Private equity: that often grey area of funding, spreading between commercial banking and stock exchanges. Growing by leaps and bounds with its own rules and customs. Now clearly explained by a trio of professors from INSEAD

The chances are, you are already quite familiar with private equity (PE). Yet, how much do you know about the intricacies of the industry, its deal-making habits, its sub-segments, and its strange lingo of “dry powder”, re-up’s, waterfalls, or carry’s?

Given the extraordinary growth of the PE financial segment, it is good that a trio of professors linked to global business school INSEAD have created a masterwork that could (somewhat pejoratively) be dubbed “Private equity for dummies.”

With its strong textbook personality, Mastering Private Equity comes in two tomes. The second volume covers 19 short case studies on the industry, with examples chosen from both developed and emerging markets.

The first volume provides encyclopaedic knowledge on the sector, giving readers everything they always wanted to know about PE, but were afraid to ask. The authors, led by Claudia Zeisberger, provide methodical thinking and text structure. Each chapter includes numerous charts, explanatory graphs, clear paragraph headings, boxes on side topics of relevance, and a contribution by a recognized industry expert, with about 25 contributors in all. No wonder then that the book’s foreword is by none other than Henry Kravis, the financial brain behind the RJR-Nabisco leveraged buyout of 1988.

Getting to the essential
Although the authors state that this book was “written with a professional audience in mind” (page XVII), they espouse Rabelais’ teaching philosophy: stoop low enough to help non-expert readers follow the conversation. Clear explanations for each of the industry’s sub-segments are provided: who the actors are, where and how the funds are raised, what lifecycles are expected… and of course, the cherry on the pie, who earns what? The florid industry jargon peppers the pages, making for a lively read.

Starting with venture capital
Although private equity has always existed as a means of financing companies, alongside well-established other branches (e.g. commercial banking or stock exchanges), PE really took off in the 1980s, thanks to its two stars: venture capital and leveraged buyouts. In fact, the authors distinguish between three sub-segments of PE: venture capital, growth equity and buyouts.

Venture capital (or VC) is the best known of the PE varieties, perhaps because of the extraordinary explosion of high-tech start-ups from Silicon Valley. “VC funds are minority investors betting on the future growth of early-stage companies” (page 19). And who among us has not heard of the fortunes made by a Facebook or Alibaba? The authors’ description of venture capital goes beyond the practical basics, to even include advice from a Foundry Group managing director on how entrepreneurs should identify and approach the proper VC, like seeking the precious needle in the haystack.

Three illustrative case studies – on Indian wine maker Sula, on Spanish IT venture fund Adara and on a Saudi Arabian investment in telecoms transmission towers – help place the theory in perspective. The cases incorporate teaching guides for classroom discussion by professors .

Growth equity
Growth equity, the second PE sub-segment, fills the continuum between venture capital for start-ups, and buyouts for mature enterprises. Growth equity is where fast-growth companies go after their initial funding from VCs. Although still limiting themselves to minority shareholdings, growth funds are betting on their horses by providing true partnership expertise, and plenty of cash to accompany the upstart’s growth.

Here, the cases have a stronger operating feel, delving into the intricacies of a chain of restaurants in Vietnam, French luxury down jacket manufacturer Moncler, and Swedish broadband provider B2.

The last sub-segment of the private equity family is the buyout fund, rendered (in)famous by the roaring leveraged buyouts of the 1980s. Unlike VCs or growth funds, buyout funds seek majority stakes in their target companies. In addition, given the sheer size of many buyout deals, the debt leverage and the management team alignment are key success factors.

Buyouts can be differentiated along two axes: what role does target company management play (buy in, buy out, etc.)?; and what type of buyout transaction is being considered (public to private, carve-out, privatization, family business, etc.)? The authors offer two case studies to illustrate the details: a two-part case on the carve-out LBO of computer chip manufacturer Avago Technologies, and the acquisition of Amadeus, the vastly profitable airline and travel software and service company.

Alternative strategies
As if VC, growth and buyout funds were not enough segmentation, the authors also introduce readers to the alternative strategies sub-segment. This grouping includes PE funds that specialize in distressed opportunities, as well as PE funds that have preferences for real asset investments, including real estate, natural resources, or infrastructure.

