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Private Equity 4.0: Reinventing Value Creation

Book Description

"Private equity is more economically significant than ever, as institutions hunt for high returns in a risky world. Private Equity 4.0 examines the role, workings and contribution of this important industry in a straightforward yet revealing manner."

Dr. Josh Lerner

Jacob H. Schiff Professor of Investment Banking ?Chair, Entrepreneurial Management Unit

Harvard Business School

A multi-perspective look at private equity's inner workings

Private Equity 4.0 provides an insider perspective on the private equity industry, and analyzes the fundamental evolution of the private equity asset class over the past 30 years, from alternative to mainstream. The book provides insightful interviews of key industry figures, and case studies of some of the success stories in the industry. It also answers key questions related to strategy, fund manager selection, incentive mechanisms, performance comparison, red flags in prospectuses, and more.

Private Equity 4.0 offers guidance for the many stakeholders that could benefit from a more complete understanding of this special area of finance.

  • Understand the industry's dominant business models

  • Discover how value is created and performance measured

  • Perform a deep dive into the ecosystem of professionals that make the industry hum, including the different incentive systems that support the industry's players

  • Elaborate a clear set of guidelines to invest in the industry and deliver better performance

  • Written by a team of authors that combine academic and industry expertise to produce a well-rounded perspective, this book details the inner workings of private equity and gives readers the background they need to feel confident about committing to this asset class. Coverage includes a historical perspective on the business models of the three major waves of private equity leading to today's 4.0 model, a detailed analysis of the industry today, as well as reflections on the future of private equity and prospective futures. It also provides readers with the analytical and financial tools to analyze a fund's performance, with clear explanations of the mechanisms, organizations, and individuals that make the system work.

    The authors demystify private equity by providing a balanced, but critical, review of its contributions and shortcomings and moving beyond the simplistic journalistic descriptions. Its ecosystem is complex and not recognizing that complexity leads to inappropriate judgments. Because of its assumed opacity and some historical deviant (and generally transient) practices, it has often been accused of evil intents, making it an ideal scapegoat in times of economic crisis, prodding leading politicians and regulators to intervene and demand changes in practices. Unfortunately, such actors were often responding to public calls for action rather than a thorough understanding of the factors at play in this complex interdependent system, doing often more harm than good in the process and depriving economies of one of their most dynamic and creative forces. Self-regulation has clearly shown its limits, but righteous political interventions even more so.

    Private equity investment can be a valuable addition to many portfolios, but investors need a clear understanding of the forces at work before committing to this asset class. With detailed explanations and expert insights, Private Equity 4.0 is a comprehensive guide to the industry ways and means that enables the reader to capture its richness and sustainability.

    Table of Contents

    1. List of case studies
    2. About the authors
      1. Hans van Swaay
      2. Esmeralda Megally
    3. Professional Acknowledgments
    4. Personal acknowledgments
      1. Benoit Leleux
      2. Hans van Swaay
      3. Esmeralda Megally
    5. Foreword
      1. The road to sustainability: from arbitrage to operational value creation
      2. Gaining perspective: The road ahead
    6. Introduction
      1. Private equity at the crossroads
      2. An historical perspective to gain insights for the future
      3. Private equity: all about people
      4. The best capitalism has to offer? The conceptual groundings
      5. Believers, sceptics and cynics
      6. Notes
    7. 1 Private equity: from “alternative” to “mainstream” asset class?
      1. Executive summary
      2. Moving into mainstream
      3. A brief history
      4. An increasingly global industry
      5. An industry in the limelight
      6. Notes
    8. 2 Private equity as a business system
      1. Executive summary
      2. Setting the stage
      3. The (apparent) madness of private equity fees
      4. Commitments versus investments
      5. Distributions in cash, please!
      6. Due diligence, leverage, focus and… incentives
      7. Illiquidity… and new ways to cope with it
      8. Notes
    9. 3 Value creation in private equity
      1. Executive summary
      2. The art of private equity
      3. Sourcing deals
      4. Creating value in private equity
      5. Exiting investments
      6. The economic impact of private equity
      7. Notes
    10. 4 Private equity performance
      1. Executive Summary
      2. Performance metrics
      3. Valuing realized and unrealized investments
      4. Reporting fund performance
      5. Membership and self-reporting biases
      6. Performance by segments
      7. Performance by fund size
      8. The persistence effect
      9. The timing effect
      10. Comparison against benchmarks
      11. Correlation to other asset classes
      12. Notes
    11. 5 The main characters in private equity
      1. Executive summary
      2. Size matters: fund sizes, deal sizes and other dimension issues!
      3. Global alternative asset managers
      4. Mid-market funds
      5. Venture capital funds
      6. Distressed private equity
      7. Secondary funds
      8. Funds-of-funds
      9. Institutional limited partners
      10. Notes
    12. 6 The supporting cast
      1. Executive summary
      2. London as European centre of gravity
      3. The private equity ecosystem: follow the fees
      4. Investment banks
      5. Lending banks
      6. Accountancy firms
      7. Law firms
      8. Due diligence specialist providers
      9. Strategy consultants
      10. Placement agents
      11. Fund administrators
      12. Recruitment consultants
      13. Public relations agencies
      14. Notes
    13. 7 Investing in a fund
      1. Executive summary
      2. The private equity game
      3. The decision to invest
      4. Choice of investment vehicle
      5. Diversification in a rich marketplace
      6. Timing
      7. The pitch
      8. Manager selection
      9. Due diligence
      10. Subscription to a fund
      11. Capital calls
      12. Monitoring
      13. Distributions
      14. Reporting
      15. Fund liquidation
      16. Notes
    14. 8 The future of private equity
      1. Executive summary
      2. Reports of private equity’s death were highly premature
      3. Private equity in a changing world
      4. Conclusion
      5. Note
    15. Index
    16. End User License Agreement