​The word “dilution” is used often private equity, particularly in venture capital financings.  One can hear venture capitalists and founders say they don’t want to be diluted.  But what are they talking about when they say this?  That’s the topic of this post.
 
I view dilution as having two components: ownership dilution and value dilution.  These concepts are related.  In this post, we’ll take a look at ownership dilution.  We’ll look at value dilution in a later post.

What can you learn from reviewing over a thousand private equity fund presentations (also known as “pitch decks”)?  Among other things, you learn what works in a fund presentation and what doesn’t.  This post contains my thoughts on what an emerging manager should include in a fund presentation. 

I am pleased to be speaking on the Private Markets Insider webinar "Esoteric Opportunities in Private Equity & Special Situations" to be held on Wednesday, September 2, 2020 at 11:00 am ET.  Here's a link to the webinar information page: ​https://www.eventbrite.com/e/private-markets-insider-webinar-tickets-112114838500.

A fund secondary transaction occurs when an existing investor in a private equity fund sells its interest to a third party in a private transaction.

While this may sound pretty straight-forward, fund secondaries are fairly complex.  One complexity relates to the fact that an investment in a private equity fund is "illiquid."  It is called illiquid because it isn’t very easy for an investor in a private equity fund to sell its fund interest.
 
There are several reasons why interests in private equity funds are illiquid.  First, unlike publicly-traded stocks which can be bought and sold very easily on public markets like the New York Stock Exchange and NASDAQ, there is no public market where one can buy or sell interests in private equity funds.  Second, for stocks to be able to be sold on public markets like the New York Stock Exchange and NASDAQ, by law they must first be registered with the US Securities and Exchange Commission (“SEC”).  Interests in private equity funds are not registered with the SEC, and so there are legal (statutory) restrictions on the sale or transfer of these fund interests.  Third, investors in private equity funds sign contracts (known as “limited partnership agreements” or “LPAs”) which contain restrictions on the sale or transfer of the fund interests.

​In my prior post, “LP Corner: Understanding the “Equity” of Private Equity” we explored the “Equity” in Private Equity.  In this post we explore the “Private” in Private Equity.  These posts are complements to my initial post “LP Corner: What is Private Equity?”.  The hope is that these posts will provide the reader with a good overview of what “Private Equity” means.
 
So what does the “Private” in Private Equity mean?  In essence, it means that the companies that PE funds (buyout, venture capital and growth equity funds) invest in and/or acquire are privately-held companies.  To understand this, first we'll explore what public companies are, and then we'll take a deeper dive into what private companies are, and we'll finish with a discussion of the types of companies that buyout funds acquire..

​Private equity, generally speaking, is an equity (stock) investment in a privately-held company.  My blog post “LP Corner: What is Private Equity?” provides an overview of how the term “private equity” is used.  This post is going to explore the “equity” component of “Private Equity.”  This post is a complement to my posts "LP Corner: What is Private Equity" and "LP Corner: The "Private" in Private Equity".
 
Let’s start with a basic definition of equity: Equity is the most basic form of ownership in a company.  Since virtually all private equity-backed companies in the United States are corporations, we are going to focus on equity in a corporation.

To all readers: I hope you and your families are healthy and safe.  My thoughts are with all who are impacted by this deadly virus.
 
I’ve been around for a while, and have experienced several market dislocations in my career.  I had just started my career as a corporate finance attorney when the “Black Monday” stock market crash of October 19, 1987 occurred.  I was a telecommunications investment banker when the dot-com crash occurred in March 2000.  I was a private equity fund-of-funds manager when the Global Financial Crisis (“GFC”) hit in 2008.  Because of these experiences, I have some thoughts for limited partners (“LPs”) during this crisis.

​A concept that is important for understanding company financings is that of “pre-money” and “post-money” valuation.  Pre-money valuation is the value of a company immediately prior to a financing round.  Post-Money Valuation is the value of the company immediately after the financing round.  The difference is usually the amount of money raised in the round.
 
Let’s explore this deeper.

