One of the most common requests I receive from readers is to cover private equity real estate in more detail. There is a great deal of information on real estate and private equity but very little on private equity real estate funds. I am working to fill this void so if you have any white papers, articles, videos or personal insight please contact me at Theo@peblogger.com I came across this document on private equity real estate funds. The author, Deloitte, prescribes five areas to focus on to achieve success in private equity real estate.
Attracting capital
Build and sustain an exceptional investment yield track record.
Build and maintain an eminent and well-regarded team of advisors, including bankers, accountants, lawyers, and other specialists.
Obtain access to qualified investors.
Make sure that satisfied and loyal investors receive timely and effective communications, including financial and tax reports.
Establish, promote, and protect a brand that exudes quality, skill, and integrity.
Sourcing and qualifying investment opportunities
Do the right things to make people want to do business with you: Demonstrate that you understand the important issues, you conduct due diligence effectively and efficiently, and you have credibility to close.
Build an extensive network of joint venture partners who are trustworthy and skillful.
Fund and investment structuring
Structure investments that are suitable, attractive, and efficient for domestic individuals, tax exempt institutions, and a variety of foreign investor profiles.
Establish best practice fee structures that align your interests with those of your investors.
Determine the right degree of leverage on investments and for the fund overall.
Structure investments to minimize federal, state, and foreign income, and asset & transfer tax costs, thereby providing optimal after-tax yield to investors and you.
Investor reporting and operational excellence
Develop and operate properties efficiently and effectively.
Build and retain a skilled team at the advisor level.
Comply with all financial and tax regulatory matters in a timely fashion.
Exit strategies
If desired, effectively recycle capital within a fund.
Correctly gauge ideal timing for closing a fund and starting a new one with the same investor group.
Tags: private equity, real estate, private equity real estate, private equity real estate funds, firms, buyout real estate, private equity funds, real estate funds
Considering a Private Equity Fund’s Past Performance
Selecting a private equity fund to partner with or invest in can be difficult. With so many choices and limited information on many buyout firms, investors should be careful in deciding what firm is best suited to their risk appetite and specific needs. This is the second article in a series of four on how to choose a private equity fund. To read the first article, see Sector Specialization. The following is explains how a private equity fund’s past performance and individual deals help in deciding what private equity firm to partner with.
Past Performance
Along with sector specialization, another important factor in selecting a private equity fund is the firm’s past performance. It is worth laboring over all aspects of the private equity firm’s track record, looking at not only each investment and fund, but the overall profits and losses for the firm. The firm’s history will reveal what deal structure they prefer, their use of leverage, minority vs. controlling interest and how their returns match up to their predictions.
When looking at the performance, if the firm has launched multiple generations of funds examine how consistent each fund performs. Is the firm a consistent performer, or do some of its funds produce high returns while others collapse? Investors are often satisfied with a solid private equity firm that has proven less volatile even if it means that you do not receive as high of a ROI as the riskier fund. As the numerous investment frauds this decade show, if a fund is promising unheard of returns there is probably a reason for it–and it’s often illegal or at least unethical practices. (After all, Bernard Madoff promised some investors annual returns as high as 46%).
If a business is looking for a buyout or significant private equity investment, here are some factors to consider:
What percentage of transactions placed under letter of intent are actually closed?
How do past sellers feel about their dealings with the private equity firm? Are they satisfied or do they feel ignored or taken advantage of? It’s important to get a sense of the buyout firm from people who have worked with the firm but are not on the payroll.
Did the firm keep with the original guidelines in the letter of intent? Although the document is usually non-binding, adherence to the core agreements builds a foundation of trust for both parties.
How professional was the transaction process? Especially if you want to be the primary decider in the direction of business, you should examine how past partnerships have succeeded (and failed). Although buyout firms do sometimes takeover a controlling interest of a company–in spite of the owner’s objections–it is not always as dramatic as the owner may suggest. In some cases, the private equity firm and the company have already agreed on terms but the business owner attempts to back out later. Similarly, if a disagreement resulted in litigation, the owner or buyout firm may be bitter and give a less-than-truthful take on the deal. In other words, be sure to get both sides of every deal.
Some of the above factors were partly based on Module IV of Private Equity: History, Governance, and Operations. As always, the preceding article is no way a means of private equity, financial advice or solicitation to sell private equity or investment products. Please seek a qualified financial or legal adviser.
Selecting the Right Private Equity Investment Fund
Selecting a private equity fund to partner with or invest in can be difficult. With so many choices and limited information on many buyout firms, investors should be careful in deciding what firm is best suited to their risk appetite and specific needs. The following is partly based on a section in Private Equity: History, Governance, and Operations. This is the first in a series of articles on how to choose a private equity fund:
Sector Specialization
The first factor to consider is sector specialization. Many funds primarily invest in a small number of sectors and seldom deviate from these areas. This should not be seen as a deficiency or an alarming lack of diversification, rather this approach ensures that the private equity firm is knowledgeable about the industry and will be more likely to predict changes.
A frequent downfall for private equity firms or venture capitalists is that they invest too far from what they understand. A buyout fund that has always invested in technology companies may run into trouble buying out a manufacturing firm. The complexities of the industry will be a major struggle for a fund that has no experience in production and distribution of supplies, competitive pricing, expanding the customer base, keeping the workers satisfied and compensated as well as any number of aspects that are unique to the manufacturing company.
Additionally, less specialized funds may be more likely to invest in volatile sectors that they do not fully understand, thus exposing its investors to significant losses. Perhaps the most dangerous and common trait among less specialized funds is that they will chase whatever industry is currently “hot.” Traditional investors will know that this is a flawed strategy, as the area that is popular and generating big returns is often a bubble on the brink of bursting.
