Section I: Private Equity Overview

KKR etc developed PE model 40 years ago

Innovated management ownership programs to align incentives of management

PE = asset class attempting to beat market via private investments with avg holding period of 7 years funded by HNWIs or institutional capital

Often thought of as buying assets with steady cash flows with lots of leverage and riding out to a big exit

PE funds invest long term capital in private cos for equity that isn’t freely tradable on a public market

(Includes take-privates and private investment in public equity that comes w specific governance rights)

Fund = standalone investment vehicle managed by PE firm on behalf of investors

Most PE funds set up as “closed-end limited partnerships” (finite lifespan and LPs commit for whole term) and “blind pool” (LPs have no say in choice of investments beyond broad mandate)

Firms have two legal entities: GP and investment manager

GPs typically invest alongside LPs but usually 1-5% and not more than 10%

Funds = 10 year term plus two 1-year extensions

Amt raised = fund’s “committed capital”

First close year = year of vintage

Investment period vs. holding period defined in governing documents

Firms must keep raising successor funds to be able to capitalize on opportunities

Typically once 75% of current fund deployed - or whatever LPA says

PE J-curve = LP’s cumulative net cash flow position in a single fund over time including fees

AKA capital invested plus fees minus returns from GP