A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

INDUSTRY OVERVIEW

Figure 8 – Comparison of private equity funds versus traditional funds

1.1

Private equity fund

Traditional fund

Investors

> Numerous public investors (retail market)

> Restriction to few well- informed investors in most cases (depends on the vehicle used) > Substantial or controlling stake in the business > Use of debt possible > Personal investment of business managers in the company they manage (share of the risks and rewards of the business) > Multiple closings within first 12 months requiring rebalances (equalisations) > Substantial financial, commercial and legal due diligence undertaken by PE funds prior to making an investment > Regular detailed reporting to PE fund managers and investors in PE funds (individual LP reporting, with special arrangements for some LPs) > Quarterly financial reporting > Assets valued by managers > Complex accounting issues requiring considerable expertise > Minimal cash balances and no stock to lend > Numerous OTC instruments > Private equity is illiquid by nature > Management fees + carried interest (share of capital profits) > Partnership, potential highly complex structures > Generally limited life of 10 years commitments to the fund; investors not authorised to request the redemption of their shares. Investor shares may only be transferred, pledged or assigned with the written consent from the GP > Closed-ended fund > Long-term capital

Control and influence

> Small minority stakes, no control and no special rights > No debt as part of investments > No personal investment of business managers > Ongoing subscriptions and redemptions

Financial structure of investments

Information available prior to investment

> Access to publicly available information only

Reporting to fund managers and investors

> No detailed information to fund managers and investors (only fund NAV)

Valuation

> Daily/weekly/monthly valuations

> Assets valued by market independent administrator (depending on countries) > Complex valuation issues

Assets

> Substantial cash balances with large portfolios to lend > Few OTC instruments

Liquidity in underlying investments

> Liquidity of investments

Rewards to fund managers

> Fee income

Fund structure and exit

> Corporate structure, generally straightforward > No limited duration,

permanent capital > Open-ended fund

> Investors can sell their fund shares/units at any point in time

Source: ICAEW, 2008 and CACEIS, 2009

A thorough understanding of PE | page 21