Inside Private Equity: The Professional Investor's Handbook PDF
Preview Inside Private Equity: The Professional Investor's Handbook
Praise for (continued from front flap) $70.00 USA/$84.00 CAN Kocis INSIDE PRIVATE EQUITY A growing number of fi nancial institutions and profes- Bachman sionals are investing in private equity for its diversifi ca- P rivate equity, the business of investing in private tion benefi ts and the opportunity to participate in sub- Long companies, has quickly grown from a cottage in- stantial long-term gains. But many are fi nding it diffi cult “This handbook is essential reading for all investors in the private markets. It is especially Nickels dustry to a mature asset class. For those that sup- to manage things they can’t always measure. Filled with helpful in understanding the mechanics of portfolio construction and challenges of performance ply the money—the endowments, foundations, pension in-depth insights and expert advice, Inside Private Equity measurement of private equity and venture capital investing.” funds, family offi ces, and others—learning the business focuses on what you can measure and how this process —Susan J. Carter, President and CEO, Commonfund Capital, Inc. I of private equity can be one of its principal challenges. will allow you to better manage these assets—as well Inside Private Equity was written for this audience to as your time. N “An invaluable handbook.” The Professional Investor’s Handbook help provide a general understanding of how to invest JAMES M. KOCIS is the founder and President of the —Sir Ronald Cohen, Chairman of The Portland Trust, S in, monitor, and measure the performance and risk of Burgiss Group, one of the leading software and fi nancial Portland Capital LLP, and Bridges Ventures private equity. I service providers to the private equity industry. He and “Private equity fund investing is often viewed as more art than science, though in reality it With Inside Private Equity, four experienced fi nancial his team designed Private i, the world’s most popular D requires an even blend of both skills. This book focuses on the science behind the art. It covers professionals—James Kocis, James Bachman, Austin program for private equity portfolio management. all the major concepts while introducing some great new ones, and must be required reading Long, and Craig Nickels—share their broad range of Private i is used to manage in excess of $1 trillion of for serious private equity market participants.” E private equity experience to help demystify this asset private equity investments. —Chihtsung Lam, founder and Managing Director of class. Axiom Asia Private Capital P JAMES C. BACHMAN IV, CAIA, is the Head of Re- Divided into four comprehensive parts—Setting the search at the Burgiss Group. In this role, he is principally “The authors have created a simple and pragmatic handbook for a very complex asset class. R Foundation, Measurements and Comparisons, Topics responsible for research-related initiatives as well as Their collective experience is invaluable. This is a fantastic read for new private equity investors on Risk, and Conclusions—Inside Private Equity opens expanding the technology platform’s portfolio manage- as well as experienced portfolio managers looking for additional tools that can be used in I with a brief introduction to this discipline and sets the ment capabilities. monitoring their current investments and in the process of screening new opportunities. Inside stage for more technical discussions to follow. Here, Private Equity is a great foundation for investors looking to improve their analysis of an exciting V you’ll become familiar with everything from traditional AUSTIN M. LONG III, JD, CPA, is the Head of Align- asset class.” A industry measurements to a structured approach to ment Capital, a private equity consultancy. He has been —Timothy B. Moore, Director of Alternative Investments, PERA of Colorado portfolio management. active in the private markets since 1987, when he co- T founded what was to become the University of Texas “A real practitioner-focused contribution bringing performance measurement down from the To discover this more structured approach, Inside Private Investment Management Company (UTIMCO) private theoretical to the practical.” E Equity: investment group. —Jesse E. Reyes, Reyes Analytics E (cid:127) Provides an exhaustive review of internal rate of CRAIG J. NICKELS, CFA, is the Director of Private “Inside Private Equity clearly explains, without oversimplifying, the hard work of managing return (IRR) calculations Markets for Washington University in St. Louis, where private equity portfolios. Full of cogent advice from an experienced team. Great work!” Q (cid:127) Outlines various peer universes and benchmarks his responsibilities include the oversight and manage- —Lawrence M. Unrein, Managing Director and Head of (cid:127) Presents tools that will help you uncover both how ment of the university’s private market investments the Private Equity Group for J.P. Morgan Asset Management U and where wealth was gained and lost within the multi-billion dollar endowment. (cid:127) Examines the effect portfolio size has on performance “A handy guide to address the pitfalls and issues of investing in private equity that most James M. Kocis James C. Bachman IV Austin M. Long III Craig J. Nickels I expectations Jacket Design: Loretta Leiva institutional investors have wrongly ignored. Well done!” T (cid:127) Explores two different modeling techniques for cash Jacket Illustration: © Getty Images —Dory Wiley, President and CEO of Commerce Street Capital