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<br /> Private equity<br /> demystified<br /> An explanatory guide<br /> THIRD EDITION<br /> John Gilligan and Mike Wright<br /> BUSINESS WITH CONFIDENCE icaew.com/financingchange<br /> Private Equity Demystified – An Explanatory Guide<br /> An initiative from the ICAEW Corporate Finance Faculty<br /> Private Equity Demystified provides an objective explanation of private equity, recognising that<br /> for public scrutiny of this sector to be effective it must be conducted on an informed basis.<br /> This is recognised by the work featuring on reading lists of leading business schools.<br /> Since the publication in 2008 of the first edition of Private Equity Demystified the major<br /> economies have moved from growth to recession to evidence of emergence from recession.<br /> We have seen the enactment and subsequent implementation of the European Commission’s<br /> Alternative Investment Fund Managers Directive which covers private e<a title="Private Equity Demystified 2014 page 1" href="http://viewer.zmags.com/publication/20b013e7?page=1"> Private equity demystified An explanatory guide </a> <a title="Private Equity Demystified 2014 page 2" href="http://viewer.zmags.com/publication/20b013e7?page=2"> Private Equity Demystified – An Explanatory Guide </a> <a title="Private Equity Demystified 2014 page 3" href="http://viewer.zmags.com/publication/20b013e7?page=3"> Private equity demystified An explanatory guide </a> <a title="Private Equity Demystified 2014 page 4" href="http://viewer.zmags.com/publication/20b013e7?page=4"> </a> <a title="Private Equity Demystified 2014 page 5" href="http://viewer.zmags.com/publication/20b013e7?page=5"> Contents Page Preface to the third edition </a> <a title="Private Equity Demystified 2014 page 6" href="http://viewer.zmags.com/publication/20b013e7?page=6"> 1.3.6 Captives versus independents </a> <a title="Private Equity Demystified 2014 page 7" href="http://viewer.zmags.com/publication/20b013e7?page=7"> 2.1.21 Fund management fees </a> <a title="Private Equity Demystified 2014 page 8" href="http://viewer.zmags.com/publication/20b013e7?page=8"> 3. EVALUATING, STRUCTURING AND RESTRUCTURING A P</a> <a title="Private Equity Demystified 2014 page 9" href="http://viewer.zmags.com/publication/20b013e7?page=9"> 3.4 Distress and restructuring </a> <a title="Private Equity Demystified 2014 page 10" href="http://viewer.zmags.com/publication/20b013e7?page=10"> 5.8 Is there a culture of secrecy? </a> <a title="Private Equity Demystified 2014 page 11" href="http://viewer.zmags.com/publication/20b013e7?page=11"> Preface to the third edition For over two </a> <a title="Private Equity Demystified 2014 page 12" href="http://viewer.zmags.com/publication/20b013e7?page=12"> Acknowledgements This report has benefited</a> <a title="Private Equity Demystified 2014 page 13" href="http://viewer.zmags.com/publication/20b013e7?page=13"> About the authors John Gilligan is a Corpo</a> <a title="Private Equity Demystified 2014 page 14" href="http://viewer.zmags.com/publication/20b013e7?page=14"> List of figures and tables 1. THE PRIVATE EQ</a> <a title="Private Equity Demystified 2014 page 15" href="http://viewer.zmags.com/publication/20b013e7?page=15"> Figure 2.22: European primary and secondary buy-</a> <a title="Private Equity Demystified 2014 page 16" href="http://viewer.zmags.com/publication/20b013e7?page=16"> Table 4.1: Operating profit projections </a> <a title="Private Equity Demystified 2014 page 17" href="http://viewer.zmags.com/publication/20b013e7?page=17"> 1. The private equity market In this section we</a> <a title="Private Equity Demystified 2014 page 18" href="http://viewer.zmags.com/publication/20b013e7?page=18"> 1.1 What is private equity? `Private' Private equ</a> <a title="Private Equity Demystified 2014 page 19" href="http://viewer.zmags.com/publication/20b013e7?page=19"> The term, therefore, has a confusingly loose defi</a> <a title="Private Equity Demystified 2014 page 20" href="http://viewer.zmags.com/publication/20b013e7?page=20"> Some argue that private equity is an alternative </a> <a title="Private Equity Demystified 2014 page 21" href="http://viewer.zmags.com/publication/20b013e7?page=21"> 2. Source investment opportunities A private equ</a> <a title="Private Equity Demystified 2014 page 22" href="http://viewer.zmags.com/publication/20b013e7?page=22"> 1.1.8 What rewards do private equity investors ea</a> <a title="Private Equity Demystified 2014 page 23" href="http://viewer.zmags.com/publication/20b013e7?page=23"> Figure 1.2: Effects of leverage – 50% debt 50% eq</a> <a title="Private Equity Demystified 2014 page 24" href="http://viewer.zmags.com/publication/20b013e7?page=24"> Figure 1.4: Effects of