CFA Level 2 - Alternative Investments

Buyout Fund

Buyout funds look for companies with stable CF.
Buyout funds invest in companies with low WC requirements, and acquire portfolio companies via auction.

A common source of value creation in LBO is debt reduction.

IPO - highest exit value
secondary sales - second highest exit value

Private Equity

General Partner (GP)

The fund manager, usually from a Private Equity firms. The GP provides the investment strategy and manages the fund.

Limited Partner (LP)

The investors of the fund

The "hurdle rate", is basically a minimum annual return that the limited partners (LPs) are entitled to before the general partners (GPs) may begin receiving carried interest.

Carried interest is the GPs' share of the profits of the investments made within a PE fund.

TVPI = RVPI + DPI
TVPI Total value to paid in
RVPI Residual value to paid in, residual value is the MV of the remaining equity that LPs have in the fund
DPI Distributions to paid in, distributions is the total amount of cash and stock that have been paid out to LPs

Tag along, drag along rights, strategic decisions to be approved by PE firm, to protect its equity investors.

Tag along gives minority shareholders (LPs) the right to negotiate in the event of a sale by the GPs.

PE equity funds increase value by taking on high level of debts on favorable terms, they offset borrowing costs by superior reorganization and re-engineering.