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Invst Bank
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Fund Structure & Investment Process
2
LP
C C
LP
GP GP
General Partner (GP) raises a fund of illiquid capital $500M to be spent over seven years
Investors (Limited Partners / LP’s) often sophisticated institutions (pensions / insurance / finance) or wealthy families
GP utilizes unique knowledge / relationships / strategy to invest in companies / securities
GP guarantees a minimum return to LP’s after which GP splits profits with LP (often 20% / 80%)
Flow of money and returns
Private and Confidential – Not for Circulation 3
Fund structure and organization
GP person / group with proven track record to attract investors
GP writes fund documents explaining investment strategy, how much they wish to raise, who else is on the team
GP meets with LP’s or increasingly with LP’s advisors
LP’s “commit” specific dollars for specified period
Fund Economics: 2% and 8% and 20% / 80% split
2% of fund size as annual management fee ($500M fund has $10M / year to pay employees, rent offices, travel, etc.)
8% annual return hurdle on money drawn for investments
20% / 80% split on profits above 8% return
This 20% is known as “carried interest”
4
PE often use a fund structure
LP
GP
Fund 1
CCC
Fund 2
CCC
5
An alternative PE structure
LP
Companies
GP
PE firm integrated with
investment sponsor, such
as bank or corporation
Investment Process
Private and Confidential – Not for Circulation 7
Investment Process
Approach the Private Equity Firm
Initial Enquiries and Negotiations
Due Diligence
Final Negotiation and Completion
Monitoring and Exit
Private and Confidential – Not for Circulation 8
Investment Process – Approach the Private Equity Firm
CompanyCompany andPrivate EquityFirm
Private EquityFirm
Reports/Documents
1. Appoint Advisers
2. Prepare Business Plan
3. Contact Private Equity firms
1. Review Business Plan
ApproachEnquiries/
Negotiations
Due Diligence
Completion Exit
Business
Plan
Private and Confidential – Not for Circulation 9
Investment Process – Approach the Private Equity Firm
CompanyCompany andPrivate EquityFirm
Private EquityFirm
Reports/Documents
1. Provide additional information
1. Meet to discuss Business Plan
2. Build relationship
3. Negotiate outline Terms
1. Conduct initial enquiries
2. Value the business
3. Consider financing Structure
Offer Letter/
Term Sheet
ApproachEnquiries/
Negotiations
Due Diligence
Completion Exit
Private and Confidential – Not for Circulation 11
Investment Process – Approach the Private Equity Firm
CompanyCompany andPrivate EquityFirm
Private EquityFirm
Reports/Documents
1. Disclose all the relevant information/ Documents
1. Liaise with accountants
2. Liaise with other
3. External consultants
1. Initiate external Due Diligence
Consultant
Reports
Accountant
Reports
ApproachEnquiries/
Negotiations
Due Diligence
Completion Exit
Private and Confidential – Not for Circulation 12
Due Diligence
Due Diligence is the process to assess the Technical and financial feasibility of the Business proposition with particular focus on the following:
Market Prospects and Technical Feasibility
Management Information System
Assumptions for Financial Projections
Latest Financial position
Assessment of ownership of assets and realizable value of inventories and debtors and Contingent Liabilities
Bank Facilities and Charge on the assets of the Company
Leased Assets
Employee Contracts, ESOP’s, PF and Pension plans
Tax benefits
Availability, Ability and Commitment of Key Management
Personnel
Private and Confidential – Not for Circulation 14
Investment Process – Approach the Private Equity Firm
CompanyCompany andPrivate EquityFirm
Private EquityFirm
Reports/Documents
1. Liaise with Legal Advisers
2. Liaise with Consultants
1. Negotiate final Terms
2. Document constitution and voting rights
1. Draw up completion documentation
Disclosure Letter
Warranties and
Indemnities
Memorandum
and Articles of
Association
Share
Holders
Agreement
ApproachEnquiries/
Negotiations
Due Diligence
Completion Exit
Private and Confidential – Not for Circulation 16
Investment Process – Approach the Private Equity Firm
CompanyCompany andPrivate EquityFirm
Private EquityFirm
Reports/Documents
1. Provide Periodic Management Accounts
2. Communicate regularly with Investors
1. Seat on Board?
2. Monitor investment
3. Constructive Input
4. Involvement in major decisions
Management
Accounts
Minutes of
Board
And other
Key Meetings
ApproachEnquiries/
Negotiations
Due Diligence
Completion Exit
Private and Confidential – Not for Circulation 17
Monitoring & Exit Routes
The Private Equity firms need to monitor the invested companies to protect and enhance the value of their investments.
This may involve
Appointment of Director
Periodic Financial and MIS Report
Constructive Input
Participation in key decisions
Strategic tie‐ups
Private equity firms require an exit route in order to realize a return on their investments. The time frame from investment to exit can be as little as two years or as much as ten or more years.
The exit route may be any of the following:
IPO
Sale to another investor
Repurchase by Company
Strategic/ Trade Sale
Recapitalization/ Partial Exit
Liquidation
Thank You