This was most evident in the late investors in the internet companies in the very end of the 1999 and beginning of 2000. These investors followed the exciting dot-com firms that had been making big returns, but in the first quarter of 2000 the bubble burst. Stock prices plummeted leaving investors with sometimes total losses on their investments and once heavily capitalized companies filed for bankruptcy. A way to prevent this type of exposure is by investing with a fund that invests in a limited number of sectors and is dedicated to improving companies within that area rather than only investing in the popular investments.
Another benefit to investing in a specialized private equity fund is that the fund will have a wealth of industry relationships. This will be useful throughout the investment; in the day-to-day operations of the company, facilitate possible mergers or acquisitions within the industry, access to industry-seasoned executives and other resources that would not be immediately available to non-specialized funds. Perhaps the biggest hazard for selecting a highly-specialized fund is that it could be more susceptible to industry declines. In the current recession, many industries are struggling, such as real estate. Real estate private equity funds were therefore hit hard by the collapse in the housing market and the changing property valuations.
Overall, when selecting a private equity fund, specialization in a limited number of industries offers a number of long-term benefits. The fund’s management will be more likely to anticipate changes in the industry, have helpful contacts in the sector, have an understanding of a portfolio company’s operational needs and problems and avoid chasing the “hot industry.”
The word “plummets” has been used repeatedly to describe the latest results from a report on private equity fundraising. During the first half of this year 173 private equity funds rounded up $54.9 billion, a far cry from the $152.7 billion that 261 funds raised during the same time period in 2008. This marks a 64% decline year-over-year.
Private-equity firms continue to struggle to raise funds as the recession wears on, according to a report today in the Dow Jones Private Equity Analyst newsletter.
During the first six months of 2009, 173 private-equity funds raised $54.9 billion, down from the $152.7 billion raised by 261 funds during the first half of 2008, representing a 64% decline, the report said. Institutional and individual investors are turning away from the asset class hoping for safer but smaller returns from traditional investments.
Some are even selling off their current capital commitments in the secondary market. Secondary funds are pooling their own capital to buy shares in private equity funds–stakes that some limited partners can’t wait to sell off, often for a loss. In contrast to the low fundraising numbers for private equity funds, 18 secondary funds accumulated $13.9 billion, a new annual record.
The venture capital fundraising industry was especially hurt with a 63% drop.
“LPs have been cautious about all illiquid asset classes since Lehman collapsed in September,” said Kelly DePonte, partner at placement agent Probitas Partners Inc. “Many LPs we talked to said as early as last December that they planned to sit on the sidelines through the second quarter, and that is exactly what we have seen.”
With the impending regulation hanging over the private equity industry, it’s hard to tell whether the industry will expand or contract. By requiring firms to register with SEC, or similar measures intended to increase transparency, it’s possible that investors may be drawn to the asset class because it would have more accountability to limited partners. On the other hand, greater regulation could limit private equity firms from generating the same kind of returns that investors have enjoyed previously. The following video examines these issues and the current state of private equity.
Students Manage Million Dollar Private Equity Fund
It’s hard to find a silver lining in the tough economy right now, but for students at the University of North Carolina Business School, it is a learning opportunity. UNC Business School students have the unique opportunity to operate a private equity fund seeking to generate real returns to limited partners.
The UNC Kenan-Flagler Private Equity Fund is operated by a 12-member student management team. And this isn’t a small responsibility, holding more than $1.3 million of committed capital under management, students have to manage all aspects of the fund. Students raise capital, source deals, perform due diligence, make investment decisions, and then present their decisions to a faculty/advisory investment committee and a board of directors. The students rely, in part, on the UNC alumni network to help source deals and already have partnered with other private equity firms across the country. The average deal size for each transaction is between $20 million to $125 million in enterprise value and the fund can invest between $100,000 to $150,000 of equity capital per investment transaction.
The students are working in an adverse environment but they have been able to capitalize on lower valuations. In fact, they have already successfully completed several investments in companies in the medical and technology fields that they hope are more recession resistant and will bring higher growth than other sectors.
“We are grappling with complex decisions amid a widened scope of risks and considerations. We have broadened our scope of due diligence and are benefiting from lower valuations and a 5-6 year investment horizon to our LPs,” said Michael Kopeikin (MBA Class of 2010), fund director. “We are committed to returning the best return given realistic values, co-investing with top quartile fund managers on leading transactions and thinking about how traditional exit strategies are changing. We are leveraging each members’ expertise and the expertise of our LPs to get our investments right.”
Kate Kitsopoulos (MBA Class of 2009), fund managing director explains the learning experience, “Lower valuations are benefiting deal variety to the fund as we capitalize on the business support from firms with UNC ties and alumni through increased information and access to companies to make the right deals. The ability to understand how to deploy our capital effectively has become even more important in the current economic climate. We continue to see solid opportunities and will take full advantage of investing through the down cycle.”
Fund I will be fully committed by the third quarter of 2009 and students will begin to raise Fund II next fall that will be open to qualified investors that are friends and family of the UNC community. To learn more about the students’ fund you can visit their website.
Private equity funds focused in Asia defied the financial crisis, raising capital at record levels in 2008. The funds raised increased from US$40.1 billion in 2007 to US$48 billion in 2008. Despite the big boost in fundraising, deal volume for Asia-focused private equity funds is very low compared to a year ago.