management and Trustee and Chairman of the Investment Committee Y (cid:127) And much more at Teachers Retirement System of Texas By providing straightforward explanations and detailed examples of the concepts covered, Inside Private Equity demystifi es many of the common assumptions about this asset class and puts the various pieces of the private equity puzzle in perspective. wileyfi nance.com (continued on back flap) P1:a/b P2:c/d QC:e/f T1:g FM JWBT055-Kocis February17,2009 15:43 Printer:Yettocome vi P1:a/b P2:c/d QC:e/f T1:g FM JWBT055-Kocis February17,2009 15:43 Printer:Yettocome Inside Private Equity i P1:a/b P2:c/d QC:e/f T1:g FM JWBT055-Kocis February17,2009 15:43 Printer:Yettocome Founded in 1807, John Wiley & Sons is the oldest independent publishing companyintheUnitedStates.WithofficesinNorthAmerica,Europe,Aus- tralia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional andpersonalknowledgeandunderstanding. TheWileyFinanceseriescontainsbookswrittenspecificallyforfinance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio manage- menttoe-commerce,riskmanagement,financialengineering,valuationand financialinstrumentanalysis,aswellasmuchmore. For a list of available titles, please visit our Web site at www. WileyFinance.com. ii P1:a/b P2:c/d QC:e/f T1:g FM JWBT055-Kocis February17,2009 15:43 Printer:Yettocome Inside Private Equity The Professional Investor’s Handbook JAMES M. KOCIS JAMES C. BACHMAN IV AUSTIN M. LONG III CRAIG J. NICKELS John Wiley & Sons, Inc. iii P1:a/b P2:c/d QC:e/f T1:g FM JWBT055-Kocis February17,2009 15:43 Printer:Yettocome Copyright(cid:1)C 2009byJamesM.Kocis,JamesC.BachmanIV,AustinM.LongIII,andCraigJ.Nickels.All rightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformor byanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermitted underSection107or108ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwritten permissionofthePublisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetothe CopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978) 646-8600,oronthewebatwww.copyright.com.RequeststothePublisherforpermissionshouldbe addressedtothePermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030, (201)748-6011,fax(201)748-6008,oronlineathttp://www.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsin preparingthisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyor completenessofthecontentsofthisbookandspecificallydisclaimanyimpliedwarrantiesof merchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreatedorextendedbysales representativesorwrittensalesmaterials.Theadviceandstrategiescontainedhereinmaynotbesuitable foryoursituation.Youshouldconsultwithaprofessionalwhereappropriate.Neitherthepublishernor authorshallbeliableforanylossofprofitoranyothercommercialdamages,includingbutnotlimitedto special,incidental,consequential,orotherdamages. QuotefromTheSiliconBoysandTheirValleyofDreams,DavidA.Kaplan,Perenniel,1999.Usedwith permissionoftheauthor. TwoarticlesbyTomJudgecopyright. MicrosoftExcelisatrademarkofMicrosoftCorporation.PowerPointisatrademarkofMicrosoft Corporation. Formoreinformationaboutthepatentedmethodologiesreferencedthisbookvisit http://www.alignmentcapital.com. Thisbookanditscontentareforinformationandeducationalpurposesonly.Youalonewillneedto evaluatethemeritsandrisksassociatedwithmethodologiesdepictedinthebook.Decisionsbasedon informationobtainedfromthebookareyoursoleresponsibility,andbeforemakinganydecisiononthe basisofthisinformation,youshouldconsider(withorwithouttheassistanceofanadvisor)whetherthe informationisappropriateinlightofyourparticularinvestmentneeds,objectives,andfinancial circumstances.Investorsshouldseekfinancialadviceregardingthesuitabilityofinvestinginanysecurities orfollowinganyinvestmentstrategies. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontactour CustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnitedStatesat(317) 572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmay notbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts,visitourwebsiteat www.wiley.com. LibraryofCongressCataloging-in-PublicationData: Insideprivateequity:theprofessionalinvestor’shandbook/JamesM.Kocis[etal.]. p.cm.–(Wileyfinanceseries) Includesbibliographicalreferencesandindex. ISBN978-0-470-42189-5(cloth) 1.Privateequity. 2.Venturecapital. 3.Portfoliomanagement. 4.Investments. I.Kocis,JamesM. HG4751.I572009 332.63(cid:2)22–dc22 2008045556 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 iv P1:a/b P2:c/d QC:e/f T1:g FM JWBT055-Kocis February17,2009 15:43 Printer:Yettocome To Nick Vallario and in memory of Shao Xin Kai v P1:a/b P2:c/d QC:e/f T1:g FM JWBT055-Kocis February17,2009 15:43 Printer:Yettocome vi P1:a/b P2:c/d QC:e/f T1:g FM JWBT055-Kocis February17,2009 15:43 Printer:Yettocome Contents Foreword xi Preface xvii Acknowledgments xxi HowtoUseThisBook xxiii AbouttheAuthors xxv PARTONE SettingtheFoundation CHAPTER1 Background 3 CHAPTER2 PrivateEquityPerspectives 13 CHAPTER3 ManagingtheInvestmentProcess 29 CHAPTER4 CapturingaPortfolio 51 CHAPTER5 TrackingPortfolioHoldings 63 vii P1:a/b P2:c/d QC:e/f T1:g FM JWBT055-Kocis February17,2009 15:43 Printer:Yettocome viii CONTENTS PARTTWO MeasurementsandComparisons CHAPTER6 StandardMeasures 79 CHAPTER7 TheIRR 89 CHAPTER8 UniverseComparisons 111 CHAPTER9 FlawedResearchMethodologies 129 CHAPTER10 VisualizingPrivateEquityPerformance 137 CHAPTER11 TheIRRandthePublicMarkets 153 PARTTHREE TopicsonRisk CHAPTER12 PerformanceAttribution 165 CHAPTER13 TheConcentrationofWealth 175 CHAPTER14 TheDiversificationofPortfolios 185 CHAPTER15 CashManagementModels 193
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