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