The total deal volume for private equity firms in the Asia Pacific region was US$2.18 billion in the first quarter. This is significant compared with the same period a year earlier when deal volume totaled US$10.24 billion. Thomas Britt, partner at Debevoise & Plimpton LLP in Hong Kong, explains that firms are waiting for a good deal to come along. Britt said, “Companies see this as a once in a generation buying opportunity. They feel like time is on their side so there are not numerous bidders.”
Asian private equity players say they’re busy eyeing deals but that valuations, while lower, still have a way to go down. Deal sizes have gotten smaller – partly a reflection of lower prices. The average private equity deal size was US$62 million in the first quarter, compared with US$70.14 million in the first quarter last year.
…Funds are also getting pressure from investors to hold off from drawing capital for investments. That means even funds that spot good deals in the market face difficulties accessing enough capital to make investments.
Pension funds and endowments have been squeezed by losses incurred by the downtrodden markets. The largest U.S. public pension fund, the $179.2 billion California Public Employees’ Retirement System, or Calpers, has asked private-equity firms to ease off on requests for additional capital it had previously committed to deliver. More recently, TPG allowed investors of its US$4 billion Asia fund to reduce commitments by 10%.
Instead of deals, fund managers in the region say they’ve been spending more time working with companies already in their portfolios. Firms such as Kroll report more demand for post-transaction investigations as private equity firms check up on companies in their existing portfolios. Speaking at the Private Equity International Forum conference in Hong Kong last month, X.D. Yang, managing director at Carlyle, and Yichen Zhang of Citic Capital, estimated they’ve been spending about 70% of their time looking at new deals, compared with 90% a year ago.
Tags: Private Equity Funds, Private Equity Asia, Asian Private Equity, Asian Private Equity Funds, Private Equity Asian Pacific, Private Equity Fundraising
Most private equity fund startups I speak with want referrals to respected service providers or advice on attracting seed capital. Almost none have a business plan for their private equity fund and only a few have PowerPoint presentations explaining their investment strategy. If you are a fund manager in this position that doesn’t mean you have done anything wrong but you may consider writing both a private equity fund business plan and comprehensive 15-25 page PowerPoint presentation now to make it easier to work with service providers, third party marketers, institutional consultants, and potential investors. Richard Wilson offers some helpful tips on starting a private equity or hedge fund.
Parts of your private equity fund business plan should include:
Management – What team members are required to run the fund effectively? What is the chain of command, how are decisions made and what happens if 2-3 professionals disappeared tomorrow? Who would take over responsibilities and what would happen to your investors funds? The importance of a well constructed and managed team can not be overstated.
Investment Process & Risk Management – Managing risk is what running a private equity fund is all about. Meet with your prime brokerage firm’s risk advisory division, speak with your traders and portfolio managers, and network with other managers to pick up some best practices within this space. At the end of the day your risk management approach, investment process and team must be molded into one cohesive group all pointed in the right direction. There is no magic bullet to raising assets or gaining seed capital but getting this combination right is the most important thing you can focus on.
Service Providers: Who are you going to use as your prime brokerage firm, fund administrator, auditor or third party marketer? How will this evolve as your fund passes the $100M and $300M marks? Will you use multi-prime brokerage services? Capital introduction teams? Multiple third party marketers? Your choice of firms within this space can affect the levels of assets you manage, the quality of advice you receive and the reputation of your firm as a whole. Our advice would be to meet and interview at least 3 service providers of each type in person or over several phone calls and go with one that is well experienced yet not so large that your sub $1B account is not an annoyance to them.
Infrastructure & Technology: Meet with other local private equity fund managers, your trader, your prime brokerage firm and other service providers to nail down exactly what you will need in terms of reporting, processing and functioning as not only a private equity fund, but a small business. When you start a private equity fund you become an entrepreneur and you have to face all of the challenges that come with that position in addition to those challenges found in managing your portfolio. Many funds under-estimate the costs of some of the technology needed to operate as they grow beyond more simple $1-$5M fund operations.
Marketing: Nothing is traded or managed until the dollars come in. Anyone who joins your firm or board will want to know how you are looking to grow your business. What channels of investors will you approach? Institutional investors including fund of private equity funds, consultants, large family offices and pension funds or smaller family offices, wealth management firms, high-net-worth individuals, and accredited investor clubs? Here is a hint, in our asset raising experience the later should be 80% of your focus if you are managing less than $100M. What resources do you or should you have in place to meet these goals? Third party marketers? Databases of investors? An in-house marketing specialist? How much does this cost and when should these resources be put in place?
We will be expanding our thoughts here on what should be included in a Private Equity Fund Business Plan. We will also be providing an example business plan eventually that will provide you with a template to use for your own hedge fund startup work.
Most private equity fund startups I speak with want referrals to respected service providers or advice on attracting seed capital. Almost none have a business plan for their private equity fund and only a few have PowerPoint presentations explaining their investment strategy. If you are a fund manager in this position that doesn’t mean you have done anything wrong but you may consider writing both a private equity fund business plan and comprehensive 15-25 page PowerPoint presentation now to make it easier to work with service providers, third party marketers, institutional consultants, and potential investors. Richard Wilson offers some helpful tips on starting a private equity or hedge fund.
Parts of your private equity fund business plan should include:
Management – What team members are required to run the fund effectively? What is the chain of command, how are decisions made and what happens if 2-3 professionals disappeared tomorrow? Who would take over responsibilities and what would happen to your investors funds? The importance of a well constructed and managed team can not be overstated.
