WSO Private Equity Guide Notes

PE Business Model:
Raise capital from LPs. Purchase equity in a company. Hold for 3-7 years. Sell the equity for a
profit. Return original capital and 80% of profit to LPs. LPs also pay 2% annual management fee.

Thought on why investing: financing the inception and expansion of many of the eras most
successful technology firms including Genentech, Apple Inc., Electronic Arts.

Blue Chip VCs:

Sequoia, Draper Fisher Jurvetson, Kleiner Perkins
Blue Chip Growth Equity:
TA Associates, Apax Partners, New Enterprise Associates and Oak Investment Partners.
LBO:
Kohlberg Kravis Roberts (KKR), Thomas H. Lee Partners (THL), Cinven, Candover; GTCR, Bain
Capital, the Blackstone Group, The Carlyle Group, and Hellman & Friedman, Apollo
Management, TPG Capital, and Madison Dearborn, Berkshire Partners, Leonard Green, Clayton
Dubilier & Rice, Summit Partners, Silverlake, Golden Gate and Audax

Famous Deals:
Wesray Capitals acquisition of Gibson Greetings in 1982 for ~$80 million while paying only ~$1
million in equity and the rest in debt. This deal made Wesray a $66 million profit when Gibson
Greetings IPOed at a $290 million valuation sixteen months later
1989 with KKRs $31 billion LBO of RJR Nabisco Barbarians at the Gate
2007 KKR, TPG, and GS bought Texas Utility TXU for 44B

Overview of History:
1970: KKR and THL doing small deals
1980: Huge boom, pensions investing in PE, low capital gains tax, huge amount of leverage
PE firms were corporate raiders, asset strip to pay debt
1990: PE was down. Too much leverage lead to BK. Milken arrested.
PE firms added value by partnering with management
2000: After 2001 tech bubble, Golden Age of PE KKR & Blackstone went public.
Ibanks provided leverage through CDOs, brought interest rates and lending standards
down, Club deals between PE firms

PE Firm Types:
Early Seed & VC
Growth Equity & Buyout
Mature Pipe, Carve-out, LBO, Distressed

PE Funds want to make 10-12 investments with each fund for diversification.
As increase fund size have to increase deal size
Firms invest where their offices are and in their targeted industry and vertical.
Firms focus on financial engineering or industry diligence

Fund Economics:
Management Fees 2% of AUM. Meant to pay PE firms overhead.
Carried Interest 20% of the profits from deals, after a hurdle rate of 8%.
Deal Fees Charging the target a deal fee for buying it.
Monitoring fees Charging the portfolio company a fee for managerial assistance.