leverage – 50% debt, 50% r</a> <a title="Private Equity Demystified 2014 page 25" href="http://viewer.zmags.com/publication/20b013e7?page=25"> from £400 to £1,840, arguably not meaningful. If </a> <a title="Private Equity Demystified 2014 page 26" href="http://viewer.zmags.com/publication/20b013e7?page=26"> Furthermore, nobody invests in the belief that th</a> <a title="Private Equity Demystified 2014 page 27" href="http://viewer.zmags.com/publication/20b013e7?page=27"> private information to achieve superior returns. </a> <a title="Private Equity Demystified 2014 page 28" href="http://viewer.zmags.com/publication/20b013e7?page=28"> 1.3.3 1980s ‘hands-off, eyes-on’ Virtually all ea</a> <a title="Private Equity Demystified 2014 page 29" href="http://viewer.zmags.com/publication/20b013e7?page=29"> Table 1.1: Selected large UK buy-out firms and the</a> <a title="Private Equity Demystified 2014 page 30" href="http://viewer.zmags.com/publication/20b013e7?page=30"> New businesses emerged that mimicked the use of l</a> <a title="Private Equity Demystified 2014 page 31" href="http://viewer.zmags.com/publication/20b013e7?page=31"> of the cycle, hoping to profit on the upturn, alt</a> <a title="Private Equity Demystified 2014 page 32" href="http://viewer.zmags.com/publication/20b013e7?page=32"> Figure 1.6: Global private equity funds raised ($</a> <a title="Private Equity Demystified 2014 page 33" href="http://viewer.zmags.com/publication/20b013e7?page=33"> As illustrated in Figure 1.7, the market for buy-</a> <a title="Private Equity Demystified 2014 page 34" href="http://viewer.zmags.com/publication/20b013e7?page=34"> Figure 1.9: £100m buy-outs as a percentage of the</a> <a title="Private Equity Demystified 2014 page 35" href="http://viewer.zmags.com/publication/20b013e7?page=35"> Second, the largest deals have increasingly invol</a> <a title="Private Equity Demystified 2014 page 36" href="http://viewer.zmags.com/publication/20b013e7?page=36"> 1.4.4 Deal initiation and proprietary deal flow P</a> <a title="Private Equity Demystified 2014 page 37" href="http://viewer.zmags.com/publication/20b013e7?page=37"> Of the largest transactions shown in Table 1.2 no</a> <a title="Private Equity Demystified 2014 page 38" href="http://viewer.zmags.com/publication/20b013e7?page=38"> 1.4.7 What are the largest private equity funds i</a> <a title="Private Equity Demystified 2014 page 39" href="http://viewer.zmags.com/publication/20b013e7?page=39"> 1.4.8 How significant are public to private trans</a> <a title="Private Equity Demystified 2014 page 40" href="http://viewer.zmags.com/publication/20b013e7?page=40"> </a> <a title="Private Equity Demystified 2014 page 41" href="http://viewer.zmags.com/publication/20b013e7?page=41"> 2. Private equity funds, funders and other </a> <a title="Private Equity Demystified 2014 page 42" href="http://viewer.zmags.com/publication/20b013e7?page=42"> 2.1 The private equity fund 2.1.1 What is a priva</a> <a title="Private Equity Demystified 2014 page 43" href="http://viewer.zmags.com/publication/20b013e7?page=43"> To solve these types of problems, in the UK, stru</a> <a title="Private Equity Demystified 2014 page 44" href="http://viewer.zmags.com/publication/20b013e7?page=44"> Table 2.1: Top 20 fund-of-funds investors in glob</a> <a title="Private Equity Demystified 2014 page 45" href="http://viewer.zmags.com/publication/20b013e7?page=45"> Figure 2.3 shows the private equity and venture c</a> <a title="Private Equity Demystified 2014 page 46" href="http://viewer.zmags.com/publication/20b013e7?page=46"> Figure 2.4: The relationship between costs and in</a> <a title="Private Equity Demystified 2014 page 47" href="http://viewer.zmags.com/publication/20b013e7?page=47"> Theoretically the fund could go ‘into carry‘ if a</a> <a title="Private Equity Demystified 2014 page 48" href="http://viewer.zmags.com/publication/20b013e7?page=48"> The objective of all of these structures is to al</a> <a title="Private Equity Demystified 2014 page 49" href="http://viewer.zmags.com/publication/20b013e7?page=49"> Table 2.2: Key differences between private equity</a> <a title="Private Equity Demystified 2014 page 50" href="http://viewer.zmags.com/publication/20b013e7?page=50"> Table 2.2: Key differences between private equity</a> <a title="Private Equity Demystified 2014 page 51" href="http://viewer.zmags.com/publication/20b013e7?page=51"> Table 2.3: Key differences between private equity</a> <a title="Private Equity Demystified 2014 page 52" href="http://viewer.zmags.com/publication/20b013e7?page=52"> The differences in the risks of the traditional p</a> <a title="Private Equity Demystified 2014 page 53" href="http://viewer.zmags.com/publication/20b013e7?page=53"> Table 2.4: Key differences between private