Private Equity revision

what is PE

when an investor buys shares in a private company with a view to realise income profits and capital gains on the value of the shares

what is a private equity fund

pool of capital contributed to by a group of investors, which will be invested in companies

how are private equity funds usually structured

limited partnerships

2 ways in which investors get returns

income through drawings from the profits of the company

capital gain on the value of the shares and exit

pros of PE

potentially very high returns

investor actively involved in business

incentivised for business to succeed

immediate cash infusion

cons of PE

riskier than investing in public companies

shares cannot readily be sold

requires up-front financing

lose some management control to the investor

two main forms of buyout

management buyouts

institutional leveraged buyouts

management buyout

where the management of the company pools resources to acquire all or part of the company

will usually seek funding from a range of sources

senior debt

debt which ranks above subordinated debts in the company in the event of winding up

mezzanine debt

debt that sits between senior debt but ahead of equity investors

loans from equity investors

loans are unsecured and rank below other loans in respect to claims for assets/earnings

institutional leveraged buyouts

where the private equity provider manages funds of institutional investors and uses those funds to acquire a majority shareholding

what structure is usually used for institutional leveraged buyouts

holding company - investment vehicle

wholly owned subsidiary of the top company - will do the bank borrowing

what are the different types of funding used

equity capital - share purchases by investors

debt instruments - financed through banks/lenders

what are the key documents

investment agreement

ancillary documents to the investment agreement

terms of the constitution of the top company

form of any debt securities

banking documentation - loan agreement

security documents

warranty and indemnity insurance

sale and purchase agreement

disclosure letter

tax covenant

pension transfer provisions

benefits of limited partnership

allow passive investors to participate, as limited partners without taking an active role in fund management and get limited liability

what are the two categories of partners

general partners - unlimited liability and manage business

limited partners - contribute capital and limited liability

benefits of private fund limited partnerships

white list of permitted actions for limited partners

no requirement for capital contribution

fewer regulatory burdens

exempt from statutory duties

easier to wind up