – depending on whom you ask. To my frustration, much of the criticism of these private investment vehicles shows a lack of understanding of the basic principles of PE and VC. Admittedly, this is a function of a traditionally opaque industry that could have done a much better job of educating the broader public on the mechanics of and benefits behind its investment activities.
This book aims to create clarity, increase the level of understanding of PE and help interested professionals not only to connect the dots, but also to support them in the process of executing that first deal, whether as a PE professional or as a board member courting the first external investor.
Two INSEAD alumni join me as co-authors for this book. Over the years, we have collaborated on various research projects at INSEAD's PE center and, through their work in the alternative investing space globally, they add another perspective to the industry.
Asking senior professionals in our network to add their thoughts to each chapter in brief guest comments and also to review our writing, was a natural extension of this principle of marrying academic rigor with the real-life challenges facing PE professionals. Our guest authors provide a candid counterpoint to our arm's length discussion and raise critical points.
The authors' views and biases of course play into the reflections; they shape the lens through which we view the world. In my case, more than 20 years in the now fully emerged markets of Asia have certainly given me a vantage point away from the standard western PE model. I have had the opportunity to observe PE firms professionalize and improve young businesses, revamp their operations and allow them to launch into an accelerated growth phase, despite owning a minority equity stake. Overall I have seen PE effect real change in the fast-growing markets of Asia and Latin America. My co-authors balance this out through their experience.
Writing this book was a fascinating journey that brought several points to light:
● PE and VC, while popular topics, are rarely, if ever, examined in the context of the broader economy.
● Industry players are often frustrated by the lack of understanding of their craft within the business community, which leads to misinterpretation and misrepresentation and at times to a backlash or unfair accusations.
● Research papers – both of the applied and academic kind – more often than not take a closer look at narrow and specific areas of PE, thereby ignoring the contextual issues. Resources to help one understand the big picture, covering the spectrum from venture to growth equity to buyouts, are few and far between.
There was room for a book to step in and fill some of the gaps to prepare all parties for an informed discussion.
HOW TO USE THIS BOOK
This book was written with a professional audience in mind and carefully structured to accommodate both graduate students and experienced professionals. It makes a solid attempt at reflecting on its central themes without judgment, by relating the facts and ensuring that readers are well prepared to participate in an intelligent discussion about the pros and cons of private equity (PE).
Used together with the case book Private Equity in Action – Case Studies from Developed and Emerging Markets, which complements the text, this book brings the learning points to life and offers readers a ringside seat to the day-to-day challenges facing partners in PE and venture funds.
● For novices to the field of PE, our book provides clear insights into the workings of the industry. While the book assumes a sound understanding of basic finance, accounting techniques and risk–return concepts, it offers links to literature and research to ensure clarity for those rusty in the theoretical concepts behind today's financial markets.
● Graduate and postgraduate students will find the book an invaluable companion for their PE, venture capital and entrepreneurship courses; it will allow them to connect the dots and ensure that an understanding of the dynamics in the industry is maintained as they explore the respective chapters in greater detail.
● For seasoned financial professionals, the book includes guest comments from industry experts and links to advanced literature that provides a nuanced view of the industry and will allow them to engage with other professionals, be they lawyers, bankers, consultants or partners of PE firms, in a meaningful way.
Ensuring that our readers develop a sound understanding of PE before diving into more controversial aspects of the industry was a clear goal from the outset; it defined the flow and the logic of the chapters. The book's structure allows the expert reader to use the book as a quick reference with easily retrievable highlights of the best practices employed in the industry; it also allows observers of the industry and students to work through the topics step by step and take advantage of the many resources and cross-references to other finance topics.
Overall the chapters are grouped into five sections:
SECTION I offers a high-level introduction to PE to ensure that we speak the same language and use appropriate industry terms and definitions throughout the book. It puts venture capital, growth equity and leveraged buyouts into context and describes several alternative PE investment strategies such as distressed investing and real estate.
SECTION II looks in greater detail at PE investment processes, starting with deal sourcing, due diligence and target valuation before exploring deal pricing considerations and the actual structuring of PE deals. It also includes a thorough coverage of transaction documentation.
SECTION III asks: What do PE and venture funds do with their portfolio companies during the holding period? How will they transform these businesses and prepare them for exit?
SECTION IV describes the key dynamics involved in raising a PE fund. We step into the shoes of global institutional investors in PE to examine their demands with regard to reporting and portfolio customization.
SECTION V builds on the understanding gained in the previous chapters and takes a closer look at recent developments in the industry, from direct and co-investment programs to the fast-growing secondaries markets and the recent rise of listed PE funds. In the closing chapter the authors comment on the industry's development and explore key themes that will shape private equity and venture capital in the years ahead.
Additional material to complement this book and connect it to the case book Private Equity in Action – Case Studies from Developed and Emerging Markets can be found on the companion website:
www.masteringprivateequity.com
SECTION I
PRIVATE EQUITY OVERVIEW
The first section of the book provides readers with a high-level introduction to the institutional private equity (PE) market – from early-stage venture capital to growth equity and buyouts, plus a brief description of several alternative PE strategies.