equity</a> <a title="Private Equity Demystified 2014 page 54" href="http://viewer.zmags.com/publication/20b013e7?page=54"> Hedge funds, in their private equity activities, </a> <a title="Private Equity Demystified 2014 page 55" href="http://viewer.zmags.com/publication/20b013e7?page=55"> Figure 2.6: Forms of diversification undertaken by</a> <a title="Private Equity Demystified 2014 page 56" href="http://viewer.zmags.com/publication/20b013e7?page=56"> An unusual circumstance arose in the case of UK i</a> <a title="Private Equity Demystified 2014 page 57" href="http://viewer.zmags.com/publication/20b013e7?page=57"> Figure 2.7: Investment $bn by country January 200</a> <a title="Private Equity Demystified 2014 page 58" href="http://viewer.zmags.com/publication/20b013e7?page=58"> reliant on third-party advisers both for t</a> <a title="Private Equity Demystified 2014 page 59" href="http://viewer.zmags.com/publication/20b013e7?page=59"> 2.1.19 Committed versus invested capital It is im</a> <a title="Private Equity Demystified 2014 page 60" href="http://viewer.zmags.com/publication/20b013e7?page=60"> No recycling of capital: return flow is the name </a> <a title="Private Equity Demystified 2014 page 61" href="http://viewer.zmags.com/publication/20b013e7?page=61"> 2.1.21 Fund management fees The fund investors pa</a> <a title="Private Equity Demystified 2014 page 62" href="http://viewer.zmags.com/publication/20b013e7?page=62"> The demand for investing in a particular fund wil</a> <a title="Private Equity Demystified 2014 page 63" href="http://viewer.zmags.com/publication/20b013e7?page=63"> would be a significant burden. This minimum varie</a> <a title="Private Equity Demystified 2014 page 64" href="http://viewer.zmags.com/publication/20b013e7?page=64"> Findings 2.1: Secondary fund market. The academic</a> <a title="Private Equity Demystified 2014 page 65" href="http://viewer.zmags.com/publication/20b013e7?page=65"> It is common practice for managers to carry out q</a> <a title="Private Equity Demystified 2014 page 66" href="http://viewer.zmags.com/publication/20b013e7?page=66"> 5. Discounted cash flows from the investment: whe</a> <a title="Private Equity Demystified 2014 page 67" href="http://viewer.zmags.com/publication/20b013e7?page=67"> Figure 2.12: Illustrative equity valuation bridge</a> <a title="Private Equity Demystified 2014 page 68" href="http://viewer.zmags.com/publication/20b013e7?page=68"> The cash flows of the fund are initially negative</a> <a title="Private Equity Demystified 2014 page 69" href="http://viewer.zmags.com/publication/20b013e7?page=69"> Figure 2.14: Distribution of returns to mid–large</a> <a title="Private Equity Demystified 2014 page 70" href="http://viewer.zmags.com/publication/20b013e7?page=70"> Thus, while the median outcome in funds has favou</a> <a title="Private Equity Demystified 2014 page 71" href="http://viewer.zmags.com/publication/20b013e7?page=71"> Findings 2.2: Do investors earn superior returns?</a> <a title="Private Equity Demystified 2014 page 72" href="http://viewer.zmags.com/publication/20b013e7?page=72"> More information about the process and logic of s</a> <a title="Private Equity Demystified 2014 page 73" href="http://viewer.zmags.com/publication/20b013e7?page=73"> Bank covenants: if a business with borrowings doe</a> <a title="Private Equity Demystified 2014 page 74" href="http://viewer.zmags.com/publication/20b013e7?page=74"> 2. Liquidity risk arises when a bank mismatches </a> <a title="Private Equity Demystified 2014 page 75" href="http://viewer.zmags.com/publication/20b013e7?page=75"> For simplicity we ignore the terminological diffe</a> <a title="Private Equity Demystified 2014 page 76" href="http://viewer.zmags.com/publication/20b013e7?page=76"> Figure 2.17: Flow of risks from original lenders </a> <a title="Private Equity Demystified 2014 page 77" href="http://viewer.zmags.com/publication/20b013e7?page=77"> As discussed above, the banking market saw a chan</a> <a title="Private Equity Demystified 2014 page 78" href="http://viewer.zmags.com/publication/20b013e7?page=78"> · Investment bankers: both a source of deals fo</a> <a title="Private Equity Demystified 2014 page 79" href="http://viewer.zmags.com/publication/20b013e7?page=79"> emerged both within the funds themselves and outs</a> <a title="Private Equity Demystified 2014 page 80" href="http://viewer.zmags.com/publication/20b013e7?page=80"> acquiring company. This is almost always the case</a> <a title="Private Equity Demystified 2014 page 81" href="http://viewer.zmags.com/publication/20b013e7?page=81"> Findings 2.5: Do private equity and buy-outs adve</a> <a title="Private Equity Demystified 2014 page 82" href="http://viewer.zmags.com/publication/20b013e7?page=82"> 2.4 Taxation The