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STUDENT NUMBER 2014458
MN-3004: Investment Banking
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Coursework 2
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Section A: Task 1

To evaluate the performance of the funds JTR I and PQC II, we must first examine the economic and
governance terms associated with them. This report will analyse how these terms will potentially
impact the interests of General Partners (GPs) and Limited Partners (LPs).

Due to Private equities’ complicated structure, and specialised function certain professional jargons
were developed in which outsiders may have difficulties understanding (Palmer, 2023). Hence, it is
important to define and examine these “jargons”. We will divide these professional jargons into two
parts, such as Economic Terms and Corporate Governance Terms.

Economic Terms

To start, we are talking about the economic terms that are present to these private equity funds.
These being Actual Fund size, Management Fees, Carried Interest, Hurdle Rate, Term of the fund and
Vintage Year. Actual Fund Size is a fixed sum stated in the fund prospectus. For GPs, the Fund size
provides an ample capital for large, or more lucrative potential investments, such as significant
buyouts or diversification into a more profitable market. This can potentially mitigate risk due to
diversification, enhancing their portfolio performance (Royal, 2023). A fund size of £500 million for
each fund will enable GPs to participate in larger, and more rewarding investments. Although this
also brings heightened risks of significant financial losses due to the fund underperforming, which
will erode investor trust, which will negatively impact a GPs’ ability to raise fund in the future. More
so for smaller LPs, a large capital call could put a pressure on liquidity. LPs are likewise exposed to
greater risk, necessitating greater research and faith in the GP's investment judgement.

Moving on, Management Fees reflect a portion of committed capital that is paid to the GPs on an
annual basis over the fund's tenure. Although the Management Fee is low for both funds (JRLT I: 1%,
PQC II: 2%) this is still a guaranteed expense for LPs, this often cause tension between GPs and LPs as
its GPs often increase the Management Fee, which leads for higher expenses for LPs (Witkowsky,
2021).

Next, carried interest indicates the GP’s share of profits generated by the private equity fund which is
20% for JTR I and 16% for PQC II. If the fund performs well, GPs will gain significant shares, whereas if
it underperforms, they may receive little to no carried interest. LPs will benefit from a higher carried
interest, as this acts as an incentive for GPs to aim for higher return, leading to better outcomes for
their investment.

Subsequently, the lowest rate of return necessary for a business or investor to proceed with a project
is known as the hurdle rate. When calculating their hurdle rate, most businesses include a risk
premium, giving projects with larger risks a higher rate and those with more moderate risks a lower
rate. For LPs, a relatively high hurdle rate is beneficial as it sets a substantial performance target
before GPs can earn carried interest. However, it might also incentivize GPs to pursue riskier
investments to surpass this threshold.

Lastly, vintage year is the year the fund was launched, it enables performance comparisons of funds
of the same stage and industry focus. Term of the fund indicates the funds life cycle which for JTR I is
9 years, whereas for PQC II is 8 years.

Corporate Terms:

To start with, there is 1 corporate term that is present in both funds which is Distribution Waterfall:
Total return. It is one of the two distinct distribution mechanisms, the latter being deal-by-deal
waterfall. Deal-by-deal waterfall allows earlier distribution of carried interest to the GP after each
individual deal (Katten, 2020), whereas total return waterfall results in an earlier distribution to LPs
as carried interest is calculated on the profits of the entire portfolio.

Performance Assessment:

Excel was used in order to calculate the Distributed to paid in (DPI), Residual Value to paid in (RVPI)
and Total value paid in (TVPI). It is also worth mentioning that Total Distribution Waterfall was used
to calculate these datas. These datas/screenshots are shown in the appendix.

JRT I is characterized by a DPI of 0.55, an RVPI of 1.69, a TVPI of 2.23, a hurdle rate of 11%, a Gross
IRR of 12%, a Net IRR of 7%, 90% capital called, 1% management fees, and 20% carried interest. JRT
I's approach, with a higher hurdle rate and Gross IRR, suggests a focus on higher-yielding
investments, potentially offering a balance between risk and high returns. Its Net IRR of 7% indicates
a respectable return after accounting for fees and carried interest, reflecting efficient fund
management.
PQC II displays a DPI of 0.71, an RVPI of 5.78, a TVPI of 6.49, a hurdle rate of 10%, a Gross IRR of 10%,
but a notably lower Net IRR of 5%, 95% capital called, 2% management fees, and 16% carried
interest. Additionally, PQC II does not have a clawback provision.

PQC II's strategy, indicated by its lower Gross IRR and hurdle rate, may lean towards steady, albeit
slightly lower-yielding investments. The Net IRR of 5%, lower than that of JRT I, suggests that its
higher management fees and aggressive capital utilization might be impacting its net returns more
significantly.

Subsequently, JRT I’s alignment of a higher hurdle rate with a higher Gross IRR reflects an aggressive
strategy targeting high returns, while PQC II’s lower hurdle rate complements its less aggressive
Gross IRR. Moreover, JRT I balances lower management fees (1%) with a standard carried interest
rate(20%) which leads to a healthier Net IRR of 7%.

