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Private Equity 4.0: Reinventing Value Creation


The Essential Guide to Today's Private Equity Market

"In this book, we offer insights into the industry deals and rules of engagement with a view to discover the most effective ways to reap benefits from it. The recipes are not simple, but like a good cooking book, the rewards can be most satisfying."
—From the Foreword

Private Equity 4.0: Reinventing Value Creation offers investors an important guide to the inner workings of private equity that is based in solid research and the authors' more than 50 years of experience. Written by noted experts in the field—Benoît Leleux, Hans van Swaay, and Esmeralda Megally—this comprehensive resource offers a wealth of information on private equity and contains compelling interviews with some of the world's leading investors. The authors include an analysis of private equity value creation and a range of illustrative case studies of successful and less successful deals. The authors explain how private equity actually functions, identify the key players, and examine the different segments of this rapidly maturing market.

Determined to offer a balanced approach to the private equity industry, Private Equity 4.0 is conceived as a timeless, unbiased investigation of the ways and means of the industry. Written in accessible terms, Private Equity 4.0 gives investors and industry observers, a realistic insider's view into the intriguing, often deeply misunderstood private equity industry, and offers expert guidance about ways to invest and reveals how to avoid common missteps.

"A most welcome and timely review of the latest trends in private equity, robust conceptually and yet approachable for all parties interested in understanding the inner working of this sophisticated industry. A 'Real World – Real Learning' contribution, with extant case studies and interviews with insiders."
—Professor Dominique Turpin, IMD President, Nestlé Professor of Marketing and Strategy

"This passionate, yet constructive'critical assessment of an industry with huge potential and positive momentum provides a valuable perspective for practitioners and interested observers alike."
—Dr. Peter Wuffli, Chairman of the board of directors of Partners Group Holding AG, Former President and Group CEO of UBS

BENOÎT LELEUX is the Stephan Schmidheiny Professor of Entrepreneurship and Finance at IMD in Lausanne (Switzerland), where he was director of the MBA program and director of Research and Development.

HANS VAN SWAAY has a long track record in private equity as Partner of Lyrique, Head of Private Equity at Pictet & Cie, Managing Director of UBS Capital, Managing Director of Merifin and partner of Lowe Finance.

ESMERALDA MEGALLY is a former manager with Boston-based venture capital firm Commons Capital. She is currently the co-founder and CEO of Xsensio, an EPFL Nanolab technology spinoff.

List of case studies ix

About the authors xi

Professional acknowledgments xiii

Personal acknowledgments xv

Foreword xvii

Introduction xxi

Private equity at the crossroads xxi

An historical perspective to gain insights for the future xxi

Private equity: all about people xxiii

The best capitalism has to offer? The conceptual groundings xxiv

Empowering and incentivizing: partnering for mutual success xxiv

Focus, focus, focus xxv

Strategy is cheap; operationalizing is key xxv

Alignment brings cohesion xxvi

Flexibility as strategic value xxvi

Carrots and sticks: the value of discipline xxvi

Leverage… at all levels xxvii

The cash flow paradox xxvii

The buy-and-sell approach: capitalism on speed xxviii

Believers, sceptics and cynics xxviii

1 Private equity: from “alternative” to “mainstream” asset class? 1

Moving into mainstream 3

A brief history 6

An increasingly global industry 8

Private equity in North America 10

Private equity in Europe 11

Private equity in Asia 12

Emerging private equity players 13

An industry in the limelight 18

2 Private equity as a business system 25

Setting the stage 27

The raison d’être of private equity funds 27

Private equity’s market segments 29

The fuel behind private equity: investors 37

Portfolio allocations by investors 39

The (apparent) madness of private equity fees 42

Management fee 43

Carried interest 43

General partner interest 46

Commitments versus investments 50

Distributions in cash, please! 51

Due diligence, leverage, focus and… incentives 53

Superior information 54

Active ownership 54

Financial leverage 55

Alignment of interests 55

Mitigating possible confl icts of interest 56

Illiquidity… and new ways to cope with it 58

Secondaries market 58

Publicly listed private equity vehicles 60

3 Value creation in private equity 69

The art of private equity 71

Sourcing deals 74

Creating value in private equity 78

Operational value 79

Exiting investments 95

The economic impact of private equity 96

4 Private equity performance 103

Performance metrics 106

Valuing realized and unrealized investments 108

Reporting fund performance 109

Membership and self-reporting biases 109

Performance by segments 112

Performance by fund size 113

The persistence effect 114

The timing effect 116

Comparison against benchmarks 117

Correlation to other asset classes 121

5 The main characters in private equity 125

Size matters: fund sizes, deal sizes and other dimension issues! 127

Global alternative asset managers 132

Example: The Carlyle Group 133

Example: Bain Capital 138

Regional, domestic and multi-country funds 142

Example: EQT Partners 143

Mid-market funds 146

Example: H.I.G. Capital 148

Venture capital funds 152

Example: TVM Capital 154

Distressed private equity 157

Example: Cerberus Capital Management LP 159

Secondary funds 162

Example: Coller Capital 163

Funds-of-funds 165

Example: Pantheon 166

Example: AlpInvest Partners 169

Institutional limited partners 171

Example: CalPERS (California Public Employees Retirement System) 171

6 The supporting cast 173

London as European centre of gravity 176

The private equity ecosystem: follow the fees 177

Investment banks 178

M&A advisory fees 179

Arrangement fees 180

Securitization fees, or the price of turning frogs into princes 180

Fund management fees, or how to compete with your best clients 182

Lending banks 183

Accountancy firms 184

Law firms 185

Due diligence specialist providers 186

Strategy consultants 187

Placement agents 189

Fund administrators 190

Recruitment consultants 191

Public relations agencies 192

7 Investing in a fund 195

The private equity game 197

The decision to invest 198

Choice of investment vehicle 203

Direct fund investments 204

Indirect fund investments 204

Diversification in a rich marketplace 209

Stages of investment 210

Geographic focus 210

Sector and size of investments 210

Strategic approach 210

Types of private equity firms 211

Timing 211

The pitch 212

Manager selection 214

Due diligence 216

Terms, conditions and fee structures 221

Subscription to a fund 228

Capital calls 228

Monitoring 229

Distributions 230

Reporting 232

Fund liquidation 233

8 The future of private equity 235

Reports of private equity’s death were highly premature 237

Private equity in a changing world 239

Conclusion 244

Index 247