Investment Process & Risk Management – Managing risk is what running a private equity fund is all about. Meet with your prime brokerage firm’s risk advisory division, speak with your traders and portfolio managers, and network with other managers to pick up some best practices within this space. At the end of the day your risk management approach, investment process and team must be molded into one cohesive group all pointed in the right direction. There is no magic bullet to raising assets or gaining seed capital but getting this combination right is the most important thing you can focus on.
Service Providers: Who are you going to use as your prime brokerage firm, fund administrator, auditor or third party marketer? How will this evolve as your fund passes the $100M and $300M marks? Will you use multi-prime brokerage services? Capital introduction teams? Multiple third party marketers? Your choice of firms within this space can affect the levels of assets you manage, the quality of advice you receive and the reputation of your firm as a whole. Our advice would be to meet and interview at least 3 service providers of each type in person or over several phone calls and go with one that is well experienced yet not so large that your sub $1B account is not an annoyance to them.
Infrastructure & Technology: Meet with other local private equity fund managers, your trader, your prime brokerage firm and other service providers to nail down exactly what you will need in terms of reporting, processing and functioning as not only a private equity fund, but a small business. When you start a private equity fund you become an entrepreneur and you have to face all of the challenges that come with that position in addition to those challenges found in managing your portfolio. Many funds under-estimate the costs of some of the technology needed to operate as they grow beyond more simple $1-$5M fund operations.
Marketing: Nothing is traded or managed until the dollars come in. Anyone who joins your firm or board will want to know how you are looking to grow your business. What channels of investors will you approach? Institutional investors including fund of private equity funds, consultants, large family offices and pension funds or smaller family offices, wealth management firms, high-net-worth individuals, and accredited investor clubs? Here is a hint, in our asset raising experience the later should be 80% of your focus if you are managing less than $100M. What resources do you or should you have in place to meet these goals? Third party marketers? Databases of investors? An in-house marketing specialist? How much does this cost and when should these resources be put in place?
We will be expanding our thoughts here on what should be included in a Private Equity Fund Business Plan. We will also be providing an example business plan eventually that will provide you with a template to use for your own private equity fund startup work. Richard Wilson’s Hedge Fund Startup Guru
Tags: Private equity startup, private equity fund startup, private equity funds, private equity advice, private equity start up, private equity fund start up, startups, starting a fund, start a fund
Private Equity Lost More Value than Venture Capital
According to Cambridge Associates new fund performance indices, private equity firms lost more value for their investors than venture capital firms did in the first three quarters of last year. Non-venture capital private equity firms fell 8.9% through the third quarter of 2008, while venture capital firms lost nearly half that, losing 4.26%. More from peHUB:
Cambridge Associates has released new fund performance data, which shows that private equity firms (buyout, growth equity, mezz) lost more value for limited partners than did VC firms, during the first three quarters of 2008. Not just actual dollars — of which buyouts simply has more — but in terms of percentage (net of fees, carried interest and other expenses). And given what we know about Q4, it’s a reversal of fortune that can be expected to accelerate.
Specifically, non-VC private equity firms were down 8.9% through Q3 2008, compared to a negative 4.26% mark for VC funds. The gap is even more pronounced for one-year performance (Q3 07-Q3 08), where buyout firms are at -5.5% compared to -0.9% for VC funds. They both suck, of course, but VC sucks less.
Things flip around once you begin looking at three-year and five-year performance. Venture has the lead on 10-year, but expect that to disappear once the tin mark signifies the dotcom bust rather than the dotcom boom.
The Cambridge Associates data is based on a sample of 748 private equity firms raised between 1986-2008, and 1,238 VC funds raised between 1981-2008. Also worth noting that Cambridge’s results are more favorable to the VC industry than are Venture Economics’ results. Not in terms of this specific issue of YTD buyouts vs. VC, but just in terms of overall VC benchmarks.
A brief story of optimism in the private equity market is that of CVC Capital Partners. The private equity firm is noted in the Wall Street Journal for its ability to raise capital while many private equity firms are struggling.
For CVC Capital Partners, finding private investors is not easy but not impossible. Despite the economic hurdles that make fundraising so difficult lately, the European-based firm managed to pull in more than $14 billion in its latest round of raising capital. The most impressive part of CVC’s success in raising investments for the sizable fund, its fifth, is that all the capital was raised in less than a year–after the biggest financial troubles emerged.
After such an impressive round of fundraising, CVC Capital must now look at where to invest the capital raised. This task is exceedingly difficult for CVC, and other private equity firms due to the reluctance of banks to lend debt to finance major deals. However, CVC Chairman Michael Smith is confidant in the fund saying that it is large enough to finance big deals without the help of leverage. Other funds are not so large and are encountering considerable difficulty in the current economic climate. Mr. Smith says of the new fund “It’s about investing in companies for the future and endeavoring to improve them.”
Tags: CVC Capital, CVC Capital Partner, CVC Capital Partners, CVC Capital Partners Fund, Private Equity Fund, Private Equity Tracker Tool, Private Equity Funds, Private equity firms
It’s a little early for this, but PitchBook Data has put together a list of the largest private equity funds of 2008. The full report reveals that private equity fundraising has increased by 29% in the first three quarters of 2008 compared to the same period last year. Although the value and number of deals executed so far during this year have declined, but capital raising for private equity funds remains strong. As the following image shows:
Here is the latest list of the largest private equity funds 2008:
Tags: Private Equity Funds, Private Equity 2008, Private Equity Data, Private Equity Funds 2008, Largest private equity funds, largest private equity funds in 2008, list of private equity funds
Starting a Private Equity Fund in the Financial Crisis
While the current financial crisis has in some ways limited private equity, primarily by reducing a private equity firm’s ability to leverage a buyout, the crisis could also yield huge returns to private equity firms that start funds for buying up profitable assets. Dwight Bush hopes that his new private equity fund will thrive by identifying and purchasing profitable assets at low prices from the government and other funds.