In comparision to, PQC II’s higher management fee and its absence of a clawback provision, despite a
slightly lower carried interest rate, results in a lower Net IRR. This could be a point of concern for
investors seeking efficiency in fund management. Also, PQC’s lack of clawback position may raise
question about it’s long term alignment of interests which is due to it’s aggressive investment
approach.

Overall, JRT reflects a strategy that focuses on high-yield investments with efficient capital use,
managing to maintain a strong balance between gross returns and net investor gains. Whereas, PQC
II exhibits a more aggressive investment approach with higher operational costs. Its unique fee
structure and the absence of a clawback provision might appeal to investors with a higher risk
appetite, despite its lower Net IRR.

In conclusion, JRT I and PQC II present distinct investment profiles. JRT I leans towards higher returns
with efficient capital utilization, achieving a commendable Net IRR. In contrast, PQC II, despite its
higher gross metrics and aggressive strategy, faces challenges in net profitability as reflected in its
lower Net IRR. This comparison underscores the importance of considering a comprehensive set of
metrics and fund terms in evaluating private equity fund performance, highlighting how different
strategies and fee structures can significantly impact investor returns.
 Reference List

Palmer, B. (2023, August 29). Learn the lingo of private equity investing. Investopedia.
https://www.investopedia.com/articles/stocks/09/abcs-of-private-equity.asp.

Royal, J. (2023, June 16). Why is portfolio diversification important for investors? Bankrate.
https://www.bankrate.com/investing/diversification-is-important-in-investing/
#:~:text=Diversification%20involves%20spreading%20your%20money,lead%20to%20a%20higher
%20return .

Witkowsky, C. (2021, October 19). GPs shift more expenses off management fee as LPs look for better
disclosure. Private Funds CFO. https://www.privatefundscfo.com/gps-shift-more-expenses-off-
management-fee-as-lps-look-for-better-disclosure/.

Katten, (2020, October 6). ILPA Releases Deal-By-Deal Model LPA. Katten. https://katten.com/ilpa-
releases-deal-by-deal-model-lpa.

Appendix: Detailed Financial Calculations for JRT I

Appendix B: Detailed Financial Calculations for PQC II
 Section B:

Summary

This report compiles information on Mergers and Acquisitions (M&As) within the banking sector in
the USA and EU for 2021, focusing on transactions that resulted in a change of ultimate control of
the target banks and had a value of 1 million USD or more.

Market Overview Trends

 A notable decrease in the number of transactions and overall deal values compared to the
previous year, suggesting a market readjustment following the surge in 2021 (Deloitte, 2021).

Number of transactions, increased from 2020 to 2021, but decreased the next year. The graph also
shows a decrease in value for its transactions.

 According to ORBIS M&A, the leading acquiror for target banks with value of at least $1
million dollars is USA, followed by Japan, with GB only able to acquire 1.

Number of Merger's and acquisitions with a

value of £1million
9
8
7
6
5
4
3
2
1
0
United States Italy Netherlands Spain Austria Japan Germany FranceGreat Britain
 A greater amount of consolidation and M&A may result from the value and volume of
mergers reaching their lowest point since the global financial crisis in 2019. This is because
the European Central Bank has permitted banks to recognise an accounting gain known as
negative goodwill, or bad will, in situations where the target bank is trading below tangible
book value. This regulatory action is anticipated to hasten the consolidation of mid-sized
banks in Europe by strengthening the viability of the combined entity's business model.

• Cross-Border M&A deals: In the euro area, banks would use subsidiaries to acquire targets in
nations where they already had a physical presence. These deals typically followed pre-existing
financial linkages. This tendency was more noticeable among banks operating in the core euro
area nations of Belgium, Germany, the Netherlands, and Austria than it was outside of those
clusters. Banks from nearby nations were also likely to interact with French and Spanish banks.
 Reference List

Deloitte. (2023). 2023 banking and capital markets M&A outlook. Deloitte.
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-2023-
banking-capital-markets-outlook.pdf.

KPMG. (2021). European banking consolidation. KPMG.

https://kpmg.com/xx/en/home/insights/2021/02/european-banking-consolidation.html.

European Central Bank. (2021, November). Bank mergers and acquisitions in the euro area: drivers
and implications for bank performance. ECB.
https://www.ecb.europa.eu/pub/financial-stability/fsr/special/html/
ecb.fsrart202111_02~33910adb15.en.html.

Appendix: How Data was collected

Used Orbis M&A to search for data regarding M&A- First step was to tick location and then USA and
UK.
Moving on, navigated to activity-industry, and move on to US SIC and checked commercial banks and
savings institutions.

Then time period needs to be defined, so we navigated through deals-time period, and input the
date range of 01/01/21-31/12/21, which was the date specified by the module handbook.
We then navigated to Deal status to check Completed-confirmed and Completed-assumed.

Next we define the deal type under Deal – Deal type and select Acquisition and Merger

As we’ve gathered the necessary data for the M&A we are then able to see the total searches of 245,
and the results then needs to be viewed.
Proof of the downloaded excel spreadsheet from ORBIS M&A
Graph from European central bank showing cross border M&A deals between countries in the EU.