A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

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EXECUTIVE SUMMARY

The term private equity is a broad description of an industry which encompasses a wide range of activities that can differ in a number of fundamental ways, where funds can have different investment strategies and operating models. Private equity funds are generally formed as limited partnerships or a legally similar structure, which varies from country to country. This concept of limited partnership among others, as well as the roles and responsibilities of the dif- ferent players involved (General and Limited Partners, placement agents, depositary banks, adminis- trative agents, registrar and transfer agents, auditors, legal and tax advisers), must be well under- stood in order to gain a clear comprehension of this complex asset class. One should keep in mind that private equity funds deeply differ from other types of investment funds in terms of governance, risk, structure, assets and liquidity, valuation, reporting and rewards to fund managers. Fiscal aspects and adequate structuring are crucial in the private equity business. Together with tax and legal advisers, the General Partner shall determine the ideal investment structure after a thor- ough analysis of all important elements of the project. Furthermore, as the operational model of pri- vate equity funds has little in common with traditional funds, there are a number of operational issues to address at the different stages of the fund lifecycle, namely with regard to assets valuation, report- ing and complex waterfall distributions. In this framework, the right skills, experience and resources are vital to succeed and expert service providers play a key role. In the wake of the global economic downturn, what are the perspectives for the private equity indus- try? A few points can be highlighted: • The acceleration of the industry’s globalisation (although North America is historically and by far the largest private equity market worldwide, recent years have already seen a rise in the importance of the Asia-Pacific region and emerging markets as investment destinations); • A time of challenges, as shown by the very tough fund raising conditions experienced by private equity firms at the moment, but also of opportunities, the best returns being usually made in troubled times; • The evolution of the partners relationship in favour of investors, which finds expression in enhanced selection, financial negotiations and in the request for more transparency and information; • Last but not least, the increased level of government regulation could have major impacts on the industry, in particular the AIFM draft directive currently under discussion at the European Union level.