structuring of a fund will have </a> <a title="Private Equity Demystified 2014 page 83" href="http://viewer.zmags.com/publication/20b013e7?page=83"> different from either where they are resident, or</a> <a title="Private Equity Demystified 2014 page 84" href="http://viewer.zmags.com/publication/20b013e7?page=84"> However, most of the profits attributable to a ge</a> <a title="Private Equity Demystified 2014 page 85" href="http://viewer.zmags.com/publication/20b013e7?page=85"> Fund managers who are individuals investing via a</a> <a title="Private Equity Demystified 2014 page 86" href="http://viewer.zmags.com/publication/20b013e7?page=86"> Figure 2.20: Different common buy-out structures </a> <a title="Private Equity Demystified 2014 page 87" href="http://viewer.zmags.com/publication/20b013e7?page=87"> The ‘paid basis’ was originally introduced as an </a> <a title="Private Equity Demystified 2014 page 88" href="http://viewer.zmags.com/publication/20b013e7?page=88"> 2.5.2 What has been the pattern of exits from pri</a> <a title="Private Equity Demystified 2014 page 89" href="http://viewer.zmags.com/publication/20b013e7?page=89"> Where a fund is approaching the end of its agreed</a> <a title="Private Equity Demystified 2014 page 90" href="http://viewer.zmags.com/publication/20b013e7?page=90"> Figure 2.23: European primary and secondary buy-o</a> <a title="Private Equity Demystified 2014 page 91" href="http://viewer.zmags.com/publication/20b013e7?page=91"> 2.5.4 What is a leveraged recapitalisation? As wi</a> <a title="Private Equity Demystified 2014 page 92" href="http://viewer.zmags.com/publication/20b013e7?page=92"> Figure 2.24: Typical simplified fund structure to </a> <a title="Private Equity Demystified 2014 page 93" href="http://viewer.zmags.com/publication/20b013e7?page=93"> renegotiate the terms of the partnership and ther</a> <a title="Private Equity Demystified 2014 page 94" href="http://viewer.zmags.com/publication/20b013e7?page=94"> Findings 2.9: Do private equity deals involve the</a> <a title="Private Equity Demystified 2014 page 95" href="http://viewer.zmags.com/publication/20b013e7?page=95"> Findings 2.10: What is the extent of asset sales </a> <a title="Private Equity Demystified 2014 page 96" href="http://viewer.zmags.com/publication/20b013e7?page=96"> 2.6.1 What are the Walker Guidelines? The Walker </a> <a title="Private Equity Demystified 2014 page 97" href="http://viewer.zmags.com/publication/20b013e7?page=97"> At the time they were introduced, there was some </a> <a title="Private Equity Demystified 2014 page 98" href="http://viewer.zmags.com/publication/20b013e7?page=98"> The Directive requires AIFM to introduce a remune</a> <a title="Private Equity Demystified 2014 page 99" href="http://viewer.zmags.com/publication/20b013e7?page=99"> 3. Evaluating, structuring and restructuring</a> <a title="Private Equity Demystified 2014 page 100" href="http://viewer.zmags.com/publication/20b013e7?page=100"> 3.1 Who's who in a private equity transaction Fig</a> <a title="Private Equity Demystified 2014 page 101" href="http://viewer.zmags.com/publication/20b013e7?page=101"> Where management have a conflict of interest, the</a> <a title="Private Equity Demystified 2014 page 102" href="http://viewer.zmags.com/publication/20b013e7?page=102"> Figure 3.2: Equity value, enterprise value and as</a> <a title="Private Equity Demystified 2014 page 103" href="http://viewer.zmags.com/publication/20b013e7?page=103"> 3.1.3 Net present value, IRR and theoretical valu</a> <a title="Private Equity Demystified 2014 page 104" href="http://viewer.zmags.com/publication/20b013e7?page=104"> Figure 3.3: Types of financial instrument: risk an</a> <a title="Private Equity Demystified 2014 page 105" href="http://viewer.zmags.com/publication/20b013e7?page=105"> Figure 3.4: The basic building blocks of financial</a> <a title="Private Equity Demystified 2014 page 106" href="http://viewer.zmags.com/publication/20b013e7?page=106"> Table 3.3: Creating a hierarchy of financial instr</a> <a title="Private Equity Demystified 2014 page 107" href="http://viewer.zmags.com/publication/20b013e7?page=107"> 3.1.6 What is a ‘Newco’? Figure 3.5: Outline stru</a> <a title="Private Equity Demystified 2014 page 108" href="http://viewer.zmags.com/publication/20b013e7?page=108"> – unless the vendor is a group selling a </a> <a title="Private Equity Demystified 2014 page 109" href="http://viewer.zmags.com/publication/20b013e7?page=109"> What is senior debt, junior debt and subordinated</a> <a title="Private Equity Demystified 2014 page 110" href="http://viewer.zmags.com/publication/20b013e7?page=110"> Figure 3.6: Relationship between length of loan, </a> <a title="Private Equity Demystified 2014 page 111" href="http://viewer.zmags.com/publication/20b013e7?page=111"> If