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C2. IB of Equities - Coggle Diagram
C2. IB of Equities
Private Equity
organizational structure
limited partner (LP) : pension funds, insurance companies, fund of funds, high net-worth individuals, family offices, endowments, foundations
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fee structure
management fee
- PE firm charges LPs
- 1.5% - 2%
- help cover the operating expenses (legal and accounting, transaction or deal fees, salary, rent, travel,..)
performance fee (incentive fee)
- PE firm retains 15-20% of the profits, 80-85% to LPs
- hurdle rate ?
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exit consideration
total exit can be a trade sale to another buyer, LBO by another PE firm, or a share repurchase
partial exit
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Corporate restructuring : where external investors get involved and increase their position in the business by partially acquiring the private equity firm’s stake
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Venture Capital
- invest a seed or startup company, early stage development, or expansion of a business (new technology, new marketing concept, new product) & do not have a proven track record or stable revenue streams
- seek board-level representation - a majority, they seldom are silent investors
- securities purchased are generally privately held
- VC market includes merchant banking : investment banks, financial holding companies, industrial companies and insurance companies.
- VC industry has many independent, specialized investment entities (cơ quan)
- high risk - high return (expect return 30-50%)
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compensation
management fee
1.5 - 2.5%, pay quarterly
performance fee (incentive fees/ carried interest)
20% to GP, 80% to LP
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Buyout Funds
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financing structure
- mostly LBO is financed with a combination of senior debt, subordinated debt and equity. The amount of equity required is determined by the amount of debt that can be borrowed
- 50 - 70% of LBO’s funding takes the form of senior financing, generally obtained from bank
- 15 - 30% is subordinated financing, generally raised from insurance company, subordinated debt funds or with a public offering (phát hành ra công chúng) of high-yield bonds :question:
- 10 - 20% is equity. Management usually invests in the equity of LBO company together with an LBO fund and investors
- in MBO, the incumbent management team (that usually has no or close to no shares in company) acquires a sizeable portion of shares. Similar to an MBO is an MBI (Management Buy In) in which an external management team acquires the shares
:question:
- mostly, the management team does not have enough money to fund the equity needed for the acquisition (to be combined with bank debt to constitute the purchase price) so that management teams work together with financial sponsors to part-finance the acquisition :question:
definition
:star: If the stake is bought by the firm’s management, it is management buyout (MBO)
:star: If high levels of debt are used to fund the buyout, it is leveraged buyout (LBO)
- Buyout is a buyer (PE firm) acquires > 50% of company, leading control
- BO funds invest in mature company and operating cash flow (VC fund : new, small company)
LBO benefit
(1) the investor itself only needs to provide a fraction of the capital for the acquisition
(2) the returns to the investor will be enhanced (as long as the ROA exceeds the cost of the debt)
- LBO mostly occur in private company, but also in public company
MBO reasons
- Ownership wish to retire and sell company to trusted members of management
- Ownership lost faith in the future of business & willing to sell it to management (which believes in the future of the business)
- Management see a value in the business that ownership does not see + not wish to pursue
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