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Private equity funds contribute heavily to the performance of the firms in which they invest beyond the provision of capital. Through detailed examination of seven case studies of private equity funds and portfolio companies, this chapter shows how private equity funds provide ‘commercial savvy’ and international connections to the companies in which they invest, as well as sector-specific knowledge. The funds may involve themselves in areas traditionally considered as matters of concern to investors, such as corporate strategy, and in matters normally considered the province of managers, such as innovation and employee skill development.

Hedge funds, private equity investments, and other forms of alternative investments that offer the possibility of enhanced portfolio returns on a risk-adjusted basis have been available to sophisticated investors and institutions for many years. In the early 2000s, trillions of dollars of new investment funds that flowed into alternative investments and contributed to the bubbles of the 2004–2007 markets suffered proportionately when the bubble burst. Banks were attracted to and participated in the surge in alternative investments in many ways, as lenders, agents, and as principal investors in funds distributed to clients. The multiple exposures of banks to mortgage-backed and nonmortgage asset-backed securities, and to hedge funds and private equity funds caused them a high degree of distress, forced writedowns of assets, and compelled banks to raise additional capital. Consequently, many banks that were once active in alternative asset investments became much less so as the industry deleveraged and lost momentum. By 2010, only a few banks were still active as major players in this industry.

This chapter discusses private equity funds. It looks at the typical fund structures, who invests in private equity, and compares and contrasts alternative investment options. A private equity fund is a form of ‘investment club’ in which the principal investors are institutional investors, such as pension funds, investment funds, endowment funds, insurance companies, banks, sovereign wealth funds, family offices/high net worth individuals and funds of funds, as well as the private equity fund managers themselves. Private equity funds have a limited life, meaning that there is a pre-agreed date on which they will stop making new investments and subsequently be wound up. Typically, a fund invests in new projects for six years and is wound up in ten years. There is a standard extension period of two years in most fund agreements, hence they are generally known as ‘ten plus two’ limited life funds. In the past few years, some longer-term funds have started to be raised by some fund managers. These are typically targeting growth capital. The chapter then differentiates limited partners (external investors) from the general partner (the manager). It also studies the economics of private equity, examines the details of a representative Limited Partners Agreement as well as taxation, and describes the secondary fund market.

This chapter defines private equity, describes the origins of the private equity market, and examines the data on the size and growth of the private equity industry. Private equity is risk capital provided outside the public markets. The businesses invested in by private equity range from early stage ventures, usually termed venture capital investments, through businesses requiring growth or development capital to the purchase of an established business in a management buyout or buy-in. Much, but not all, of the investing done in the private equity market is by private equity funds. The objective of a private equity fund is to invest equity or risk capital in a portfolio of private companies which are identified and researched by the private equity fund managers. The chapter then considers what private equity fund managers do. It also provides a brief history of private equity before assessing how big the private equity market is.

This chapter examines the composition and structure of ownership in the American information sector. There are several forms of non-commercial ownership in the United States. They include direct governmental ownership; indirect control by lower levels of government, such as a broadcast station licensed to a state university; nonprofit public television stations; and some newspapers owned by foundations set up by the original owners. But more significant in terms of size, impact, and prevalence are the several types of private ownership—by individuals, families, partnerships, publicly held corporations, institutional investors, and venture capitalists. American newspapers and magazines have often been owned and controlled by individuals and families through closely held (that is, largely non-traded) corporations or special voting stock. Other media firms have relied on outside financing through a more “public” ownership of shares, or from “private equity” funds. This, in turn, has led to a significant ownership role by institutional investors that buy stakes in companies on behalf of smaller investors.

This chapter details the process of a private equity transaction. There are two sides to every corporate transaction: those acting with or for the purchaser and those acting with or for the owners of the target company, the shareholders. Private equity funds outsource many functions. The chapter looks at the advisory relationships at three stages of an asset’s ownership cycle: acquisition of the target company, during the ownership life, and finally at disposal. It considers both what the advisers are doing and the incentives that this creates in the broader private equity market, particularly focusing on reciprocity. The chapter also examines the auction process that lies at the heart of many private equity deals. The key contracts in a private equity deal include the Articles of Association, the Investment Agreement, and the Sale and Purchase Agreement. The chapter then describes the Heads of Terms, which is a non-binding agreement that sets out the key terms of the deal prior to starting to draft the formal contracts.

