Fund Structure and Investment Process

Fund Structure & Investment Process

2

LP

C C

LP

GP GP

General Partner (GP) raises a fund of illiquid capital $500M to be spent over seven years

Investors (Limited Partners / LP’s) often sophisticated institutions (pensions / insurance / finance) or wealthy families

GP utilizes unique knowledge / relationships / strategy to invest in companies / securities

GP guarantees a minimum return to LP’s after which GP splits profits with LP (often 20% / 80%)

Flow of money and returns

Private and Confidential – Not for Circulation 3

Fund structure and organization

GP person / group with proven track record to attract investors

GP writes fund documents explaining investment strategy, how much they wish to raise, who else is on the team

GP meets with LP’s or increasingly with LP’s advisors

LP’s “commit” specific dollars for specified period

Fund Economics: 2% and 8% and 20% / 80% split

2% of fund size as annual management fee ($500M fund has $10M / year to pay employees, rent offices, travel, etc.)

8% annual return hurdle on money drawn for investments

20% / 80% split on profits above 8% return

This 20% is known as “carried interest”

4

PE often use a fund structure

LP

GP

Fund 1

CCC

Fund 2

CCC

5

An alternative PE structure

LP

Companies

GP

PE firm integrated with

investment sponsor, such

as bank or corporation

Investment Process


Investment Process

Approach the Private Equity Firm

Initial Enquiries and Negotiations

Due Diligence

Final Negotiation and Completion

Monitoring and Exit


Investment Process – Approach the Private Equity Firm

CompanyCompany andPrivate EquityFirm

Private EquityFirm

Reports/Documents

1. Appoint Advisers

2. Prepare Business Plan

3. Contact Private Equity firms

1. Review Business Plan

ApproachEnquiries/

Negotiations

Due Diligence

Completion Exit

Business

Plan




Private EquityFirm

Reports/Documents

1. Provide additional information

1. Meet to discuss Business Plan

2. Build relationship

3. Negotiate outline Terms

1. Conduct initial enquiries

2. Value the business

3. Consider financing Structure

Offer Letter/

Term Sheet

ApproachEnquiries/

Negotiations

Due Diligence

Completion Exit




Private EquityFirm

Reports/Documents

1. Disclose all the relevant information/ Documents

1. Liaise with accountants

2. Liaise with other

3. External consultants

1. Initiate external Due Diligence

Consultant

Reports

Accountant

Reports

ApproachEnquiries/

Negotiations

Due Diligence

Completion Exit


Due Diligence

Due Diligence is the process to assess the Technical and financial feasibility of the Business proposition with particular focus on the following:

Market Prospects and Technical Feasibility

Management Information System

Assumptions for Financial Projections

Latest Financial position

Assessment of ownership of assets and realizable value of inventories and debtors and Contingent Liabilities

Bank Facilities and Charge on the assets of the Company

Leased Assets

Employee Contracts, ESOP’s, PF and Pension plans

Tax benefits

Availability, Ability and Commitment of Key Management

Personnel




Private EquityFirm

Reports/Documents

1. Liaise with Legal Advisers

2. Liaise with Consultants

1. Negotiate final Terms

2. Document constitution and voting rights

1. Draw up completion documentation

Disclosure Letter

Warranties and

Indemnities

Memorandum

and Articles of

Association

Share

Holders

Agreement

ApproachEnquiries/

Negotiations

Due Diligence

Completion Exit




Private EquityFirm

Reports/Documents

1. Provide Periodic Management Accounts

2. Communicate regularly with Investors

1. Seat on Board?

2. Monitor investment

3. Constructive Input

4. Involvement in major decisions

Management

Accounts

Minutes of

Board

And other

Key Meetings

ApproachEnquiries/

Negotiations

Due Diligence

Completion Exit


Monitoring & Exit Routes

The Private Equity firms need to monitor the invested companies to protect and enhance the value of their investments.

This may involve

Appointment of Director

Periodic Financial and MIS Report

Constructive Input

Participation in key decisions

Strategic tie‐ups

Private equity firms require an exit route in order to realize a return on their investments. The time frame from investment to exit can be as little as two years or as much as ten or more years.

The exit route may be any of the following:

IPO

Sale to another investor

Repurchase by Company

Strategic/ Trade Sale

Recapitalization/ Partial Exit

Liquidation

Thank You

Fund Structure and Investment Process

Documents

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