A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

FISCAL AND OPERATIONAL ISSUES

While completing the final decision making process, the legal agreements are drafted around the terms agreed in the term sheet. On confirmation of the investment decision, the documents, such as the investment agreement, the share purchase agreement, the man- agement agreement, the advisory agreement, financing agreements, etc., are signed and funds transferred based on the cash flow requirements of the company.

The ongoing management of investments includes: • Monitoring of the cash flow and potential additional drawdown; • Income collection and distribution of proceeds; • Reporting, such as financial statements and/or investor reporting. 3. Exit phase The exit phase includes the following aspects: • Fine-tune predefined exit strategy (planned right from the beginning); • Prepare divestment deal and transaction planning; • Compliance on divestments; • Monitor payments to managers and investors; • Reporting.

As the company matures (usually after two to four years) the GP prepares the company for an exit – either a trade sale (sale to a larger party, multi-national or conglomerate), an IPO, or recapitalisation. Once the company has exited, investors’ money will be returned with the profit that has been gained for them after paying fees for the consultant and carried interest to the GP.

NAV calculation/IRR

3.2.5

Private equity managers may be required to carry out periodic valuations of investments as part of the reporting process to investors in the funds they manage.

3.2

The NAV of a private equity fund is the amount estimated as being attributable to the investors in that fund on the basis of the value of the underlying investee companies and other assets and liabilities. The NAV gives to third parties, such as leverage providers, financial regulators or tax authorities, a financial overview of the private equity vehicle, in addition to giving to share- holders a value of their investments. Existing or subsequent shareholders willing to invest in a private equity fund also need to know the NAV, but allocated per share. NAV calculation is a key issue and must notably take into account the type of vehicle, the type of assets held and the legal obligations related to investors’ requirements. A ssets valuation issues NAV calculation implies to be able to value correctly the assets held by private equity funds, which demands high expertise, as with little trading it is hard to determine the market value of illiquid assets. Another impediment in valuation is the uncertainty of future cash flows. Even though the product offered is potentially successful, themanagers may lack experience inmak- ing a success of it and there is no guarantee of the timeframe needed to achieve that success. Fair value , i.e. the price at which an orderly transaction would take place between market participants at the reporting date (measurement date), is a key issue. For quoted instruments, available market prices will be the primary basis for the determination of fair value, whereas for

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