I'm pleased to be a moderator and discussion facilitator at the upcoming PartnerConnect Texas conference to be held December 9-11 at the Fairmont Dallas.  I will be moderating the panel "LP Corner: How LPs are preparing and managing their private markets portfolios for a potential downturn," and facilitating a breakout discussion on "The Impending Bear Market and its Effects on PE and VC."

​Here's a link to the PartnerConnect Texas conference website: https://www.peievents.com/en/event/partnerconnect-texas-2019/

I'm pleased to be a featured speaker at the marcus evans Private Equity Summit 2019 to be held November 4-6, 2019 at the Fairmont Copley Plaza Hotel in Boston.  I will lead a discussion on "Family Offices and Private Equity: How Much to Allocate and Portfolio Construction Considerations." 

Here's a link to the conference website: http://privateequity.marcusevans-summits.com/

If you're at the conference, please say hello after the presentation.

I am pleased to be speaking at the IvyFON Family Office Trends Forum in San Francisco on October 16, 2019.  I will be speaking on the panel "Emerging Manager Strategies & Manager Selection Topics."  Here's a link to the conference website: ​http://ivyfon.com/oct16forum/index.html

I will be speaking at the upcoming PartnerConnect West private equity conference taking place on September 23-25 at the Fairmont San Francisco.  I will be a panelist on the panel: "How VCs can stand out in a crowded market."  

Here's a link to the conference website: https://www.peievents.com/en/event/partnerconnect-west-2019

Please say hello after the panel if you are at the conference.

​In April 2005, my article “An LP’s 10 Tips for Emerging Managers” appeared in the Venture Capital Journal.  This article offered advice to new managers on how to successfully raise a private equity fund.  With the advantage of many(!) additional years of experience evaluating emerging managers, I thought I should update that advice.  Below are some tips for emerging managers seeking to raise money from potential private equity fund investors (also known as “Limited Partners” or “LPs”).

1. Have Sufficient Resources for a Lengthy Fundraise.
Raising a fund takes lots of determination, time and money.  Some people rush into raising a fund without considering whether they have the resources to successfully raise a fund.  Raising a first-time fund can take a long time, in some cases 18 to 24 months (or more), and can cost over $1 million, which the partners of the emerging manager must pay out of their pockets until the fund has its initial closing, at which time fundraising expenses (excluding placement agent fees, see below) are reimbursed by the fund.  The partners must have sufficient resources to finance the costs of fundraising as well as the costs of opening and maintaining an office (with staff).  In addition, each partner of the emerging manager must have enough resources to finance that partner’s personal household expenses during the fundraising.  Having the resources to fundraise for an extended period of time is critical to the success of raising a fund.

My firm Campton Private Equity Advisors today hosted a webinar "Private Equity Investing 101: An Overview for New Investors" which provided an overview of investing in Private Equity.  Topics covered in the webinar included:

• What is Private Equity?
• Introduction to Venture Capital and Buyouts
• Why invest in Private Equity?
• Private Equity investment strategies: direct investing, fund investing and fund-of-funds investing

Click the button below to go to a reply of the webinar on YouTube:

If the button doesn't work, here's a link to the webinar on YouTube at: ​​https://youtu.be/zsFgajgoE2E

The presentation is available for download below:

​Overview
Private equity funds-of-funds (“FOFs”) ​are funds that invest in other private equity funds, which then invest directly into privately-held companies.  By investing in a FOF, a limited partner (“LP”) obtains a diversified portfolio of private equity fund investments as well as a larger portfolio of indirect investments in underlying private companies.  I have worked for two private equity fund-of-fund managers and understand well the pros and cons of these vehicles.  This post provides an overview of FOFs.
 
Structure
FOFs invest in a portfolio of private equity funds (known as “portfolio funds”), which in turn invest in privately-held companies (known as “underlying portfolio companies”).  A FOF will invest in a portfolio of private equity funds and each portfolio fund will invest in a portfolio of private companies.  As a result, an LP’s single investment in a FOF can provide the LP with exposure to many funds and potentially hundreds of underlying portfolio companies.  The simplified diagram below illustrates this.