Stay tuned for more
Given the depth of the material in the book, we will publish four instalments of which the first three cover theoretical aspects, while the last article will focus more on the numerous case studies:

* in this issue (Issue 59) we have examined the basics of private equity;
* in Issue 60 we look at deal sourcing for PE players;
* in Issue 61 we’ll examine how PE funds are managed;
* in Issue 62 we’ll cover how the authors see the outlook for the industry.

Book Data 

Title: Mastering Private Equity; Transformation via venture capital, minority investments and buyouts.
Authors: Claudia Zeisberger, Michael Prahl, Bowen White
Pages: 350
Publisher: Wiley
Price: ca. $60.00

Book Data – Accompanying case studies
Title: Private Equity in Action; Case studies from developed and emerging markets
Authors: Claudia Zeisberger, Michael Prahl, Bowen White
Pages: 402
Publisher: Wiley
Price: ca. $55.00

Author/s Bio

Claudia Zeisberger
Claudia Zeisberger is a Senior Affiliate Professor of Decision Sciences and Entrepreneurship & Family Enterprise at INSEAD, and is the Founder and Academic Director of the school’s private equity centre (GPEI). Before joining INSEAD in 2005, she spent 16 years in global investment banking.

Professor Zeisberger is a founding investor of INSEADAlum Ventures (IAV), the business school’s first dedicated seed fund and she devotes a significant amount of her time to mentor early stage companies with a special interest in robotics and artificial intelligence.

She launched INSEAD’s popular MBA elective ‘Managing Corporate Turnarounds’ and built an intensive computer-based simulation involving an iconic car brand and its struggle with bankruptcy. As a natural extension, she teaches INSEAD’s Risk Management elective and the Private Equity elective in the MBA & EMBA programmes.

Professor Zeisberger is known for her extensive research on PE in emerging markets, and her close working relationships with GPs and their portfolio firms, institutional investors, Family Offices and SWFs.

Bowen White
Bowen White currently serves as the Associate Director of INSEAD’s GPEI, where he leads its research and outreach activities and has published on topics including operational value creation, responsible investment, LP portfolio construction and minority investment in family businesses.

Bowen has spent his career working in and conducting research on the global alternative asset management industry. In the New York hedge fund industry, he researched topics from statistical arbitrage investment strategies in commodities markets to macroeconomic trends and global hedge fund performance. Having worked for both a proprietary trading firm and a fund of funds, he has seen first-hand the challenges faced by investors and allocators of capital to the hedge fund industry. Bowen has also advised on a range of VC and growth equity fundraising opportunities across Southeast Asia.

An alumnus of INSEAD’s MBA program, Bowen earned a BSBA from the Kenan Flagler Business School at the University of North Carolina at Chapel Hill.

Michael Prahl
Michael is an INSEAD Distinguished Fellow at GPEI with a focus on LBOs and Asian Private Equity. Based out of Hong Kong, Michael is a founding partner at Asia-IO Advisors, an asset manager focused on implementing innovative, thesis-driven Asia/Asia-nexus private equity co-investment programs for an alliance of large institutional and corporate investors.

An INSEAD alumnus, Michael served as GPEI’s Executive Director from 2010 to 2015 and was instrumental in shaping all aspects of the centre’s activity and developing its core research agenda. During his tenure as Executive Director, Michael oversaw the expansion of the Centre’s research and outreach activities and drove specific research projects related to co-investments, risk & return propositions in emerging markets PE and family offices. Michael continues to engage directly with the INSEAD community as an Adjunct Professor teaching the MBA Leveraged Buyout elective.

Prior to joining GPEI, Michael spent nine years with Apax Partners, a global private equity firm. He worked on some of the most high profile retail and consumer investments for Apax in Europe and the US including regular buyouts, public to privates, PIPE’s, minority investments and privatisations. He moved to Hong Kong beginning of 2006 to help set up Apax Partners’ Asian operations. Prior to Apax Partners, Michael was associated with the Corporate Venture Capital arm of Deutsche Telekom and The Boston Consulting Group.

Michael is a graduate of INSEAD (MBA) and Handelshochschule Leipzig (MSc Business) and holds undergraduate degrees in business and law.

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Source: INSEAD Website/s