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Investment Banks, Hedge Funds, and Private Equity, 2nd Edition

Book Description

The dynamic environment of investment banks, hedge funds, and private equity firms comes to life in David Stowell’s introduction to the ways they challenge and sustain each other. Capturing their reshaped business plans in the wake of the 2007-2009 global meltdown, his book reveals their key functions, compensation systems, unique roles in wealth creation and risk management, and epic battles for investor funds and corporate influence. Its combination of perspectives—drawn from his industry and academic backgrounds—delivers insights that illuminate the post-2009 reinvention and acclimation processes. Through a broad view of the ways these financial institutions affect corporations, governments, and individuals, Professor Stowell shows us how and why they will continue to project their power and influence.



  • Emphasizes the needs for capital, sources of capital, and the process of getting capital to those who need it.
  • Integrates into the chapters ten cases about recent transactions, along with case notes and questions
  • Accompanies cases with spreadsheets for readers to create their own analytical frameworks and consider choices and opportunities.

Table of Contents

  1. Cover image
  2. Title page
  3. Table of Contents
  4. Copyright
  5. Dedication
  6. Preface
  7. Acknowledgments
  8. 1. Overview of Investment Banking
    1. Postcrisis Global Investment Banking Firms
    2. Other Investment Banking Firms
    3. Investment Banking Businesses
    4. Investment Banking Division
    5. Trading Division
    6. Nonclient-Related Trading and Investing
    7. Asset Management Division
  9. 2. Regulation of the Securities Industry
    1. Introduction
    2. Section One: U.S. Regulations
    3. Section Two: Recent Developments in Securities Regulations
    4. Section Three: Securities Regulations in Other Countries
  10. 3. Financings
    1. Capital Markets Financings
    2. Financing Alternatives
    3. Fees to Bankers
    4. Distribution Alternatives
    5. Shelf Registration Statements
    6. “Green Shoe” Overallotment Option
    7. International Financings
  11. 4. Mergers and Acquisitions
    1. The Core of M&A
    2. Creating Value
    3. Strategic Rationale
    4. Synergies and Control Premium
    5. Credit Ratings and Acquisition Currency
    6. Regulatory Considerations
    7. Social and Constituent Considerations
    8. Role of Investment Bankers
    9. Other M&A Participants
    10. Fairness Opinion
    11. Acquisitions
    12. Breakup Fee
    13. Alternative Sale Processes
    14. Cross-Border Transactions
    15. Tax-Free Reorganizations
    16. Corporate Restructurings
    17. Takeover Defenses
    18. Risk Arbitrage
    19. Valuation
  12. 5. Trading
    1. Client-Related Trading
    2. Equity Trading
    3. Fixed Income, Currencies, and Commodities Trading
    4. Market Making
    5. Proprietary Trading
    6. International Trading
    7. Risk Monitoring and Control
    8. Value at Risk
  13. 6. Asset Management, Wealth Management, and Research
    1. Asset Management
    2. Wealth Management
    3. Research
  14. 7. Credit Rating Agencies, Exchanges, and Clearing and Settlement
    1. Credit Rating Agencies
    2. Exchanges
    3. Dark Pools
    4. Over-the-Counter Market
    5. Clearing and Settlement
  15. 8. International Banking
    1. Euromarkets
    2. Japan's Financial Market
    3. China's Financial Market
    4. Emerging Financial Markets
    5. Global IPO Market
    6. American Depositary Receipt
    7. Standardized International Financial Reporting
    8. International Investors
  16. 9. Convertible Securities and Wall Street Innovation
    1. Convertible Securities
