This second edition of Introduction to Private Equity ismore than an update, it reflects the dramatic changes which haveaffected an industry which is evolving rapidly, internationalizingand maturing fast. What is recognized as a critical yet groundedguide to the private equity industry blends academic rigour withpractical experience. It provides a clear, synthetic and criticalperspective of the industry from a professional who has worked atmany levels within the industry; including insurance, funds offunds, funds and portfolio companies. The book approaches the private equity sector top-down, toprovide a sense of its evolution and how the current situation hasbeen built. It then details the interrelations between investors,funds, fund managers and entrepreneurs. At this point, theperspective shifts to bottom-up, how a private business is valued,how transactions are processed and the due diligence issues toconsider before moving ahead. Introduction to Private Equity, SecondEdition covers the private equity industry as a whole,putting its recent developments (such as secondary markets,crowdfunding, venture capital in emerging markets) intoperspective. The book covers its organization, governance andfunction, then details the various segments within the industry,including Leveraged Buy-Outs, Venture Capital, Mezzanine Financing,Growth Capital, Distressed Debt, Turn-Around Capital, Funds ofFunds and beyond. Finally, it offers a framework to anticipate andunderstand its future developments. This book provides a balanced perspective on the corporategovernance challenges affecting the industry and draws perspectiveson the evolution of the sector, following a major crisis.

Cyril Demaria specializes in private equity and combines practical and entrepreneurial experience, academic knowledge and lecturing experience. Prior to founding and managing Pilot Fish, a series of private equity funds, he was Chief Investment Officer of Tiaré Investment Management AG (Zurich). He previously created a multi-strategy fund of funds focused on environment (Pionat Viable Investments). Prior to that, he was an Investment Associate in a Swiss private equity fund of funds; a Portfolio Manager responsible for private equity funds investments for a French insurance group; and Head of Corporate Development of a French IT firm in charge of acquisitions and financing. He started his career in an American hybrid venture capital and fund of funds firm. A French citizen, Cyril holds a BA in Political Sciences from the Institut d'Etudes Politiques (Lyon), a Master in Geopolitics applied to Money and Finance (Paris); a Master in European Business Law (Paris) and is a graduate from HEC (Paris, specialized in Entrepreneurship). He is a doctoral candidate at University Sankt-Gallen and an Associate Professor at EDHEC (Nice, Lille, London), ESCP-Europe (London), ESCE (Paris), EADA (Barcelona), Fipecafi (Sao Paulo), USP (Sao Paulo) and IFP Business School (Paris). He lectures on "Private Equity", "LBO", "Money and Finance", and "International Finance". He notably holds executive training sessions at the Association Française des Investisseurs en Capital (Paris), and the Société Française des Analystes Financiers (Paris). Cyril collaborates regularly as an expert with the SECA, AFIC and EVCA.

This second edition of Introduction to Private Equity is more than an update, it reflects the dramatic changes which have affected an industry which is evolving rapidly, internationalizing and maturing fast. What is recognized as a critical yet grounded guide to the private equity industry blends academic rigour with practical experience. It provides a clear, synthetic and critical perspective of the industry from a professional who has worked at many levels within the industry; including insurance, funds of funds, funds and portfolio companies.

The book approaches the private equity sector top-down, to provide a sense of its evolution and how the current situation has been built. It then details the interrelations between investors, funds, fund managers and entrepreneurs. At this point, the perspective shifts to bottom-up, how a private business is valued, how transactions are processed and the due diligence issues to consider before moving ahead.

Introduction to Private Equity, Second Edition covers the private equity industry as a whole, putting its recent developments (such as secondary markets, crowdfunding, venture capital in emerging markets) into perspective. The book covers its organization, governance and function, then details the various segments within the industry, including Leveraged Buy-Outs, Venture Capital, Mezzanine Financing, Growth Capital, Distressed Debt, Turn-Around Capital, Funds of Funds and beyond. Finally, it offers a framework to anticipate and understand its future developments.

This book provides a balanced perspective on the corporate governance challenges affecting the industry and draws perspectives on the evolution of the sector, following a major crisis.

Foreword to the Second Edition xi

Acknowledgements xiii

About the Author xv

Introduction 1

0.1 A Moving Target 1

0.2 A Consubstantial Lack of Information 2

0.3 Benign Neglect, Malign Consequences 5

0.4 Knowing the Devil to Circumvent it 6

PART I WHAT IS PRIVATE EQUITY? 9

1 Private Equity as an Economic Driver: An Historical Perspective 11

1.1 Pooling Interests to Identify and Exploit Sources of Wealth 12

1.1.1 Identify, Control and Exploit Resources 13

1.1.2 Leverage Public Policies and a Favourable Business Environment 15

1.2 Championing Entrepreneurship 17

1.2.1 No Private Equity without Entrepreneurs 17

1.2.2 Convert Ventures into Business Successes 20

1.2.3 Entrepreneurship and Private Equity Form a Specific Ecosystem 22

1.3 Conclusion: An Attempt at Definition 24

1.3.1 A Negotiated Investment in Equity or Quasi-Equity 24

1.3.2 A Fixed Maximum Term 25

1.3.3 Implying Specific Risks 25

1.3.4 With High Expected Returns 25

1.3.5 Undertaken on Behalf of Qualified Investors 25

1.3.6 To Support Entrepreneurs 25

2 Modern Private Equity - A French Invention? 33

2.1 USA: The Foundry of Modern Private Equity 34

2.1.1 The Strict Separation of Public Policies and Public Financing 34

2.1.2 The Separation of Public Endeavours and Private Efforts; the Subsequent Support of the Former for the Latter 35

2.1.3 Governmental Input: SBA, DARPA and ERISA 35

2.1.4 Universities, Defence and Disruptive Innovation 36

2.1.5 Challenges 37

2.2 Europe: Adapting a Successful Model or Creating its Own? 39

2.2.1 Governmental Input: Legal Changes, Tax Rebates, Infrastructures and Pan-EU Market 40

2.2.2 National Champions, Information Technologies and Incremental Innovation 43

2.2.3 Challenges 47

2.3 Conclusion: Emerging Markets, Building Castles on Sand? 57

PART II THE PRIVATE EQUITY ECOSYSTEM 71

3 Private Equity: A Business System Perspective 73

3.1 We Are All Investors in Private Equity 73

3.1.1 Sources of Capital 73

3.1.2 Private Equity Investment Rationale 79

3.2 Organisation and Governance of Private Equity Funds 91

3.2.1 Private Equity Fund Managers are Financial Intermediaries 91

3.2.2 Incentives and Fees 93

3.2.3 Conflicts of Interest 95

3.2.4 Power, Checks and Balances 98

3.3 Measuring Performance, Managing Risks and Optimising Returns 99

3.3.1 Measuring Performance in an Uncertain Context 99

3.3.2 Managing Risks and Optimising Returns 103

3.4 Pitfalls and Challenges 110

3.5 Conclusion 113