In parallel to reading about pharmaceuticals, I have also started reading "Private Equity: History, Governance and Operations" by Cendrowski et al. I just wish to understand the place and importance of Private Equity (PE) from point of view of a future entrepreneur. The books consists of four modules: history, governance, operations and special considerations. I will simply record my main observations for future reference.
Reading about history, I understand that PE is a relatively recent phenomenon with its roots in the USA. In fact, the book is primarily written with US in mind. Nevertheless, I hope the basic working and attitude would not differ significantly across borders due to a close-knit PE community. It explains the structure of PE firms and general terms used in the industry (e.g. describing what is a general partner or a limited partner, the fee structure, legal agreements and other legal aspects). The books focuses primarily on two type of PE investments: venture capital (VC) financing and buyout transactions. It is interesting to learn that VC funding is further classified as Angel Investing, Seed Funding and Later Stage VC depending upon the maturity of the product portfolio. PE has developed as a distinctive alternative investment vehicle whose profitability is highly dependent on the overall performance of the economy and government policies (especially wrt Capital Gains Tax Rate).
Due to comparatively higher rate of returns many institutions and high-net worth individuals wish to invest with a PE firm. However, it is a very tightly knit circle that works on "knowing" the right people and by being successful. While the top quartile funds are plush with funds, others struggle to raise basic amounts. It is a highly competitive arena where success breeds more success. In the last decade buyout funds have apparently performed better than VC funds. Consequently they find it easier to raise money.
There are primarily two ways in which the PE firms "harvest" their investments: Initial Public Offerings (IPO) and Mergers & Acquisitions (M&A).
The book notes that IPO can be an expensive, lengthy and cumbersome procedure. It not only depends on the prevalent market condition but also it enforces more complexity and regulation on the organization. Nevertheless, it can be seen as an important step in the life of a company signifying a strong historical growth. It also allows the entrepreneur to possibly maintain the control over his company, something that he may loose in some M&A transaction.
Takeovers are defined as horizontal (same industry), vertical (supporting industry) or conglomerate (unrelated). The can be further seen as strategic, defensive, growth or financial. Reverse Takeover is mentioned as a credible and more efficient alternative to IPO. The company can be acquired either in an auction (can turn-away strategic buyers but attract financial buyers - the company's financial advisor may favour this as it may lead to more fee. Overall useful if there are not many keen buyers) or an exclusive offering (attracts strategic buyers, can be attractive for the entrepreneur. Advisable when there exists many strategic buyers with a high level of interest). It is important for the entrepreneur to realize that he may loose control of the company in this harvesting strategy. The popularity of M&A has increased significantly since 1999, something that has further bolstered buyout funds.
Reading about history, I understand that PE is a relatively recent phenomenon with its roots in the USA. In fact, the book is primarily written with US in mind. Nevertheless, I hope the basic working and attitude would not differ significantly across borders due to a close-knit PE community. It explains the structure of PE firms and general terms used in the industry (e.g. describing what is a general partner or a limited partner, the fee structure, legal agreements and other legal aspects). The books focuses primarily on two type of PE investments: venture capital (VC) financing and buyout transactions. It is interesting to learn that VC funding is further classified as Angel Investing, Seed Funding and Later Stage VC depending upon the maturity of the product portfolio. PE has developed as a distinctive alternative investment vehicle whose profitability is highly dependent on the overall performance of the economy and government policies (especially wrt Capital Gains Tax Rate).
Due to comparatively higher rate of returns many institutions and high-net worth individuals wish to invest with a PE firm. However, it is a very tightly knit circle that works on "knowing" the right people and by being successful. While the top quartile funds are plush with funds, others struggle to raise basic amounts. It is a highly competitive arena where success breeds more success. In the last decade buyout funds have apparently performed better than VC funds. Consequently they find it easier to raise money.
There are primarily two ways in which the PE firms "harvest" their investments: Initial Public Offerings (IPO) and Mergers & Acquisitions (M&A).
The book notes that IPO can be an expensive, lengthy and cumbersome procedure. It not only depends on the prevalent market condition but also it enforces more complexity and regulation on the organization. Nevertheless, it can be seen as an important step in the life of a company signifying a strong historical growth. It also allows the entrepreneur to possibly maintain the control over his company, something that he may loose in some M&A transaction.
Takeovers are defined as horizontal (same industry), vertical (supporting industry) or conglomerate (unrelated). The can be further seen as strategic, defensive, growth or financial. Reverse Takeover is mentioned as a credible and more efficient alternative to IPO. The company can be acquired either in an auction (can turn-away strategic buyers but attract financial buyers - the company's financial advisor may favour this as it may lead to more fee. Overall useful if there are not many keen buyers) or an exclusive offering (attracts strategic buyers, can be attractive for the entrepreneur. Advisable when there exists many strategic buyers with a high level of interest). It is important for the entrepreneur to realize that he may loose control of the company in this harvesting strategy. The popularity of M&A has increased significantly since 1999, something that has further bolstered buyout funds.
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