    2. Wall Street Innovation
  17. 10. Investment Banking Careers, Opportunities, and Issues
    1. Investment Banking
    2. Trading and Sales
    3. Private Wealth Management
    4. Asset Management
    5. Research
    6. Principal Investments
    7. Other Investment Banking Functions
    8. Investment Banking Opportunities and Issues
  18. 11. Overview of Hedge Funds
    1. Leverage
    2. Growth
    3. Composition of Investors
    4. Industry Concentration
    5. Performance
    6. Slowdown during 2008
    7. Market Liquidity and Efficiency
    8. Financial Innovation
    9. Illiquid Investments
    10. Lock-Ups, Gates, and Side Pockets
    11. Comparison with Private Equity Funds and Mutual Funds
    12. High-Water Marks and Hurdle Rates
    13. Public Offerings
    14. Fund of Funds
  19. 12. Hedge Fund Investment Strategies
    1. Equity-Based Strategies
    2. Macro Strategies
    3. Arbitrage Strategies
    4. Event-Driven Strategies
    5. Summary
  20. 13. Shareholder Activism and Impact on Corporations
    1. Shareholder-Centric versus Director-Centric Corporate Governance
    2. Activist Hedge Fund Performance
    3. Activist Hedge Fund Accumulation Strategies
    4. CSX versus TCI
    5. Changing Rules That Favor Activists
    6. Daniel Loeb and 13D Letters
    7. Carl Icahn versus Yahoo!
    8. Bill Ackman versus McDonald's, Wendy's, Ceridian, Target, and MBIA
    9. Summary
  21. 14. Risk, Regulation, and Organizational Structure
    1. Investor Risks
    2. Systemic Risk
    3. Regulation
    4. Organizational Structure
  22. 15. Hedge Fund Performance and Issues
    1. Hedge Fund Performance
    2. Funds of Funds
    3. Absolute Return
    4. Benefits Revisited
    5. Transparency
    6. Fees
    7. High-Water Mark
    8. Searching for Returns
    9. Future Developments
    10. Merging of Functions
    11. International Hedge Fund Initiatives
  23. 16. Overview of Private Equity
    1. Characteristics of a Private Equity Transaction
    2. Target Companies for Private Equity Transactions
    3. Private Equity Transaction Participants
    4. Structure of a Private Equity Fund
    5. Capitalization of a Private Equity Transaction
    6. Assets under Management
    7. History
    8. Financing Bridges
    9. Covenant-Lite Loans and PIK Toggles
    10. Club Transactions and Stub Equity
    11. Teaming up with Management
    12. Private Investment in Public Equities
    13. Leveraged Recapitalizations
    14. Secondary Markets for Private Equity
    15. Funds of Funds
    16. Private Equity Goes Public
    17. Impact of Financial Services Meltdown on Private Equity
  24. 17. LBO Financial Model
    1. Determining Cash Flow Available for Debt Service and Debt Sources
    2. Determining Financial Sponsor IRR
    3. Determining Purchase Price and Sale Price
    4. LBO Analysis Example
    5. LBO Analysis Post–Credit Crisis
  25. 18. Private Equity Impact on Corporations
    1. Private Equity–Owned Companies: Management Practices and Productivity
    2. Private Equity–Owned Company Failures
    3. Scorecard during 2008
    4. Private Equity Purchase Commitment Failures
    5. Private Equity Portfolio Companies Purchased during 2006 and 2007
    6. Private Equity Value Proposition for Corporations
    7. Corporate Rationale for Completing Private Equity Transactions
    8. Private Equity as an Alternative Model of Corporate Governance
    9. Private Equity Influence on Companies
  26. 19. Organization, Compensation, Regulation, and Limited Partners
    1. Organizational Structure
    2. Compensation
    3. Regulation
    4. Limited Partners
  27. 20. Private Equity Issues and Opportunities
    1. PIPEs
    2. Equity Buyouts
    3. Distressed Assets
    4. M&A Advisory
    5. Capital Markets Activity
    6. Hedge Fund and Real Estate Investments
