Understanding Private Equity – A Primer for Sellers

About the Episode

Listen as we take a deep dive into the world of private equity with Jeff Hooke, author of five books on M&A, including his most recent book – The Myth of Private Equity: An Inside Look at Wall Street’s Transformative Investments. Jeff has been the director of a $5 billion private equity firm and an investment banker at Lehman Brothers. In this show, we cover everything you need to know about private equity if you are an entrepreneur and are considering a sale to a private equity firm, including how private equity firms operate and are structured, what investments they prefer to make, and how they acquire companies.

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In this Episode

Highlights

• Target companies are low-tech with minimal debt and consistent cash flow. Consistent cash flow is required to service the debt.
• There are approximately 4,000 private equity funds, in addition to approximately 4,000 active publicly traded firms.
• The United States stock market is valued at approximately $40 trillion. The private equity business is valued at approximately $3 trillion to $4 trillion, or about 10% of the value of the US-stock market.
• Private equity is just that – “private” – so data is limited.
• The first major fund was started by KKR in the 1980s.
• 65% of the private equity business consists of leveraged buyouts, another 20% consists of venture capital, and 15% is in growth capital and distressed funds.
• Venture capital is an unleveraged minority investment in a high-growth, highly scalable (e.g., tech) company that may be losing money and can’t support their debt payments.
• Private equity investments are highly leveraged, which magnifies returns (or losses).
• Limited partners consist of pension funds, foundations, and sovereign funds whose objective is preservation of capital and diversification – their return expectations are 8% to 9% per year with minimal downside risk. Large limited partners invest in hundreds of PE funds.
• The average PE deal structure consists of 20% to 25% down payment, 5% to 10% seller note, and 65% to 75% third-party (bank) financing.
• The typical life of a PE fund is 10 to 12 years.
• Most professionals in the private equity field come from Wall Street.
• The typical PE firm charges a 2% annual management fee.
• The cost of capital is much lower for public companies than for private firms.
• Most PE firms are industry agnostic.

Learn More About This Episode

• Business Valuation & Return on Investment (ROI)
• M&A Guide | The 4 Types of Buyers of Businesses

Resources Mentioned in This Episode

• “The Myth of Private Equity, An Inside Look at Wall Street’s Transformative Investments”

Meet Our Guest

Jeff Hooke

Senior Finance Lecturer at Johns Hopkins Carey Business School | Baltimore, MD, Washington, D.C

Jeff is currently a senior finance lecturer at Johns Hopkins Carey Business School, and a Senior Advisor at Focus Investment Bank in Washington, D.C. Previously, he was a Managing Director of Focus. Earlier, he was Vice President of Research at the Committee on Economic Development (CED), a Washington think tank. He has also been a director at the Emerging Markets Partnership, a $5 billion private equity group, and a Principal Investment Officer of the International Finance Corporation, the $30 billion private sector division of the World Bank.

His New York investment-banking career covered two major firms: Lehman Brothers and Schroder Wertheim. He began his career as an investment officer in the private placement department of Metropolitan Life Insurance. Jeff has an MBA from the Wharton School and a BS degree (cum laude) from the University of Pennsylvania.

Jeff is the author of five books on finance:

• The Myth of Private Equity, An Inside Look at Wall Street’s Transformative Investments (Columbia University Press, 2021)
• M&A, A Practical Guide to Doing the Deal (John Wiley & Sons, 2nd edition, 2015)
• Security Analysis and Business Valuation on Wall Street: A Comprehensive Guide to Today’s Valuation Methods (Wiley, 2nd edition, 2010)
• The Emerging Markets: A Practical Guide for Corporations, Lenders, and Investors (John Wiley & Sons, 2001)
• The Dinosaur Among Us: The World Bank and its Path to Extinction” (BookSurge, 2007)

Jeff’s specialties cover a wide range of financial areas, including business valuation, mergers and acquisitions, international finance, emerging markets, private equity, investor relations, corporate finance, and equity and security analysis.

In addition to his books on finance, Jeff is the author of multiple peer-reviewed academic papers and has spoken in front of many university and industry groups around the world. In December 2021, he spoke before both the Harvard and Wharton business schools about his newest book.

LinkedIn: https://www.linkedin.com/in/jeffhooke/