This chapter explores the major criticisms levelled at the private equity sector. It clarifies some misrepresentations and myths in the light of experience over the evolution of the market and the weight of systematic evidence summarized in this book. It is important to distinguish between analysis at the fund level and at the level of the underlying individual investments. The majority of studies in the finance literature are at the fund level and discuss private equity as an investment strategy. Analysis at the investment level is often done by case study, which always risks creating general conclusions from specific examples. The chapter then looks at areas which are under-researched. These areas include performance and returns; deal structures; the private equity process; new and secondary markets; and the political environment.

This chapter explains how to measure private equity performance. One of the key distinctions to be focused on is the gross versus net performance of a fund or investor. Gross returns are the returns earned by the private equity fund before fees are paid to the manager. Meanwhile, net returns are the returns earned by the investors in the fund after the fees of the manager have been deducted. Various measures are applied to monitor and adjust for the timing differences between total return and receipt of cash flows. DPI measures distribution as a percentage of paid-in capital, while TVPI measures total value as a percentage of paid-in capital. However, the most commonly used measure is the Internal Rate of Return (IRR). IRR is a cash flow measure that allows for the timing of cash flows. The chapter then highlights the importance of understanding both the overall industry returns and their variance and volatility over time. The variation in returns between the most successful and least successful fund managers is a key statistic to understand the performance and risks of the industry.

This chapter explores the major criticisms levelled at the private equity sector. It clarifies some misrepresentations and myths in the light of experience over the evolution of the market and the weight of systematic evidence summarized in this book. It is important to distinguish between analysis at the fund level and at the level of the underlying individual investments. The majority of studies in the finance literature are at the fund level and discuss private equity as an investment strategy. Analysis at the investment level is often done by case study, which always risks creating general conclusions from specific examples. The chapter then looks at areas which are under-researched. These areas include performance and returns; deal structures; the private equity process; new and secondary markets; and political environment.

For investors, ‘infrastructure’ is now an ‘asset class’, the boundaries of which are limited only by the ability of finance to build new contracted income streams that extract wealth from funding, constructing and operating infrastructure facilities. What started off with investments in so-called economic infrastructure (utilities, roads, ports, airports) now include investments in resource/commodity infrastructure (oil and gas facilities, mining, forests), social infrastructure (hospitals, public housing, schools, prisons, law courts, military bases), information infrastructure (big data harvesting) and, still in its infancy, natural infrastructure (payments for so-called environmental services). This Chapter looks at the many new investment vehicles – from private equity infrastructure funds to venture capital funds – that are being used to profit from infrastructure, and attempts to quantify the amount of money now being extracted. The trajectory is not only towards increased inequality: it is also profoundly undemocratic, elitist and unstable. Undemocratic because a handful of fund managers now increasingly determine what gets financed and what does not. Elitist because the facilities that would most benefit the poor do not get built. And unstable because infrastructure-as-asset class is a bubble that is set to burst.

This chapter outlines the market for mutual funds in emerging markets. Two types of funds to consider when describing emerging market mutual funds (EMMFs) are the funds in the United States that invest in emerging markets and funds in emerging markets that invest in their own domestic markets. This chapter provides descriptive statistics, performance evaluation, and performance persistence for funds that invest in emerging markets both domiciled in the United States and those domiciled in their home countries. The chapter also examines the factors that might explain both the persistence and determinants of performance of hedge funds. With greater public scrutiny and disclosure of hedge funds, some attention must be devoted to their performance in emerging countries. Hedge funds are increasingly popular among investors in private equity.

The evolutionary trajectory of capitalism has now rendered the household precarious, economically disadvantaged, and vulnerable to the whims of firms under the authoritarian grip of the wrangler. Stagnant living standards for the vast majority of households in the metropolitan core is evidence that most households have been reduced to peripatetic hustlers in order to survive. Job loss haunts many areas within the core. Worker protections have been reduced to a minimum, and political alienation is on the rise. The Brexit decision in the United Kingdom, the election of an angry outsider to the presidency of the United States, and the rise of right-wing parties in Europe signal the extent to which households have become marginalized and angry.