A Practical Guide to Private Equity Transactions.pdf
This book runs to some 400 pages and delves into the very heart of how private
equity deals work, yet the concepts that it describes and the methods that it
unpicks are simple ones. Private equity is not reliant on complex algorithms or
other financial wizardry for its successes, but on the expertise of its managers,
who know their business sectors intimately and understand what decisions to
take and when to take them.
The operating model of private equity is very straightforward and this
model can be applied to businesses which possess wildly differing characteristics.
This is one of the fascinating aspects of the private equity industry;
from a high street clothes shop to a waste treatment plant, a cereal maker to
an aerospace parts manufacturer, the fundamentals which govern everything
that a private equity firm does remains more or less the same regardless of
the industry in which the target company operates. Private equity invests in
businesses which have reached a plateau and need private equity expertise
and resources to grow, or those which have suffered from underperformance
or stagnation due to imperfect management and need to undergo significant
change in order to be revived.
In all of these cases, the model works because it aligns the interests of the
people running the business with the private equity investor, providing those
people with the monetary and operational support they need. The overriding
goal is for the private equity firm and the management team it supports to sell
the business for a greater sum than that for which it was bought, and the only
way to do that is to ensure that what you are trying to sell is an improvement
on the entity you originally acquired (a strikingly simple philosophy which
debunks the notion that private equity success is down to ‘asset stripping’).
Management of the company and the private equity firm are both working
towards this same goal, and the structure of the fund is such that rewards are
always tied to long-term success. This model does not eradicate failure but
does focus minds by ensuring that, in the event of failure, no one is rewarded.
Many private equity funds are organised as a fund which has a life of a
minimum of ten years, during which the limited partners are locked in. The
virtue of this is that it affords a private equity firm the time to take a long-
term