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1.Introduction 1

What Are Venture Capital and Leveraged Buyouts？ 4

Why is Private Equity Needed？ 5

What is the History of Private Equity？ 7

About This Book 11

What are the Key Themes in this Book？ 15

Illiquidity 15

Uncertainty and Information Gaps 16

Cyclicality 16

Certification 16

Incentives 16

Deal Context 17

Career Management 17

2.The Private Equity Cycle—Fund-Raising and Fund Choosing 18

Different Types of Private Equity 19

Who are the LPs？ 23

Angel Investors 23

Endowments 25

Pension Funds 26

Corporations 27

Sovereign Wealth Funds 28

Intermediaries 29

The Limited Partnership 31

The Limited Partnership Agreement 33

Characteristics of the Fund 33

Management of the Fund 35

Activities of the General Partners 36

Types of Investments 38

Alignment of Interests：Fees and Carry 39

Management Fees 40

Carried Interest 41

Other Fees 44

Capital Calls 45

The LP-GP Relationship：Stuff That Can’t Be Written Down 46

The Fund-Raising Cycle：The Mating Habits of GPs and LPs 47

Due Diligence and Access 50

Patterns of Private Equity Fund-Raising 51

Conclusion 52

Questions 52

3.Deal Sourcing and Evaluation—Not as Easy as it Looks 54

Finding the Deal 56

Where to Look—Specialization vs.Diversification 56

Attracting vs.Finding Deals 59

The Entrepreneur’s Perspective 63

Deal Evaluation 65

Due Diligence 66

The Due Diligence Checklist 68

What to Do with All This Stuff？ 76

The Role of the Partnership 78

Serial Entrepreneurs and Successful Deals 78

The Decision 80

Networks and Syndicates 82

Winning the Deal 85

Follow-ons 86

Conclusion 87

Questions 88

4.Assigning Value 89

The Building Blocks：Pre-and Post-Money Valuations 90

Comparables 91

The Net Present Value Method 95

Strengths and Weaknesses of the Net Present Value Method 99

Monte Carlo Simulation 100

The Adjusted Present Value Method 101

The Venture Capital Method 105

Strengths and Weaknesses of the Venture Capital Method 107

Options Analysis 107

Valuing Firms as Options 108

Reducing Complex Problems to Options Analyses 108

Strengths and Weaknesses of Using Option Pricing to Value Investment Opportunities 110