we compare two situations with the same total </a> <a title="Private Equity Demystified 2014 page 112" href="http://viewer.zmags.com/publication/20b013e7?page=112"> 3.2.3 How did banks increase the levels of borrow</a> <a title="Private Equity Demystified 2014 page 113" href="http://viewer.zmags.com/publication/20b013e7?page=113"> 2. One-third eight-year ‘B’ senior bullet loan: </a> <a title="Private Equity Demystified 2014 page 114" href="http://viewer.zmags.com/publication/20b013e7?page=114"> incentives were to maximise the amount lent and s</a> <a title="Private Equity Demystified 2014 page 115" href="http://viewer.zmags.com/publication/20b013e7?page=115"> Mezzanine therefore typically uses capital holida</a> <a title="Private Equity Demystified 2014 page 116" href="http://viewer.zmags.com/publication/20b013e7?page=116"> 3.2.7 Can Newco repay the borrowings? The ability</a> <a title="Private Equity Demystified 2014 page 117" href="http://viewer.zmags.com/publication/20b013e7?page=117"> Figure 3.10: Structural subordination PE fund £X</a> <a title="Private Equity Demystified 2014 page 118" href="http://viewer.zmags.com/publication/20b013e7?page=118"> The tax charge is dealt with in a detailed worked</a> <a title="Private Equity Demystified 2014 page 119" href="http://viewer.zmags.com/publication/20b013e7?page=119"> Figure 3.11: Illustration of the restructuring in</a> <a title="Private Equity Demystified 2014 page 120" href="http://viewer.zmags.com/publication/20b013e7?page=120"> In the case of Southern Cross Group, a large reti</a> <a title="Private Equity Demystified 2014 page 121" href="http://viewer.zmags.com/publication/20b013e7?page=121"> Findings 3.3: What are the effects of buy-outs on</a> <a title="Private Equity Demystified 2014 page 122" href="http://viewer.zmags.com/publication/20b013e7?page=122"> Findings 3.6: Do private equity deals and buy-out</a> <a title="Private Equity Demystified 2014 page 123" href="http://viewer.zmags.com/publication/20b013e7?page=123"> to secure 100% control subject to a vote of quali</a> <a title="Private Equity Demystified 2014 page 124" href="http://viewer.zmags.com/publication/20b013e7?page=124"> covenants that are a series of tests that measure</a> <a title="Private Equity Demystified 2014 page 125" href="http://viewer.zmags.com/publication/20b013e7?page=125"> the projected value of the equity and therefore t</a> <a title="Private Equity Demystified 2014 page 126" href="http://viewer.zmags.com/publication/20b013e7?page=126"> 3.2.21 Restoring leverage: asset-based lenders Fi</a> <a title="Private Equity Demystified 2014 page 127" href="http://viewer.zmags.com/publication/20b013e7?page=127"> 3.3 Institutional and management equity The proce</a> <a title="Private Equity Demystified 2014 page 128" href="http://viewer.zmags.com/publication/20b013e7?page=128"> Table 3.5: IRRs calculated at varying exit years </a> <a title="Private Equity Demystified 2014 page 129" href="http://viewer.zmags.com/publication/20b013e7?page=129"> Over the years the target rate of return in a ‘va</a> <a title="Private Equity Demystified 2014 page 130" href="http://viewer.zmags.com/publication/20b013e7?page=130"> Arguably the most appropriate measure should be t</a> <a title="Private Equity Demystified 2014 page 131" href="http://viewer.zmags.com/publication/20b013e7?page=131"> Figure 3.14: European deal structures (deals €100</a> <a title="Private Equity Demystified 2014 page 132" href="http://viewer.zmags.com/publication/20b013e7?page=132"> Table 3.8: Largest private equity-backed receiver</a> <a title="Private Equity Demystified 2014 page 133" href="http://viewer.zmags.com/publication/20b013e7?page=133"> Taxation of ratchets is complicated and needs car</a> <a title="Private Equity Demystified 2014 page 134" href="http://viewer.zmags.com/publication/20b013e7?page=134"> than you earn before finance costs. Unless</a> <a title="Private Equity Demystified 2014 page 135" href="http://viewer.zmags.com/publication/20b013e7?page=135"> However, the difference in the scenario lies in t</a> <a title="Private Equity Demystified 2014 page 136" href="http://viewer.zmags.com/publication/20b013e7?page=136"> However, in many situations the complex interacti</a> <a title="Private Equity Demystified 2014 page 137" href="http://viewer.zmags.com/publication/20b013e7?page=137"> 3.4.6 What tools are available to restructure a b</a> <a title="Private Equity Demystified 2014 page 138" href="http://viewer.zmags.com/publication/20b013e7?page=138"> circumstances of the company. Ultimately, a bank </a> <a title="Private Equity Demystified 2014 page 139" href="http://viewer.zmags.com/publication/20b013e7?page=139"> The growth of traded buy-out bonds has also resul</a> <a