I will be speaking at the upcoming PartnerConnect Midwest private equity conference in Chicago June 24-26.  I will be speaking on the panel "Better Your Benchmarks: The Latest Strategies and Techniques You Need to Know to Assess Your Investments' Relative Returns."

Here's a link to the conference website: https://partnerconnectevents.com/pcmidwest2019/index.php

Please stop by and say hello if you're at the conference.

I am pleased to be a panelist at the upcoming PartnerConnect East conference in Boston on March 25-27, 2019.  I will be speaking on the Buyouts panel "Maximizing Value When Winding Down Funds."

Here's a link to the conference website: https://partnerconnectevents.com/pceast2019/index.php
​
If you're at the conference, please stop by and say hello.

Just as wines have “vintage years”, private equity funds also have "vintage years."  But what is a vintage year?  For wine, it’s universally recognized as the year the grapes were harvested.  However, it’s not that simple for private equity, as various industry participants define “vintage year” differently.

Consider the following hypothetical:  In 2011, two private equity professionals decide to raise a fund.  That year they form a legal entity for the fund and launch their fundraising efforts.  In late 2012 the fund has its initial closing of commitments from limited partners, and makes its first capital call, where limited partners make their first cash contribution to the fund.  In 2013, the fund makes its first investment.  In 2014, the fund has its final closing.  As of September 30, 2018, the fund has a net IRR of 18.5%.  What should the vintage year be for this fund - 2011, 2012, 2013 or 2014?

​To read more, please click on "Read More" below.

An important event in the life of a private equity fund is when the fund “exits” its investment in a portfolio company.  An exit is also known as the time when a fund “cashes out” or “liquidates” its investment in a portfolio company.  Exits occur in three main ways: (1) the portfolio company is sold and the fund receives cash or publicly-traded securities for its shares in the portfolio company; (2) the portfolio company holds its initial public offering, or IPO, and the fund later sells its shares in the portfolio company on the public market or the fund distributes the publicly-traded shares to the fund’s limited partners; and (3) the fund sells its shares of a portfolio company to another investor in a private transaction (this is known as a direct secondary sale).  While there are other ways a fund can achieve a full or partial exit, the above exit routes are the main ways a fund achieves liquidity.
 
We have discussed IPOs in prior posts (see for example: LP Corner: What LPs Need to Know About IPOs).  In this post, we will discuss some of the things about the sale of a portfolio company that LPs should know.
 
Common M&A structures.
The sale of a company can take many different forms.  The most common sale structures are:

• Stock for Cash
• Stock for publicly-traded stock
• Stock for privately-traded stock
• Asset sales
• Mergers

The type of structure can have an impact to a limited partner in a fund (“LP”) in terms of how and when the LP may receive a distribution from the fund relating to the transaction.
​
To read more, please click on "Read More" below.

I am pleased to announce that I will be a panelist at the upcoming PartnerConnect LP-GP Outlook conference in New York on January 22, 2019.  I will be speaking on the panel "Manager Outlook: Venture Capital."

Here's a link to the conference website:  https://partnerconnectevents.com/lpgpoutlook2019/index.php

Please stop by and say hello if you're at the conference.

Why is it that mutual funds take an investor’s capital on day 1, while PE funds take an investor’s capital over time?  That’s the topic of this post.

When an investor makes an investment in a mutual fund, the investor invests the entire amount of the investment on day 1.  The mutual fund manager will quickly use this money to increase existing positions in the fund or make new investments.  It’s easy for the mutual fund manager to put the money to work by buying publicly-traded securities.
 
Investments in private equity funds are different.  Private equity funds operate on a “called capital” model.  By way of background, when an investor (known as a “limited partner” or “LP”) makes a legal commitment to a private equity fund, the LP commits to providing the fund with a certain maximum investment amount, which is known as the “LP commitment.”  For example, if an LP agrees to invest a total of $10 million in a private equity fund, that $10 million is the LP commitment.  For more background, please see the following posts:

• LP Corner: On Committed Capital, Called Capital and Uncalled Capital
• LP Corner: US Private Equity Fund Structure – The Limited Partnership

 
​To read more, please click “Read More” below.