Using Option Pricing to Price Private Equity Securities 111

Putting It All Together 111

Final Thoughts 115

For Further Reading 115

Questions 116

5.Deal Structuring—Private Equity Securities and Their Motivation 117

Basic Private Equity Securities 118

Preferred Stock and its Variations 121

Redeemable Preferred 121

Convertible Preferred Stock 125

Participating Convertible Preferred Stock 126

Multiple Liquidation Preferences 128

Exotic Securities（“Gingerbread”） 131

Seniority and the Interplay of Multiple Securities 134

Dividends 137

Terms 139

Vesting 139

Covenants 140

Antidilution Provisions 144

A Tour of a Term Sheet 149

Venture and Mezzanine Debt Securities 150

Structuring a Buyout 152

Debt Covenants 154

Conclusion 156

Questions 156

6.After the Money Arrives 165

Boards—The Seat of Governance 167

Board Composition and Responsibilities 168

Board Powers 172

Staging of Financing 173

The Business of Boards：Creating Value 178

Value in Venture 180

Avid Radiopharmaceuticals 181

Endeca Technologies 182

Board Strategy for Buyout Investments 184

Montagu Private Equity 185

Clayton＆Dubilier 185

TPG 187

Kohlberg Kravis Roberts 188

Value Destruction 188

Recent Studies 189

Governance Techniques 189

Information Gathering and Monitoring 190

Deal Management：The Nitty Gritty 192

When the Unexpected Happens：Re-contracting 193

Conclusion 195

Questions 196

7.Achieving Liquidity—Exits and Distributions 198

The Decision to Exit 200

IPO or Acquisition？ 201

The Process of Exiting 208

The IPO Process 209

The Impact of Private Equity on IPOs 216

IPOs as Exits from LBOs 218

Acquisitions 219

Other Ways to the Exit 224

Partial Exits：Dividends 224

Loss-Minimizing Exits 225

Selling the Shares Back 226

Shutdowns 227

The Details of Distributions 229

Why Distribute Stock？ 231

Dealing with Distributions 234

Conclusion 234

Questions 235

8.The Globalization of Venture Capital and Private Equity 237

Private Equity in the Developed Markets 241

Historical Experience 241

The Industry Since 2000 245

Why These Differences？ 248

The European Private Equity Cycle 250

Fund-Raising 250

Investing 250

Exiting 251

Other Developed Private Equity Markets 251

Private Equity in Emerging Markets 255

Emerging Market Private Equity in the Past 256

Emerging Markets：Private Equity Since 2000 258

Private Equity Markets in Other Countries 261

The Emerging Market Private Equity Cycle 268

Investments 269

Deal Identification and Due Diligence 269

Deal Structuring 270

Pricing 271

Exits 271

Conclusion 272

Questions 273

9.Risk and Return 274

Why is Assessing Private Equity Performance Difficult？ 275

How is Performance Typically Measured？ 276

Cash on Cash 276

Internal Rate of Return 276

What are the Problems with These Measurements？ 279

The Case of the Tortoise and the Hare 279

Lack of Systemization 280

The Paradox of Multiple IRRs 281

The Aggregation Problem 284

Comparing Private Equity to the Public Markets 285

The Yardstick Problem 287

Solving the Yardstick Problem—Harder Than It Looks 291

Thinking about Diversification 291

The Asset Allocation Dilemma 297

What Not to Do：The Boston University Horror Show 298

Elements of Private Equity Diversification 298

Other Forms of Diversification 300

Final Thoughts 302

Questions 302

10.The Impact of Private Equity on Society—Does This Really Matter Anyway？ 304

The Consequences of Venture Capital 306

The Impact of Buyouts 312

Assessing the Buyouts of the 1980s 312

Assessing Recent Buyouts 313

Some Important Caveats 318

The Consequences of Public Interventions 319

Stimulus Efforts 319

Regulatory Initiatives 322

Taking Stock 324

Questions 324

11.People，Positions and Culture—Management of the Private Equity Firm 326

Private Equity Jobs—What Are They，and How Do You Get One？ 327

Anal vsts 328

Associates 331

Principal 333

Special Partners 333

General Partners 334

Other Professionals 335

The Special Case of Venture Capital 335

Compensation 337

Managing the Private Equity Firm 340

Small-Scale Firms 340

Large-Scale Firms 343

Culture and Strategy 345

A Special Case：Corporate Venture Capital and Affiliated Funds 346

Final Thoughts 347

Questions 348

12.Scaling and Institutionalization 349

Key Facts About Growth and Scaling：Quantitative Evidence 351

Dispersion 351

Maturity 354

Persistence 355

Getting Big 357

Human Resource Challenges 359

Key Facts About Growth and Scaling：Case Study Evidence 363

Growth Can Introduce Tensions 364

One Size Does Not Fit All 366

Despite Limited Partner Fears，Growth Can Be Helpful 367

Final Thoughts 370

Questions 371

13.Boom and Bust 372

The Nature of Industry Cycles 374

Cycles and Fund-Raising 374

Cycles and Investment Levels 377

Cycles and Investment Performance 381

What is Behind the Cycles？ 385

A Simple Framework 385

The Impact of Shifts 386

Why Does the Private Equity Market Overreact？ 389

Effectively Managing Cycles 390

Implications for Private Equity Groups 390

Implications for Public Policy 392

Taking Stock 395

Questions 395

14.Wrapping Up 396

Scenarios 397

Recovery 397

Back to the Future 399

The Limited Partners’Desertion 400

A Broken Industry 401

Taking Stock 403

Some Specific Predictions 403

The Growing Importance of Emerging Markets 404

The Renewed Attention to Incentives 405

The Increased Public Footprint 405

The Challenge of Institutionalization 406

Final Thoughts 406

Questions 407

Glossary 409

Index 423