Making the Best of a Bad Situation The financial crisis could be very profitable for private equity funds. At least this is the bet that some investors are making, hoping to capitalize on the weak assets available by fixing them up and selling them for a profit. One such optimist is Dwight Bush, an experienced corporate banker who is setting up a private equity fund, he is also the subject of a recent Washington Post article. One might wonder why he chose this bad economic period to start a private equity fund, or how he plans to raise capital from “cash-strapped” investors and more importantly how he hopes to give his Limited Partners more money than initial investment? Here are his basic answers to these questions:
Why choose a financial crisis to start a private equity fund?
Bush: “What we know is that the last time we had a mortgage meltdown, there were great fortunes made,” Bush said. “In this type of fragmented environment, those people who can identify good assets that are undervalued . . . people like Joe Robert . . . and that can work with those assets over time to help realize their true value” will make lots of money.”
What is his strategy for his private equity fund?
Bush: He said the private-equity fund plans to do two things: manage assets that the federal government buys from banks and buy assets that the “Paulson Plan” auctions, then fix them up and sell them — hopefully at a profit.
Additionally, he hopes to make money of hedge funds dishing out assets at fire-sale prices. Some $43 billion came out of the hedge fund market in September because investors are demanding their money. Bush said hedge funds are selling off quality assets, from manufacturing companies to farmland to commodities, at low prices so they can give cash to their impatient investors.
Okay, sound strategy, but where will the private equity fund get money to buy the assets?
Bush: “Remember one thing,” he said. “Every month, pension funds take in money and pension funds have an obligation to pay their retirees over time. So new capital is available in the market every month and the money has to be put to work.”
What about the private equity buyout model based on leverage in light of the current credit crunch?
“In the short term, private-equity firms will tend to work more with strategic partners, and the assets acquired will be less leveraged,” he said. “Over the long term, you’ve got to remember that banks have to lend to make money and that this too shall pass. My view is that the current situation should reach bottom some time in early to mid-2009, and by 2010 we should have a more robust economy again.”
Dwight Bush presents a strong argument for why private equity can endure the financial crisis with what he sees as eternal investment capital (pension funds) and long-term lending from banks that necessarily lend in order to make money.
Tags: Private Equity, Private Equity Fund, Financial Crisis, Private Equity Funds, Private Equity Fund manager, Dwight Bush, Private Equity and the Credit Crunch, Private Equity Fund Management, Private Capital
A private equity firm offers a private placement memorandum to potential investors. The document explains an investment opportunity to potential limited partners, and the firm hopes they will be interested enough to invest capital in the investment.
Private equity firms usually include in the private placement memorandum a wide range of information that a limited partner would like to know when considering the investment. This includes summary terms and conditions proposed by the firm that a limited partner may negotiate if the LP decides to invest. In public capital investment offerings, the Securities and Exchange Commission regulates the document, but a private placement memorandum is not regulated and therefore the material and specifics provided to the limited partners may vary by firm. This article will cover what is most often included in a private placement memorandum, but private equity firms may choose to exclude any of these sections or add one that is not present.
The private placement memorandum is a document for private equity firms hoping to attract investors, and limited partners rely on the PPM to make their decision based on the information presented in it. Here are some general sections of the private placement memorandum:
Executive Summary: Some information usually included here would be the size of the fund, expected close date, and the management team’s experience in past funds. Additionally this section includes a brief description of the General Partner, the investment strategies used, and the opportunities and challenges in the current market.
Firm and Fund Investment Strategies: This is more or less self-explanatory but what you want to present is the firm’s past performance and history; how it has succeeded and what strategies were used. How the firm’s advantages and resources will succeed in the specified market. This section is a detailed overview of the fund’s investment strategy discussing the geographical focus of the fund, stage and relevant factors in its market. This is also an opportunity for the General Partner to present a thorough explanation investment strategy, process, deal sourcing and exit strategy.
Investment Professionals and Committee: This section presents the investment professionals involved in the new fund and explains their role. An especially important detail here is the history and experience of the investment professionals. Principal investors’ records are often included here with current board positions held in portfolio companies of the firm’s past funds. This is important information for the potential Limited Partners to know as it gives them an idea of the firm’s degree of involvement in portfolio companies and the individual partner’s ability to manage a new fund. Second in this section, firms often provide information on the Advisory Board or Investment Committee. This section varies by different firms but often larger Limited Partners will hold seats on the Advisory Board which is of particular importance in for prospective LP’s. This shows the details of the Advisory Board’s members, scheduled meetings, as well as valuation methodology and important factors when considering new investments.
Investment Performance Record: This section varies by firm because of different sizes and especially the difference between how long a firm has been established. Generally, firms use a table format to present the fund’s investment track record. This table usually includes past fund sizes and IRR performances of the funds (typically stated in terms of gross returns rather than individual LP’s net returns over fees).
General Partners and Limited Partners Terms and Agreements: This is where the firm gives its initial proposal of terms and agreements between the General Partner and the Limited Partners. Most importantly, the management fee, General Partner’s commitment the fund, distribution of the capital call schedules and the fund’s cooperative investment policy. Of interest to the investors is the percentage of profits that the General Partner takes, known as “carry”.
