Why and How to Invest

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Why and How to Invest
in Private Equity

Special Paper
Special Paper

An EVCA Investor Relations
Committee Paper
Written by Alex Bance

EVCA Investor Relations Committee
Max Burger-Calderon

Apax Partners (D)

Wanching Ang

Allianz Private Equity Partners (D)

Janet Brooks

ECI Ventures Limited (GB)

Patrick Cook

3i Goup Plc (GB)

Graham Dewhirst

Bridgepoint Capital (GB)

Remy Kawkabani

Credit Suisse First Boston (GB)

Javier Loizaga

Mercapital Servicios Financieros (E)

Jan Moulijn

NIB Capital Private Equity NV (NL)

Charles Soulignac

Fondinvest Capital (F)

Javier Echarri

EVCA

About EVCA...
The European Private Equity and Venture Capital Association (EVCA) exists to represent the European private equity sector. With over 950 members throughout Europe, EVCA's many roles include providing information services for members, creating networking opportunities, representing the industry in public affairs and working to promote the asset class both within Europe and throughout the world. EVCA's activities cover the whole range of private equity, from seed and start-up to development capital, buyouts and buyins, and the flotation of private equity-backed companies.

An EVCA Investor Relations Committee Paper
Written by Alex Bance
Data prepared by Michael Henningsen

contents
Contents
Part One

Introduction and Background to the Asset Class

Page 2

Part Two

Why Invest in Private Equity?

Page 5

Part Three

Approaches to Portfolio Construction

Page 8

Part Four

The Practical Aspects of Investment

Page 10

Part Five

Due Diligence

Page 13

Part Six

Monitoring the Portfolio and Measuring Performance

Page 16

Appendix

Glossary of Terms

Page 18

Introduction

Part One Introduction and Background to the Asset Class
1.

Introduction
Private equity has arrived as a major component
of the alternative investment universe and is now
broadly accepted as an established asset class
within many institutional portfolios. In Europe,
sums committed to private equity funds have
increased dramatically over the last ten years.
Consequently, many investors still with little or no
existing allocation to private equity are now
considering establishing or significantly expanding
their private equity programmes.
This document is designed to help such investors
consider the characteristics of private equity
investment and how best to approach the
construction and implementation of a private
equity portfolio. Information on private equity, by

its nature, is harder to come by than information
on the public markets. This can make it
challenging to understand the dynamics of the
asset class and to determine how best to construct
an investment strategy.
It is useful to begin with an overview of the
industry. Private equity is often categorised under
the umbrella of "alternative investments",
comprising a variety of investment techniques,
strategies and asset classes that are complimentary
to the stock and bond portfolios traditionally used
by investors. The chart below shows the main
components of the alternative investment space at
a broad level.

Alternative Investments
Private Equity

Hedge Funds

Real Estate

• Venture Capital

• Long/short

• Office

• Buyout

• Global Macro

• Retail

• Mezzanine Capital

• Event Driven

• Residential

• Special Situations

• Market Neutral

• REITs

Physical Commodities
Currencies
Interest Rates

• Arbitrage
• Emerging Markets

2.

Definition of private equity
Private equity investing may broadly be defined as
"investing in securities through a negotiated
process".
The majority of private equity investments are in
unquoted companies. Private equity investment is
typically a transformational, value-added, active
investment strategy. It calls for a specialised skill
set which is considered in more detail in Part 5
and...
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