Kaplan, Stromberg “Leveraged Buyouts and Private Equity” Flashcards Preview

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Flashcards in Kaplan, Stromberg “Leveraged Buyouts and Private Equity” Deck (13)
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1

Features of Private equity firms

- comparatively small
- high-profile teams

2

Features of Private equity funds

- usually closed-end
- raises capital for the firms
- limited lifetime (10 years)

3

Ways of compensation in PE

- annual mgmt. fee
- share of profits (~ 20%)
- deal and monitoring fees from the companies

4

Describe the process how PE works

- buy a firm with premium above stock price
- financed with debt (60-90%)
- new mgmt. team, that also contributes to equity
- take company private
- improve performance
- sell after 6-7 years to
o strategic buyer
o another PEF in SEO
o IPO

5

What is Financial special about Private Equity?

o Mgmt. incentives (give stock, make mrg invest) – equity illiquid, has to perform
o Leverage – pressure not to waste money (reduces AC), increases value through TS, but can’t be too high

6

What is governance engineering special about Private Equity?

o the boards of companies more actively involve, meet more often,
o replace mgrs.

7

What is operational engineering special about Private Equity?

o experts and professionals;
o consulting groups

8

PE influences on:

- Employment (increase efficiency, can lay sb off – employment grows but at a slower rate)
- Taxes (TS due to increased leverage)
- information asymmetries (not really, but can negotiate deal better than others)

9

Trends in activity of PE

- cyclicality
- debt used driven by credit market conditions
- D/E decreases when interest rates rise
- Returns decline when more capital is committed
- More capital committed when past returns higher (engage in worse projects afterwards)

10

Conclusion about PE

- private equity creates economic value on average (AC down)
- no superior returns for investors
o large premiums at acquisitions
o large fees
 gross of fees outperform, but not net of fees

11

Future of PE

- less leverage
- more minority stakes (new operational engineering capabilities – better position than in the past)
- decrease in activity due to crisis

12

 Secondary buyout

Situation when a private equity fund exits their old investments and sells portfolio companies to other private equity firm.

13

Asymmetric information

Results on operating improvements can be as an outcome of investors having superior information on future portfolio company performance than previous managers.