Legal and Tax Concerns: Tax treatment varies by whether the investor is U.S. based or non-U.S. based, and this section will briefly address different tax treatments and how it effects the Limited Partners.
Fund-related Investment Risks: This sectiontypically covers three areas of investment risk: business, management and fund risk. Business concerns would address concerns over the investment’s industry and risks inherent to the industry and possible uncertainty in the business environment. The management concerns are usually relationships to other entities, possibly a parent company. The fund-related risks may include cross-fund investments, principal’s co-investment activities or investments in public equities.
Accounting and Reporting: Included in this section is an explanation of the allocation of returns and losses and accounting for stock options. This section gives a schedule for audited and non-audited financial statements that are delivered by the General Partner. This gives Limited Partners an idea of the valuation of their investment and a way for keeping track of their capital commitment.
Again, this is a general overview of the typical sections of a private placement memorandum which may be subject to change by private equity firm, as it is not regulated by the SEC. In the future I will provide an article on the important factors that Limited Partners consider in a private placement memorandum.
Private equity real estate is an emerging area of private equity that has developed successfully this decade especially. These private equity real estate funds use various strategies to create returns from large real estate property investments, mostly through a value-added approach that improves the worth of acquired real estate.
As of the year end of 2006, historical 5-year and 10-year compounded annualized returns of private equity real estate in the United States have been 13.3% and 12.7%. The NCREIF Property Index reveals current returns averaging 8% since 1978. Private equity real estate will likely see changes following the mortgage meltdown, but it is an expanding sector of the private equity industry.
Private equity real estate fund of funds are relatively new to private equity, really becoming well-known in private equity early in the 21st century. The majority of private equity fund of funds managers are located in the United States at 50%, followed by Europe with 43% and only 7% in Asia and other regions. Real estate fund of funds often attract investors because they provide an element of diversification to a portfolio and investors with smaller capital to commit are able to invest in a fund of funds if they are not able to invest in a large hedge fund of private equity fund. If you’d like to learn more about private equity real estate fund of funds, here is the 2008 Private Equity Real Estate Fund of Funds available for purchase.
Here is a list of the largest private equity real estate firms:
The Blackstone Group
Morgan Stanley Real Estate
Tishman Speyer
Goldman Sachs Real Estate Principal Investment Area
Colony Capital
Lehman Brothers Real Estate
The Carlyle Group
ProLogis
Beacon Capital Partners
LaSalle Investment Management
MGPA
AEW
Rockpoint Group
Apollo Real Estate Advisors
CB Richard Ellis Investors
RREEF Alternative Investments
Grove International Partners
Shorenstein Properties
The JBG Companies
Citigroup Property Investors (CPI) Capital Partners
Tags: Private equity real estate fund of funds, private equity real estate, real estate private equity, investment in private equity real estate, real estate investment
Boston is a center for private equity in the U.S., especially in the private equity boom over the last few years private equity has established itself in the Boston business community. Through big local buyouts like that of Toy’s R Us by a Boston private equity group, Bain Capital, and an expanding Boston market for those bigger buyouts but also smaller venture capital deals, Boston’s private equity market has grown substantially.
While New York remains a relatively unchallenged hub for private equity activity, Boston is certainly among the top private equity cities in the country. Although the major private equity groups in Boston compete amongst themselves, they also work together on large deals. This is evident in the recent acquisition of Warner Music Co that was led by two Boston private equity firms, Bain Capital and Thomas H. Lee Partners.
The growth of private equity in Boston has been largely accelerated by the success of large Boston private equity firms like Bain Capital, Thomas H. Lee Partners, TA Associates, Berkshire Partners and Summit Partners. In addition to the more well-known Boston Private equity firms, here is a list of Boston private equity firms that will be updated in hopes of creating a very comprehensive resource for those interested in Boston private equity.
If you represent a Boston private equity firm and would like to be added to the list or you know of a Boston private equity group that is not listed please send an e-mail to Theo@peoblogger.com
Tags: Boston Private Equity, Boston Private Equity Firms, Boston Private Equity Groups, Private Equity in Boston, Venture Capital Boston, Boston Venture Capital, Private Equity Boston
The World Economic Forum has released a report based on data gathered from private equity activity in 21,000 firms from 1970 to 2007. This private equity report is nearly 200 pages and provides an extensive overview of how private equity has changed over recent decades. While it’s difficult to summarize such a large report, it does provide the key findings. Today, I am mostly focusing on the important findings in buyout activity (LBOs especially), private equity trends and exit strategies:
WEF Private Equity Report 2008
Private equity activity has dramatically increased over recent years. Almost 40% of private equity activity occurred from January 1, 2004, of the 37 years included in the study. The total value of firms acquired through leveraged buyouts is estimated in the study to be about $3.6 trillion, and $2.7 trillion of those transactions occurred between 2001 and 2007.
While a lot of media and public scrutiny centers around the public-to-private transactions, this activity only accounts for 6.7% of total transactions. Instead, the majority of transactions involve acquiring private companies and corporate divisions. (I wonder if private equity will use this to combat negative attention toward private equity over public-to-private buyouts?)
Leveraged buyout activity takes place predominantly in Western Europe and the United States, with only 9% of the total value of global LBOs happening outside these areas. However, there is an increasing amount of private equity activity taking place beyond Western Europe and the U.S. as other regions warm up to the private equity industry.
Research into private equity exit strategies revealed that 39% of exits are through trade sales to another corporation, making it the most common exit strategy. Following with 24% was exits through secondary buyouts and only 13% of private equity investments took the exit route of an Initial Public Offering.