title="Private Equity Demystified 2014 page 140" href="http://viewer.zmags.com/publication/20b013e7?page=140"> There are therefore a strong set of incentives to</a> <a title="Private Equity Demystified 2014 page 141" href="http://viewer.zmags.com/publication/20b013e7?page=141"> buy-outs. Debt repurchases can be achieved in two</a> <a title="Private Equity Demystified 2014 page 142" href="http://viewer.zmags.com/publication/20b013e7?page=142"> will typically, at a minimum, include both some d</a> <a title="Private Equity Demystified 2014 page 143" href="http://viewer.zmags.com/publication/20b013e7?page=143"> 4. A worked example In this section we apply th</a> <a title="Private Equity Demystified 2014 page 144" href="http://viewer.zmags.com/publication/20b013e7?page=144"> 4.1 A detailed worked example of a leveraged buy-</a> <a title="Private Equity Demystified 2014 page 145" href="http://viewer.zmags.com/publication/20b013e7?page=145"> Figure 4.1: Actual and forecast sales and profit </a> <a title="Private Equity Demystified 2014 page 146" href="http://viewer.zmags.com/publication/20b013e7?page=146"> Figure 4.2: EBITDA and operating cash flows 20 1</a> <a title="Private Equity Demystified 2014 page 147" href="http://viewer.zmags.com/publication/20b013e7?page=147"> impact morale which may impact the motivation and</a> <a title="Private Equity Demystified 2014 page 148" href="http://viewer.zmags.com/publication/20b013e7?page=148"> The profit bridge highlights the salient features</a> <a title="Private Equity Demystified 2014 page 149" href="http://viewer.zmags.com/publication/20b013e7?page=149"> From the perspective of the borrower all of these</a> <a title="Private Equity Demystified 2014 page 150" href="http://viewer.zmags.com/publication/20b013e7?page=150"> Table 4.5: Sources of funding Funding structure </a> <a title="Private Equity Demystified 2014 page 151" href="http://viewer.zmags.com/publication/20b013e7?page=151"> Table 4.6: Illustrative financing structure Fundin</a> <a title="Private Equity Demystified 2014 page 152" href="http://viewer.zmags.com/publication/20b013e7?page=152"> 6. Institutional ‘A’ preferred ordinary shares: </a> <a title="Private Equity Demystified 2014 page 153" href="http://viewer.zmags.com/publication/20b013e7?page=153"> Figure 4.6: Profit: EBITA, EBIT, NPBT 35 Net prof</a> <a title="Private Equity Demystified 2014 page 154" href="http://viewer.zmags.com/publication/20b013e7?page=154"> Table 4.8: Reconciliation of interest charges Act</a> <a title="Private Equity Demystified 2014 page 155" href="http://viewer.zmags.com/publication/20b013e7?page=155"> Table 4.9: Summary of cash flows after funding Sum</a> <a title="Private Equity Demystified 2014 page 156" href="http://viewer.zmags.com/publication/20b013e7?page=156"> Figure 4.9: Forecast values of interest cover and</a> <a title="Private Equity Demystified 2014 page 157" href="http://viewer.zmags.com/publication/20b013e7?page=157"> 4.3 Restructured balance sheet The output of the </a> <a title="Private Equity Demystified 2014 page 158" href="http://viewer.zmags.com/publication/20b013e7?page=158"> The presentation highlights a fundamental feature</a> <a title="Private Equity Demystified 2014 page 159" href="http://viewer.zmags.com/publication/20b013e7?page=159"> We call the situation when managers have a high-e</a> <a title="Private Equity Demystified 2014 page 160" href="http://viewer.zmags.com/publication/20b013e7?page=160"> Figure 4.12: The book value of assets is differen</a> <a title="Private Equity Demystified 2014 page 161" href="http://viewer.zmags.com/publication/20b013e7?page=161"> Note 4 – goodwill deductibility In section 3, we </a> <a title="Private Equity Demystified 2014 page 162" href="http://viewer.zmags.com/publication/20b013e7?page=162"> • As a result of these disallowances, even comp</a> <a title="Private Equity Demystified 2014 page 163" href="http://viewer.zmags.com/publication/20b013e7?page=163"> 4.9 Sensitivity analysis Sensitivity analysis is </a> <a title="Private Equity Demystified 2014 page 164" href="http://viewer.zmags.com/publication/20b013e7?page=164"> Table 4.15 below shows the projected value of the</a> <a title="Private Equity Demystified 2014 page 165" href="http://viewer.zmags.com/publication/20b013e7?page=165"> Table 4.17: Projected share of exit enterprise va</a> <a title="Private Equity Demystified 2014 page 166" href="http://viewer.zmags.com/publication/20b013e7?page=166"> Table 4.19: Split of proceeds on exit Split of pr</a> <a title="Private Equity Demystified 2014 page 167" href="http://viewer.zmags.com/publication/20b013e7?page=167"> Table 4.21: Private equity investor blended retur</a> <a title="Private Equity Demystified 2014 page 