2d yr full time
possible exam – 1-1.5 on last day
Jan. 10, 2012
Why take this class?
* Reason 1: Leveraged acquisitions (LAs) aren’t going away * Lots of decline in 2007, 08, 09
* 10, 11, 12 little better
* M&A isn’t going anywhere
* LA and PE isn’t going anywhere – may decrease, but doubtful * Over 1 tril. avail.
* Big factor: big institutional investors (pension funds, CALPERs) * PE drives a ton of returns; outperforms public markets * Over half of UMI endowment is in lev. aqs.
* David Swenson?
* Growing internationally
* Went US > Europe > global
* Reason 2: LA is not a narrow area of the law
* Applicable to most big law activity—just a lot going on at the same time * M&A
* SR secured financing deal
* GK represents these guys
* Subordinated debt
* This is half of what Cahill does
* Equity shareholder deal
* Management incentive deal
* Executive ownership arrangement
* Factors in employment law too
* PE Fund Formation
* We’ll look at
* offering brochures
* fund agreement
* LP agreement for LA fund
* Looks like RE dev. deal—the template actually comes from RE * LLP operating agreement
* Mark up exercise
Random question answering this semester
Walk though syllabus
What is private equity?
* Includes a lot: LA, VC, turn-around, PIPE, others
* LA high-return comes from financial engineering
* VC high return comes from growth
* Lutz: high-risk, high-return investing, in active business enterprises, that is privately negotiated and managed by others, where the investor takes an active role. 1. high-risk, high-return investing (20–30+ ROI)
2. privately negotiated
3. in active business enterprises
4. managed by others
5. investor takes an active role
If a transaction fails to meet any of these five characteristics, it’s not private equity * As distinguishable from
* Hedge fund
* Real estate private equity
* This transaction is pretty similar to a leveraged acquisition of a building rather than a business—but not always in an “active business enterprise”
What is a private equity fund?
* Lutz: A closed-end, limited life, pool of capital obtained by fund managers from passive investors for the purpose of making private equity investments * Funds.
* Arranged as LPs
* Why? Pass through tax treatment. LP avoids double tax. * So why not use LLCs?
* No one used LLCs until 1997sh (only formed in Utah in 1970s) * Closed-end.
* Finite period of investment—every investor commits a set amount at the outset * Commitments are on a blind basis
* Single cycle investment
* Limited life
* 10-14 year
* 1-6 yr investment period
* remainder period, funds are returned to investors * Management compensation
* 2 and 20 (KKR invented the 2 and 20)
* 2% annual management fee, based on the amount of committed capital * varies a little
* 20% carried interest of profits that the fund makes on investments * this varies a little
* Passive investors
* Mainly pension funds (CALPERs)
* Sovereign wealth—the investing arm of a foreign government (Norway) * Insurance companies (they have some limits)
* Endowments (universities)
* Family offices (wealthy families)
* Fund of funds (Bon French, adam...