22 PAUL MORRIS: DEMYSTIFYING PRIVATE EQUITY – AN INSIDER’SVIEW
GLOSSARY
PE
The investment of funds into privately owned businesses with the aim of generating high rates of return. PE funds typically have a fixed life span of 10 years, By the end of 10 years the investors will expect a return on the original money invested. This will be achieved by the fund selling all the investments it has made. A financial buyer that obtains investment funds from banks, pension funds and insurance companies in order to make investments in privately owned businesses. A PE firm will buy either a majority or substantial minority stake in a business. It will work alongside the management team with the objective of growing the profits and then selling the business in the future, typically in 3 to 5 years’ time. Different to PE in that the investment is made into small, early stage private businesses. Venture Capital investments are higher risk than PE ones so the investor is looking for much higher returns. VC investments have a much higher failure rate that PE investments. Where an outside management team purchases all or part of a company. Because the outside management team have limited knowledge of the company an MBI is usually seen as higher risk by investors and funders. The management team of a company purchases all or part of the company they manage. Management are rarely wealthy enough to buy the company on their own so additional funds may have to be raised. The funding for the deal will come from a mixture of management team resources, PE and debt. A transaction where existing management along with outside managers decides to buy out a company. This type of transaction is less risky than a MBI as the existing management will be part of the team going forward. The outside management often add expertise and depth to the new team. Is the use of debt to purchase a company often alongside a PE investment. The amount of debt available will depend on the company’s assets and profits. The debt is expected to be repaid over 4 to 6 years. A type of investment (either venture capital or PE) to support the expansion of an existing business. Growth or expansion capital may be used for a variety of purposes including: pay for the R&D for a new product; finance a sales and marketing drive; and fund exporting to new territories. Is an investigation of a business by an investor or funder prior to purchasing a company. Examples of the types of questions due diligence will ask include: does the company have healthy cash flow; are the profits going up or down; are there any hidden liabilities; and are there any major competitors likely to enter the market?
PE HOUSES / FIRMS / FUNDS
VENTURE CAPITAL
MANAGEMENT BUY IN
MANAGEMENT BUY OUT
BUY IN MANAGEMENT BUY OUT (BIMBO)
LEVERAGEDOR ACQUISITION FINANCE
GROWTHOR EXPANSION CAPITAL
DUE DILIGENCE
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