CHAPTER 2 – FUNDRAISING

TYPES OF PRIVATE EQUITY

1- VENTURE CAPITAL FUNDS:

Usually invest in start ups or early staged companies. They know the market and have
profesionals that help the Company grow. They acquire minority stakes.
Ex: Facebook/ Dropbox/ Spotify (created in 2006 but didn’t have any investors until
2011 because of the geographycal barriers )

2- LEVERAGED BUYOUT FUNDS :

They look for companies that could take some changes, create value and then sell it.
This is done in mature companies, this way the leverage is higher. They buy a big stake
of the Company and usually have to fire the manager. They need the controlling stake
to make the big changes that are necessary.
”Leverage”- they want to acquiere leverage to have total control, in this cases the
companies have taken a lot of credit from Banks so what they have to do is return first
the money the Company owes ( interest is around 5-10%). They invest in mature
companies because this way companies have enough money to pay back their credits.
Usually these type of funds are successfull .

3- GROWTH FUNDS:
They invest in a Company, make it grow and then obtain profit form selling it.
Ex: Dropbox, IVP invested in 2011, 4 years after the original investment (a diferencia
del VC) that way they knew that the Company had growth perspective.

4- MEZZANINE CAPITAL FUNDS:

This funds deal with debt. There exists senior debt- safest debt for shareholders; low
risk but low interest rate.
This type of funds deal with: Subordinate debt( or mezzanine debt) : higher risk
therefore hihger return. However it has less risk than equity debt. Subordinate debt is
the debt in the middle. These funds dont’ want to be part of the Company, they give
you debt.
Ex: PENTA- flexible growth- deals with small/médium firms that need debt to expand.
They dont invest in new or distress companies)

5- DISTRESSED PRIVATE EQUITY FUNDS:

They invest primarily in companies that are in a bad situation. These companies have
something that is good to maintain but also it is very cheap to invest in it because of
it’s current situation. Usual exit: private sale ( not a good name in the market after
their bad financial situation so going public is a mistake).

6- FUNDS OF FUNDS:
Double duediligence. High costs. Usually they dont say they are funds of funds to not
having to go though all the fiscal/financial trouble. Can achieve greater diversification
and receive access to specific investments not available internally.
All private equity funds have something in common:
 Illiquidity
 Long-term investment horizon- This is a very long run investment, once
you get in it is very hard to get out of it.
 Investments are actively managed by general partners- a lot of
investment in doing research . This is why it is very expensive

TYPES OF PARTNERSHIPS

1- Limited partners (fund investors): In these cases, they supply capital to the
fund, pay management fees for general partners to operate the fund (you need
to pay to carry out the whole process). At exit, receive the cost of investment +
80% of the profit. They want to protect their money (initial investment) .
At minimum they have to receive what they have invested

2- General partners: They raise capital from investors,manage day-to-day

operations of the fund, receive management fees for managing the fund
At exit, receive 20% of the profit ONLY HAPPENS WHEN LIMITED
PARTNERS GET THEIR MONEY BACK.
They open the fund and do the fundraising. Professionals that have a good
understanding about what and how it is done.

3- Angel investors: Individuals investing personal funds, provide early stage

financing (between “borrowing money from friends and family” and VC
investment). They usually are more mentors than investors. They might act as
intermediaries: introduce firms to VCs and syndicate with other angels.

4- Endowments: investments of universities or foundations

5- Pension funds: invest contributions of employees

6- Corporations: banks and insurance companies invest to offset their future

payouts. Corporations are often more interested in innovation than investing in
their industries

7- Sovereign wealth funds: are affiliated with governments. Ex: Norway

Government Pension Fund

8- Financial intermediaries: financial advisors and consultants, funds of funds

LIMITED PARTENRSHIP AGREEMENT

This document is very specific, the more detailed the better. Usually it includes a lot of
hypothetical situations that might happen to have every possible outcome covered
legaly. It must include a detailed description of the following :
 1- Characteristics of the fund:
 Size of the fund
 Contributions by general and limited partners
 Life of the fund
 Termination clause
2- Management of the fund:
 intended to control actions of general partners and align their
incentives with those of limited partners
 % of investment in one company
 use of debt
 investment in firms’ other funds
3- Activities of the general partners:
 personal investments (conflict of interests)
 selling their share of the fund (changes their incentives)
 future fundraising (conflict of interests)
 limit on other projects (conflict of interests, attention span)
 accepting new general partners
4- Types of investments

COMPENSATION

Is crucial to align interests of general and limited partners

Compensation structure: Usually within a firm the issue with the managers is that
they don’t have a stake of the company so they want to save their jobs and get their
salaries. In some companies managers are given incentives ( stock of the company,
conditions- if the stock reaches x you can liquidate your stock of the companies…)
General partners have to be committed to the cause. The distribution is usually
between 1-2%.

Management fees(1%-2%):
 received by general partners
 paid for daily expenses to operate the fund
 could change depending on the life cycle of the fund

Carried interest (~20%):

 represents share of investment gains received by general partners
 gains are based on the value of exited investments
 allows partners to start receiving payments earlier
 CARRIED INTEREST: This is what the managers get . Only after limited and
generals get their initial investments .

Very frequently funds loose money. How do limited partners get their money back ?
General partners might have to redistribute the allocations and sometimes pay limited
partners ( they get the money out of other companies)- this is like an incentive for
limited partners so they continue receiving money and investing.

Other fees (1%-5%):

 monitoring fee (essentially a redistribution from limited to general
partners)
 transaction fees

Capital call:
 limited partners do not have to pay a full investment amount right away
once they are
 general partners have calls when money is needed for immediate
investments

When will the funds have lower fees ?

Usually in the beging of the existance it takes a lot of work , resources and this is the
time when the fees are higher. At the end of the fund the Split gets lower because
there is less effort needed.