    7. 2008 Losses and Future Expectations
    8. Boom and Bust Cycles
    9. Annex Funds
    10. Limited Partner Pullbacks
    11. Risk Factors
    12. Asian Private Equity Activities
    13. European Private Equity
    14. Strategic Alliances
    15. Private Equity IPOs
    16. Focus on Portfolio Management
    17. Comparison of Private Equity Firms
    18. Profile of The Carlyle Group
    19. Future Issues and Opportunities
    20. The New Landscape
  28. Investment Banking in 2008 (A): Rise and Fall of the Bear
    1. Bear Stearns
    2. Long-Term Capital Management
    3. The Credit Crisis
    4. Bear Stearns Asset Management
    5. The Calm before the Storm
    6. Run on the Bank
    7. Bear's Last Weekend
  29. Investment Banking in 2008 (B): A Brave New World
    1. The Aftermath of Bear Stearns
    2. Gramm–Leach–Bliley and the Fall of Glass–Steagall
    3. Lehman Brothers
    4. Merrill Lynch
    5. Goldman Sachs and Morgan Stanley
  30. Freeport-McMoRan: Financing an Acquisition
    1. Metals Heating Up
    2. Enter Freeport-McMoRan
    3. Role of the Investment Banks
    4. Mandatory Convertible Preferred Shares
    5. FCX Post-Allocation
  31. The Best Deal Gillette Could Get?: Proctor & Gamble's Acquisition of Gillette
    1. A Dream Deal
    2. Deal Structure: An “All-Stock,” 60/40, No-Collar Acquisition
    3. Valuation of the Deal
    4. Key Stakeholders: Beantown, Wall Street, DC, and Main Street
    5. Conclusion
  32. A Tale of Two Hedge Funds: Magnetar and Peloton
    1. What a Year
    2. What a Nightmare
    3. Magnetar's Structured Finance Arbitrage Trade
    4. The 2007–2008 Financial Crisis
    5. The CDO Market
    6. Rating Agencies
    7. Correlation
    8. CDO Market Evolution
    9. Bank Debt and the Cov-Lite Craze
  33. Kmart, Sears, and ESL: How a Hedge Fund Became One of the World's Largest Retailers
    1. The Unusual Weekend
    2. Flash Forward: November 2004
    3. The Rise and Fall of Kmart
    4. Bankruptcy and Inefficient Financial Markets
    5. Financial Buyers versus Strategic Buyers
    6. Private Equity
    7. Hedge Funds
    8. ESL: The Hedge Fund That Could Not Be Categorized
    9. 2002–2003 Decision: Should ESL Seek to Gain Control of Kmart during Bankruptcy?
    10. Lampert's Kmart Play
    11. November 2004 Decision: Should Kmart (under ESL's Control) Acquire Sears?
  34. McDonald's, Wendy's, and Hedge Funds: Hamburger Hedging?: Hedge Fund Activism and Its Impact on Corporate Governance
    1. Growing Hedge Fund Activism
    2. A Tale of Two Activists: Carl Icahn and William Ackman
    3. Pershing Square's Initial Involvement: Wendy's and McDonald's
    4. McDonald's Management and Franchisees Respond
    5. Rating Agency Concern
    6. Unlocking McDonald's Real Estate Value
    7. Aftermath of McDonald's Rejection
    8. The Truce
    9. Retrospective
  35. Porsche, Volkswagen, and CSX: Cars, Trains, and Derivatives
    1. Using Derivatives to Obtain Control Positions
    2. CSX Collides with TCI and 3G
    3. Porsche and Volkswagen: Brothers Reunited
  36. The Toys “R” Us LBO
    1. Case Focus
    2. Emergence of Club Deals in a Maturing Industry
    3. Dividends and Fees Paid to Private Equity Firms
    4. U.S. Retail Toy Industry in 2005
    5. European Retail Toy Industry
    6. Infant, Toddler, and Preschool Market
    7. Overview of Toys “R” Us
    8. Challenging Times for Toys “R” Us
    9. Toys “R” Us Strategic Review and Sale
    10. The Toys “R” Us Club
    11. The Assignment
  37. Cerberus and the U.S. Auto Industry
    1. Introduction
    2. “What's Good for GM?”
    3. Cerberus Capital Management to the Rescue … Maybe
    4. GM's Supplier Relationships
    5. Cerberus Builds an Even Bigger Auto Stage
    6. The Dream Becomes a Nightmare
  38. Index