Private equity investors seem to favor long term investments with 58% of private equity investments’ exits occurring after 5 years from the initial transaction. The last few years have seen a decline from “quick flips” (exits after only 2 years or less from the initial transaction) from the already low 12% of private equity deals. I would not be surprised if the bias toward long term investments increases even more in the next couple years as investors are drawn toward more stable investments amid the financial instability.
Another key finding was the big increase in companies backed by- and operating under private equity ownership. The number of firms entering LBO status has outpaced the number leaving LBO status so a steady margin has formed; 14,000 companies were held in LBO ownership as of 2007, compared to just 5,000 in 2000 and 2,000 in the mid-1990s. Also, the length of time that these companies are held in LBO status has increased.
These are only some of the more noteworthy findings in the private equity report, if you’re interested in viewing the whole 189 page report click here: the full private equity report from WEF
Many hedge funds offer private equity like funds, many private equity funds invest in hedge funds or now offer hedge fund vehicles to their investor base. To help provide some helpful information on private equity firms please see our list below of firms in the industry. Far from exhaustive, hopefully it helps:
Top 15 Private Equity Firms in New York
Here is a list I’ve made from a list of the Top Private Equity Firms to only show the Top 15 New York Private Equity Firms by assets raised over last 5 yrs (billions).
Goldman Sachs Principal Investment Area = 49.05 billion
Kohlberg Kravis Roberts = 39.67 billion
Apollo Management = 32.82 billion
Blackstone Group = 23.3 billion
Warburg Pincus = 23 billion
Cerberus Capital Management = 14.9 billion
AIG Investments = 14.22 billion
Fortress Investment Group = 14 billion
Clayton Dubilier & Rice = 11.38 billion
Lehman Brothers Private Equity = 10.22 billion
J.C. Flowers & Co. = 7 billion
New Mountain Capital = 6.69 billion
MatlinPatterson = 6.67 billion
W.L. Ross & Co. = 6.65 billion
Welsh Carson Anderson & Stowe = 5.88 billion
Top 50 Private Equity Funds
1 The Carlyle Group $32.5 billion 2 Kohlberg Kravis Roberts $31.1 billion 3 Goldman Sachs Principal Investment Area $31 billion 4 The Blackstone Group $28.36 billion 5 TPG $23.5 billion 6 Permira $21.47 billion 7 Apax Partners $18.85 billion 8 Bain Capital $17.3 billion 9 Providence Equity Partners $16.36 billion 10 CVC Capital Partners $15.65 billion 11 Cinven $15.07 billion 12 Apollo Management $13.9 billion 13 3i Group $13.37 billion $ 14 Warburg Pincus $13.3 billion 15 Terra Firma Capital Partners $12.9 billion 16 Hellman & Friedman $12 billion 17 CCMP Capital $11.7 billion 18 General Atlantic $11.4 billion 19 Silver Lake Partners $11 billion 20 Teachers’ Private Capital $10.78 billion 21 EQT Partners $10.28 billion 22 First Reserve Corporation $10.1 billion 23 American Capital $9.57 billion 24 Charterhouse Capital Partners $9 billion 25 Lehman Brothers Private Equity $8.5 billion 26 Candover $8.29 billion 27 Fortress Investment Group $8.26 billion 28 Sun Capital Partners $8 billion 29 BC Partners $7.9 billion 30 Thomas H. Lee Partners $7.5 billion 31 Leonard Green & Partners $7.15 billion 32 Madison Dearborn Partners $6.5 billion 33 Onex $6.3 billion 34 Cerberus Capital Management $6.1 billion 35 PAI Partners $6.05 billion 36 Bridgepoint $6.05 billion 37 Doughty Hanson & Co $5.9 billion 38 AlpInvest Partners $5.4 billion 39 TA Associates $5.2 billion 40 Berkshire Partners $4.8 billion 41 Pacific Equity Partners $4.74 billion 42 Welsh, Carson, Anderson & Stowe $4.7 billion 43 Advent International $4.6 billion 44 GTCR Golder Rauner $4.6 billion 45 Nordic Capital $4.54 billion 46 Oak Investment Partners $4.06 billion 47 Clayton, Dubilier & Rice $4 billion 48 ABN AMRO Capital $3.93 billion 49 Oaktree Capital Management $3.93 billion 50 Summit Partners $3.88 billion
Tags: List of Private Equity Firms, List of Private Equity Funds, Private Equity Funds, Private Equity Fund List, private equity, Private Equity List, Private Equity Firm List
Video of Conference Discussing Private Equity Structure Changes
Today’s video deals with private equity’s structure changes as discussed by several qualified private equity fund and fund of funds managers. This video is about 45 minutes, I wish that I could edit these private equity videos so that they are shorter, I’ll look into this soon. The video is from a source that I often look to for quality videos for private equity professionals, Private Equity Exchange. The conference also deals with exit strategies for private equity groups. A major benefit of this video is the European perspective on private equity and it gives a good structure discussion.
If you found this video especially beneficial please send me an email at Theo@peblogger.com and I will provide similar videos.
New York City is a major hub for private equity activity so I’ve made the following list of the top private equity firms located in New York. In the near future I will be creating more articles based on private equity in New York.
Top 15 Private Equity Firms in New York
Here is a list I’ve made from a list of the Top Private Equity Firms to only show the Top 15 New York Private Equity Firms by assets raised over last 5 yrs (billions).
Goldman Sachs Principal Investment Area = 49.05 billion
Tags: New York Private Equity, New York Private Equity Firms List, Private Equity In New York, New York City Private Equity, New York City Private Equity Firms
Here is a list of the top private equity funds, ranked by size over the last five years. The top fifty private equity funds in this list account for 75% of the world’s global buyout activity and have a total buyout power of $2.76 trillion, according to IUF.