168" href="http://viewer.zmags.com/publication/20b013e7?page=168"> </a> <a title="Private Equity Demystified 2014 page 169" href="http://viewer.zmags.com/publication/20b013e7?page=169"> 5. Critics and the research In this section, in</a> <a title="Private Equity Demystified 2014 page 170" href="http://viewer.zmags.com/publication/20b013e7?page=170"> Several years ago, we published an assessment of </a> <a title="Private Equity Demystified 2014 page 171" href="http://viewer.zmags.com/publication/20b013e7?page=171"> When we look at the risk element in the equation,</a> <a title="Private Equity Demystified 2014 page 172" href="http://viewer.zmags.com/publication/20b013e7?page=172"> Figure 5.1: Buy-out types, strategy and timescale</a> <a title="Private Equity Demystified 2014 page 173" href="http://viewer.zmags.com/publication/20b013e7?page=173"> 5.7 Is there tax avoidance and why are tax havens</a> <a title="Private Equity Demystified 2014 page 174" href="http://viewer.zmags.com/publication/20b013e7?page=174"> 5.10 Is there sufficient permanent capital in priv</a> <a title="Private Equity Demystified 2014 page 175" href="http://viewer.zmags.com/publication/20b013e7?page=175"> 5.11.3 Zombie funds As funds have started to ‘fai</a> <a title="Private Equity Demystified 2014 page 176" href="http://viewer.zmags.com/publication/20b013e7?page=176"> 5.12 Do the conclusions to be reached about priva</a> <a title="Private Equity Demystified 2014 page 177" href="http://viewer.zmags.com/publication/20b013e7?page=177"> • What are the relative contributions of differ</a> <a title="Private Equity Demystified 2014 page 178" href="http://viewer.zmags.com/publication/20b013e7?page=178"> </a> <a title="Private Equity Demystified 2014 page 179" href="http://viewer.zmags.com/publication/20b013e7?page=179"> Appendix: Summaries of studies of buy-outs and pr</a> <a title="Private Equity Demystified 2014 page 180" href="http://viewer.zmags.com/publication/20b013e7?page=180"> Table 1: Pre-buy-out governance in P2Ps </a> <a title="Private Equity Demystified 2014 page 181" href="http://viewer.zmags.com/publication/20b013e7?page=181"> Table 2: Financial returns to private equity and </a> <a title="Private Equity Demystified 2014 page 182" href="http://viewer.zmags.com/publication/20b013e7?page=182"> Table 2: Financial returns to private equity and </a> <a title="Private Equity Demystified 2014 page 183" href="http://viewer.zmags.com/publication/20b013e7?page=183"> Table 2: Financial returns to private equity and </a> <a title="Private Equity Demystified 2014 page 184" href="http://viewer.zmags.com/publication/20b013e7?page=184"> Table 2: Financial returns to private equity and </a> <a title="Private Equity Demystified 2014 page 185" href="http://viewer.zmags.com/publication/20b013e7?page=185"> Table 3: Employment, wage and HRM effects </a> <a title="Private Equity Demystified 2014 page 186" href="http://viewer.zmags.com/publication/20b013e7?page=186"> Table 3: Employment, wage and HRM effects (contin</a> <a title="Private Equity Demystified 2014 page 187" href="http://viewer.zmags.com/publication/20b013e7?page=187"> Table 3: Employment, wage and HRM effects (contin</a> <a title="Private Equity Demystified 2014 page 188" href="http://viewer.zmags.com/publication/20b013e7?page=188"> Table 3: Employment, wage and HRM effects (contin</a> <a title="Private Equity Demystified 2014 page 189" href="http://viewer.zmags.com/publication/20b013e7?page=189"> Table 4: Effects on debt-holders, taxation </a> <a title="Private Equity Demystified 2014 page 190" href="http://viewer.zmags.com/publication/20b013e7?page=190"> Table 5: Longevity </a> <a title="Private Equity Demystified 2014 page 191" href="http://viewer.zmags.com/publication/20b013e7?page=191"> Table 6: Asset sales and disposals </a> <a title="Private Equity Demystified 2014 page 192" href="http://viewer.zmags.com/publication/20b013e7?page=192"> Table 7: Post-exit effects </a> <a title="Private Equity Demystified 2014 page 193" href="http://viewer.zmags.com/publication/20b013e7?page=193"> Table 8: Distress, failure and recovery </a> <a title="Private Equity Demystified 2014 page 194" href="http://viewer.zmags.com/publication/20b013e7?page=194"> Table 9: Operating performance changes post-buy-o</a> <a title="Private Equity Demystified 2014 page 195" href="http://viewer.zmags.com/publication/20b013e7?page=195"> Table 9: Operating performance changes post-buy-o</a> <a title="Private Equity Demystified 2014 page 196" href="http://viewer.zmags.com/publication/20b013e7?page=196"> Table 10: Productivity changes in buy-outs and pr</a> <a title="Private Equity Demystified 2014 page 197" href="http://viewer.zmags.com/publication/20b013e7?page=197"> Table 11: Strategy, investment, R&D and control s</a> <a title="Private