Introduction to private equity

1.

Introduction To
Private Equity
© Igor Rozdestvenskiy 2013

2. Economics and chrematistics

• Economics (from Greek word
οἰκονομία) – "household
management".
• Chrematistics (from
Greek: χρηματιστική) according
to Thales of Miletus is the art of

3.

4. Henry Ford

"Nothing can be made except by makers, nothing can be
managed except by managers. Money cannot make anything and
money cannot manage anything.“
"Two classes of people lose money; those who are too
weak to guard what they have; those who win money by
trick. They both lose in the end.“
"When people are 'stung' in false investment schemes
there are three causes; greed of something for nothing; sheer
inability to know their mind; or infantile trustfulness.“
"What right have you, save service to the world, to think
that other men's labor should contribute to your gains?"

5. WIKI: What is private equity

Private equity is an asset class consisting
of equity securities and debt in operating
companies that are not publicly traded on
a stock exchange.[1]
A private equity investment will generally be
made by a private equity firm, a venture
capital firm or an angel investor. Each of
these categories of investor has its own set
of goals, preferences and investment
strategies; however, all provide working
capital to a target company to nurture

6. WIKI: What is private equity

Bloomberg Businessweek has called private
equity a rebranding of leveraged buyout
firms after the 1980s. Among the most
common investment strategies in private
equity are: leveraged buyouts, venture
capital,growth capital, distressed
investments and mezzanine capital. In a
typical leveraged buyout transaction, a
private equity firm buys majority control of
an existing or mature firm. This is distinct
from a venture capital or growth capital

7. Private equity structure

8. WIKI: What is venture capital

Venture capital (VC) is financial
capital provided to early-stage, highpotential, high risk, growth startup
companies. The venture capital fund makes
money by owning equity in the companies it
invests in, which usually have a novel
technology or business model in high
technology industries, such
as biotechnology, IT and software. The
typical venture capital investment occurs
after the seed funding round as growth

9. WIKI: What is expansion capital

Growth capital (also called expansion
capital and growth equity) is a type
of private equity investment, most often
a minority investment, in relatively mature
companies that are looking for capital to
expand or restructure operations, enter new
markets or finance a significant acquisition
without a change of control of the
business.[1]
Companies that seek growth capital will
often do so in order to finance a

10. WIKI: What is mezzanine capital

Mezzanine capital, in finance, refers to
a subordinated debt or preferred
equity instrument that represents a claim on
a company's assets which is senior only to
that of the common shares. Mezzanine
financings can be structured either
as debt (typically
an unsecured and subordinated note)
or preferred stock.
Mezzanine capital is often a more expensive
financing source for a company than secured

11. WIKI: What is mezzanine capital

. The higher cost of capital associated with
mezzanine financings is the result of it being
an unsecured, subordinated (or junior)
obligation in a company's capital
structure (i.e., in the event of default, the
mezzanine financing is only repaid after all
senior obligations have been satisfied).
Additionally, mezzanine financings, which are
usually private placements, are often used by
smaller companies and may involve greater
overall levels of leverage than issues in

12. WIKI: What is buyout and acquisition

A takeover is the purchase of
one company (the target) by another
(the acquirer, or bidder). In UK, the term
refers to the acquisition of a public company
whose shares are listed on a stock exchange,
in contrast to the acquisition of a private
company.
Buyout is an investment transaction by
which the ownership equity of a company, or

13. Warren Buffet: Discipline, Patience and Value

"The essence of Warren's thinking is that the business world is divided into a
tiny number of wonderful businesses – well worth investing in at a price – and
a large number of bad or mediocre businesses that are not attractive as longterm investments. Most of the time, most businesses are not worth what they
are selling for, but on rare occasions the wonderful businesses are almost
given away. When that happens, buy boldly, paying no attention to current
gloomy economic and stock market forecasts."
John Train, "The Money Masters"(1980)
Buffett's criteria for "wonderful businesses" include, among others,
the following:
They have a good return on capital without a lot of debt.
• They are understandable.
• They see their profits in cash flow.
• They have strong franchises and, therefore, freedom to price.
• They don't take a genius to run.
• Their earnings are predictable.

14. George Soros

Markets are constantly in a state of uncertainty and flux and money is
made by discounting the obvious and betting on the unexpected.
As quoted in "Great Money Minds" by Chris Stallman at
TeenAnalyst.com (5 May 2005)
If investing is entertaining, if you're having fun, you're probably not
making any money. Good investing is boring.
As quoted in The Winning Investment Habits of Warren Buffett & George
Soros (2006) by Mark Tier, p. 217
The main difference between me and other people who have amassed
this kind of money is that I am primarily interested in ideas, and I don't
have much personal use for money. But I hate to think what would have
happened if I hadn't made money: My ideas would not have gotten much
play.
As quoted in The Winning Investment Habits of Warren Buffett & George
Soros (2006) by Mark Tier, p. 219