Top 50 Private Equity Funds
1 The Carlyle Group $32.5 billion 2 Kohlberg Kravis Roberts $31.1 billion 3 Goldman Sachs Principal Investment Area $31 billion 4 The Blackstone Group $28.36 billion 5 TPG $23.5 billion 6 Permira $21.47 billion 7 Apax Partners $18.85 billion 8 Bain Capital $17.3 billion 9 Providence Equity Partners $16.36 billion 10 CVC Capital Partners $15.65 billion 11 Cinven $15.07 billion 12 Apollo Management $13.9 billion 13 3i Group $13.37 billion $ 14 Warburg Pincus $13.3 billion 15 Terra Firma Capital Partners $12.9 billion 16 Hellman & Friedman $12 billion 17 CCMP Capital $11.7 billion 18 General Atlantic $11.4 billion 19 Silver Lake Partners $11 billion 20 Teachers’ Private Capital $10.78 billion 21 EQT Partners $10.28 billion 22 First Reserve Corporation $10.1 billion 23 American Capital $9.57 billion 24 Charterhouse Capital Partners $9 billion 25 Lehman Brothers Private Equity $8.5 billion 26 Candover $8.29 billion 27 Fortress Investment Group $8.26 billion 28 Sun Capital Partners $8 billion 29 BC Partners $7.9 billion 30 Thomas H. Lee Partners $7.5 billion 31 Leonard Green & Partners $7.15 billion 32 Madison Dearborn Partners $6.5 billion 33 Onex $6.3 billion 34 Cerberus Capital Management $6.1 billion 35 PAI Partners $6.05 billion 36 Bridgepoint $6.05 billion 37 Doughty Hanson & Co $5.9 billion 38 AlpInvest Partners $5.4 billion 39 TA Associates $5.2 billion 40 Berkshire Partners $4.8 billion 41 Pacific Equity Partners $4.74 billion 42 Welsh, Carson, Anderson & Stowe $4.7 billion 43 Advent International $4.6 billion 44 GTCR Golder Rauner $4.6 billion 45 Nordic Capital $4.54 billion 46 Oak Investment Partners $4.06 billion 47 Clayton, Dubilier & Rice $4 billion 48 ABN AMRO Capital $3.93 billion 49 Oaktree Capital Management $3.93 billion 50 Summit Partners $3.88 billion
Permanent Link: Top Private Equity Funds
Tags: Top Private Equity Funds, Best Private Equity Funds, Largest Private Equity Funds, List of Private Equity Funds by Size, Biggest Private Equity Funds
As I alluded to in today’s earlier post about the state of private equity, many firms are holding a lot of assets and simply waiting through the rough economic conditions for solid investment opportunities.
If you recall about two years earlier, private equity firms were attracting a lot of criticism for the perceived secrecy of the big buyouts they were making and the potential risk in the use of leverage to conduct these buyouts. Now, the economy is in dire need of capital to support the financial giants that have been collapsing recently. Private equity firms possess a large amount of this capital and many people are advocating for increased private equity investment as a sort of stimulus to the economy. This is not to say that private equity firms haven’t felt the effects of the economy’s decline, much to the contrary, but the industry has maintained a fair amount of capital throughout that many hope will revive the economy, at least in a minor way.
Dale Oesterle mentions the irony of this situation in his blog here.
It seems all anyone is talking about is the recent collapse of Lehman Brothers and how the financial crises will effect the economy, specifically private equity. While a major decline in the market is potentially harmful to private equity, it is worth noting that private equity often thrives in down markets. This is because the nature of private equity is to buy large firms, which may be selling unusually low in a bad market, and turn enormous profits on the acquisitions. Here is a brief private equity video that talks about the state of private equity under the economic crisis (click the link to watch the video):
Investing in a private equity fund has a lot of advantages compared to other investment areas, here are just five advantages of private equity for not only investors but also the companies that private equity firms acquire:
Companies that are backed or acquired by private equity firms are often made more efficient and produce higher profits, which benefits now only the private equity firm but also the company. Private equity firms use skilled management teams to correct the problems and ineffective parts of the company and many times this intervention prevents the company from further declining or even failing.
The management receives carried interest, a portion of the profits, so managers and their staff are motivated to produce good results to investors. Although carried interest is often criticized for taking money from the investors, it is a very big incentive for managers.
By definition, private equity firms work outside the public eye and do not have to follow the same transparency standards that public firms and funds must adhere to. This allows private equity firms to reform the companies without the constraint of having to report quarterly to the SEC or similar distractions.
Private equity firms generally perform very rigorous due diligence on potential investments. By utilizing a team of researchers the private equity firm is able to identify most risks that would not otherwise be found.
Private equity managers are paid very well and so it is easy to attract high caliber, experienced managers that tend to perform very well. The same goes for lower level employees at private equity firms, they tend to be the top young business school graduates.
I just found an interesting PowerPoint presentation describing the different types of private equity funds and hedge funds available today. This is pretty high level but within one presentation it covers much of both industries relatively well.
One of the most common requests I receive from readers is to cover private equity real estate in more detail. There is a great deal of information on real estate and private equity but very little on private equity real estate funds. I am working to fill this void so if you have any white papers, articles, videos or personal insight please contact me at Theo@peblogger.com I came across this document on private equity real estate funds. The author, Deloitte, prescribes five areas to focus on to achieve success in private equity real estate.