Equity Demystified 2014 page 198" href="http://viewer.zmags.com/publication/20b013e7?page=198"> Table 11: Strategy, investment, R&D and control s</a> <a title="Private Equity Demystified 2014 page 199" href="http://viewer.zmags.com/publication/20b013e7?page=199"> Table 11: Strategy, investment, R&D and control s</a> <a title="Private Equity Demystified 2014 page 200" href="http://viewer.zmags.com/publication/20b013e7?page=200"> Table 12: Drivers of post-buy-out changes </a> <a title="Private Equity Demystified 2014 page 201" href="http://viewer.zmags.com/publication/20b013e7?page=201"> Table 12: Drivers of post-buy-out changes (contin</a> <a title="Private Equity Demystified 2014 page 202" href="http://viewer.zmags.com/publication/20b013e7?page=202"> Table 13: Secondary buy-outs </a> <a title="Private Equity Demystified 2014 page 203" href="http://viewer.zmags.com/publication/20b013e7?page=203"> References Acharya, V., Hahn, M. and Kehoe</a> <a title="Private Equity Demystified 2014 page 204" href="http://viewer.zmags.com/publication/20b013e7?page=204"> Asquith, P. and Wizman, T. (1990), ‘Event risk, w</a> <a title="Private Equity Demystified 2014 page 205" href="http://viewer.zmags.com/publication/20b013e7?page=205"> Brown, D.T., Fee, C.E. and Thomas, S.E. (2007), ‘</a> <a title="Private Equity Demystified 2014 page 206" href="http://viewer.zmags.com/publication/20b013e7?page=206"> Cornelli, F., Lichtner, K., Perembetov, K., Simin</a> <a title="Private Equity Demystified 2014 page 207" href="http://viewer.zmags.com/publication/20b013e7?page=207"> Easterwood, J.C. (1998), ‘Divestments and financi</a> <a title="Private Equity Demystified 2014 page 208" href="http://viewer.zmags.com/publication/20b013e7?page=208"> Gospel, H., Pendleton, A., Vitols, S. and Wilke, </a> <a title="Private Equity Demystified 2014 page 209" href="http://viewer.zmags.com/publication/20b013e7?page=209"> Jelic, R. and Wright, M. (2011), ‘Exits, performa</a> <a title="Private Equity Demystified 2014 page 210" href="http://viewer.zmags.com/publication/20b013e7?page=210"> Lichtenberg, F.R. and Siegel, D.S. (1990), ‘The e</a> <a title="Private Equity Demystified 2014 page 211" href="http://viewer.zmags.com/publication/20b013e7?page=211"> Phalippou, L. (2011), ‘Why is the evidence on pri</a> <a title="Private Equity Demystified 2014 page 212" href="http://viewer.zmags.com/publication/20b013e7?page=212"> Strömberg, P. (2008), ‘The new demography of priv</a> <a title="Private Equity Demystified 2014 page 213" href="http://viewer.zmags.com/publication/20b013e7?page=213"> Wilson, N., Wrig</a> <a title="Private Equity Demystified 2014 page 214" href="http://viewer.zmags.com/publication/20b013e7?page=214"> Glossary Source This glossary is adapted f</a> <a title="Private Equity Demystified 2014 page 215" href="http://viewer.zmags.com/publication/20b013e7?page=215"> Beauty parade An accepted mechanism for an invest</a> <a title="Private Equity Demystified 2014 page 216" href="http://viewer.zmags.com/publication/20b013e7?page=216"> Chinese walls Deliberate information barriers wit</a> <a title="Private Equity Demystified 2014 page 217" href="http://viewer.zmags.com/publication/20b013e7?page=217"> Conditions precedent Certain conditions that a pr</a> <a title="Private Equity Demystified 2014 page 218" href="http://viewer.zmags.com/publication/20b013e7?page=218"> Debt:equity ratio A measure of a company’s levera</a> <a title="Private Equity Demystified 2014 page 219" href="http://viewer.zmags.com/publication/20b013e7?page=219"> Equity kicker In a mezzanine loan, equity warrant</a> <a title="Private Equity Demystified 2014 page 220" href="http://viewer.zmags.com/publication/20b013e7?page=220"> General partner's commitment Fund managers typica</a> <a title="Private Equity Demystified 2014 page 221" href="http://viewer.zmags.com/publication/20b013e7?page=221"> IRR, definition of An IRR is the value of r that s</a> <a title="Private Equity Demystified 2014 page 222" href="http://viewer.zmags.com/publication/20b013e7?page=222"> Management buyout (MBO) A buy-out in which the ta</a> <a title="Private Equity Demystified 2014 page 223" href="http://viewer.zmags.com/publication/20b013e7?page=223"> PIPE Generally referring to a private investment </a> <a title="Private Equity Demystified 2014 page 224" href="http://viewer.zmags.com/publication/20b013e7?page=224"> Secondary loan market Market in which loans trade</a> <a title="Private Equity Demystified 2014 page 225" href="http://viewer.zmags.com/publication/20b013e7?page=225"> TVPI (Total Value to Paid-In) TVPI is the sum of </a> <a title="Private Equity Demystified 2014 page 226" href="http://viewer.zmags.com/publication/20b013e7?page=226"> ICAEW is a world leading professional membership </a>