Private Equity as an Asset Class
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Unfairly reviled, and much misunderstood, private equity differs from all other asset classes in various important respects, not least the way in which its fund mechanisms operate, and the way in which its returns are recorded and analysed. Sadly, high level asset allocation decisions are frequently made on the basis of prejudice and misinformation, rather than a proper appreciation of the facts.
Guy Fraser-Sampson draws upon more than twenty years of experience of the private equity industry to provide a practical guide to mastering the intricacies of this highly specialist asset class. Aimed equally at investors, professionals and business school students, it starts with such fundamental questions as ’what is private equity?’ and progresses to detailed consideration of different types of private equity activity such as venture capital and buyout.
Rapid and significant changes in the environment during the recent financial crisis have prompted the need for a new edition. Separate chapters have been added on growth and development capital, as well as secondary investing. Newly emergent issues are considered, such as lengthening holding periods and the possible threat of declining returns. Particular problems, such as the need to distinguish between private equity and hedge funds, are addressed. The glossary has also been expanded. In short, readers will find that this new edition takes their understanding of the asset class to new heights.
Key points include:
- A glossary of private equity terms
- Venture capital
- Growth capital
- Development capital
- Secondary investing
- Understanding private equity returns
- Analysing funds and returns
- How to plan a fund investment programme
- Detailed discussion of industry performance figures
new fund in normal circumstances to remain in business. 2 Figures from Thomson Financial’s VentureXpert system. 160 Private Equity as an Asset Class Then there is the problem of coming to any sort of accurate view on what European Venture has actually achieved in terms of historic performance, and in any event is historic European performance necessarily a good guide to future returns? We have demonstrated that coming to any sort of accurate view of how European Venture has really performed
be a VCT (Venture Capital Trust) in the UK or an FCPR4 (Fonds Commun de Placement à Risques) in France. In these cases, again, high quality institutional returns are unlikely to be achieved, but investors will hope that the beneﬁt of the associated tax breaks will make up for this. In certain countries, legal and regulatory reform has been slow to catch up with investor requirements, with the result that even today some rather bizarre legal forms are sometimes 3 This bland statement is a gross
emphasises the need for extreme care and specialist skills in the selection of managers in the ﬁrst place. Any Private Equity fund is likely to last longer than the average marriage, and while an active secondary market does exist, a Private Equity fund commitment should be thought of as essentially long term. There are some investors who chafe at the bit and ﬁnd ways of inﬂuencing the investment process, either from behind the scenes, or through sitting on the investment committee or even quite
dealing with it). As you will see, the suggested approach takes into account only the direct impact of any debt paid off during the period of ownership, not the gearing effect of debt upon the equity returns. It is acknowledged that this is imperfect. Clearly the algebra set out below understates the effect of debt. Strictly speaking we should calculate the transaction twice, once as it actually occurred and once on a notionally debt-free basis and then compare the difference in the two results.
11.30 16.80 −34% −53% 12.30 14.00 29.80 25.80 21.50 15.10 9.90 11.10 9.60 13.90 21.30 19.70 22.20 15.80 −10% −20% 125 227 220 243 252 300 263 461 485 458 626 665 308 501 1.54 1.70 2.23 2.09 2.80 2.12 1.72 1.64 1.39 1.50 1.56 1.86 1.46 1.41 −33% −51% 1.84 2.07 2.29 2.73 3.07 1.89 1.82 1.91 1.62 1.53 1.70 1.86 1.76 2.15 −25% −50% 9.70 15.00 23.00 17.70 42.70 42.80 18.10 16.10 7.80 10.20 13.40 24.50 18.80 16.70 −5% −29% 19.70 25.90 23.40 28.30 49.20 21.70 22.50 17.50 10.20 11.80 18.20 25.20