Private Equity Demystified : an Explanatory Guide

ICAEW Corporate Finance Faculty, Second Edition, 2010. — 154 pages. — ISBN 978-1-84152-830-4 The first edition of Private Equity Demystified – An Explanatory Guide was published in August 2008, as the first report to be issued under Financing Change, the thought leadership programme of the ICAEW Corporate Finance Faculty. The faculty is the world’s largest network of professionals involved in corporate finance and counts accountants, lawyers, bankers, other practitioners and people in business among its members. Financing Change aims to advance the economic and social contribution of corporate finance activity by promoting better understanding and practice. Since the publication of the first edition of Private Equity Demystified the major economies have moved from growth to recession, the global banking community has experienced unprecedented turmoil and distress and we have all come to be familiar with the term ‘credit crunch’. We have also seen the publication, in April 2009, of the European Commission’s proposed Alternative Investment Fund Managers directive which would cover private equity funds. The second edition builds on the work of the first edition to reflect this recent turmoil and examines the way in which the banking market has changed its approach to private equity investments. It also includes more discussion of both mid-market buy-outs and the dynamics of the restructuring industry. It remains the case that media coverage of private equity and some public commentary have frequently displayed a poor understanding of how private equity operates, yet these sources are frequently relied upon as fact. This guide provides an objective explanation of private equity, recognising that for public scrutiny to be effective it must be conducted on an informed basis. This publication is unlikely to result in a reduction in the scrutiny of private equity. Its value will be measured in better-informed debate, in private equity’s effective engagement with wider stakeholders and in well thought out public policies. We welcome views and other comments on this work and related themes. For further information on the Financing Change programme please email financingchange@icaew.com or telephone +44 (0)20 7920 8685. For information on the ICAEW’s work in funding academic research please contact Gillian Knight, Research Manager on +44 (0)20 7920 8478. The report, which includes a summary of academic studies and references, is also available to download from www.icaew.com/corpfinfac. Contents Executive Summary The private equity market Who are the participants in a private equity transaction? Evaluating, structuring and restructuring a private equity investment A detailed worked example of a leveraged buy-out and a restructuring In 2007 the private equity industry came under intense public scrutiny including a House of Commons Select Committee enquiry. We published the first edition of Private Equity Demystified in August 2008 and since then the financial world has experienced unprecedented turmoil. We have therefore taken the opportunity to revisit the accusations laid at the feet of the private equity industry and our tentative support for the industry in the first edition of this guide with the benefit of hindsight. In summary we find the thesis that private equity created, spread or encouraged an increase in systemic risk to be almost wholly incorrect....