A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

INDUSTRY OVERVIEW

private equity fund will make distributions to its LPs. In addition to the limited partnership agreement, separate side letters may set out specific, individual, preferential agreements between a GP and a LP, e.g. with respect to manage- ment fees, advisory board seats, or co-investment rights. I nvestee companies Investee companies (also called portfolio companies ) are enterprises (often small or me- dium-sized companies) or infrastructures in which private equity fund managers invest the fund’s capital. They are generally selected because of their drive, their potential for growth or because they are promising infrastructure projects. The private equity firm provides more than finance to investee companies, notably it: • Enables a growth strategy; • Professionalises a company; • Offers on-going support to the management on strategic and policy matters; • Represents a broader perspective on corporate development; • Provides management expertise and a sounding board for management ideas; • Opens networking opportunities/connections. Private equity managers have typically a greater degree of involvement in their investee companies compared to other investment professionals, such as mutual fund or hedge fund managers. This is due to the larger size of their holdings in individual investee compa- nies (which can be up to 100%), their longer investment horizons, and the relatively lower number of companies in individual fund portfolios. And as a result of their closer involve- ment, private equity managers are naturally expected to play a greater role in influencing the corporate governance practices of their investee companies. F und raising Fund raising refers to the process through which a private equity firm solicits financial com- mitments from private, corporate or institutional investors (the LPs) to pool them into a pri- vate equity investment fund. Commitments represent the LP’s obligation to provide a certain amount of capital to a pri- vate equity fund when the GP asks for capital in order to proceed to an asset purchase: Contrary to traditional funds where subscription monies can be invested right after sub- scription, private equity funds investment process is more lengthy and thus subscription proceeds are generally needed at a later stage, hence a commitment to contribute rather than an immediate payment of the subscription. Private equity fund raising is most often carried out through private placement , which means that the fund units/shares are placed with a selected number of private investors instead of through a public offering. Firms typically set a target when they begin raising capital and ultimately announce that the fund has closed at that amount. Fund raising is measured in terms of aggregate capital raised on fund level . • Initial and subsequent closings The initial offering period is the first period during which investors will be offered to subscribe to the fund’s units/shares, as determined by the GP. The last day of this period is called the initial closing date.

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A thorough understanding of PE | page 13