Inside Private Equity: The Professional Investor's Handbook

292 Pages·2009·1.629 MB·English

by  James M. Kocis, James C. Bachman IV, Austin M. Long III, Craig J. Nickels

Praise for
(continued from front flap) $70.00 USA/$84.00 CAN
Kocis
INSIDE PRIVATE EQUITY
A growing number of fi nancial institutions and profes-
Bachman
sionals are investing in private equity for its diversifi ca- P
rivate equity, the business of investing in private
tion benefi ts and the opportunity to participate in sub- Long
companies, has quickly grown from a cottage in-
stantial long-term gains. But many are fi nding it diffi cult
“This handbook is essential reading for all investors in the private markets. It is especially Nickels dustry to a mature asset class. For those that sup-
to manage things they can’t always measure. Filled with
helpful in understanding the mechanics of portfolio construction and challenges of performance ply the money—the endowments, foundations, pension
in-depth insights and expert advice, Inside Private Equity
measurement of private equity and venture capital investing.” funds, family offi ces, and others—learning the business
focuses on what you can measure and how this process
—Susan J. Carter, President and CEO, Commonfund Capital, Inc. I of private equity can be one of its principal challenges.
will allow you to better manage these assets—as well
Inside Private Equity was written for this audience to
as your time. N
“An invaluable handbook.” The Professional Investor’s Handbook help provide a general understanding of how to invest
JAMES M. KOCIS is the founder and President of the —Sir Ronald Cohen, Chairman of The Portland Trust, S in, monitor, and measure the performance and risk of
Burgiss Group, one of the leading software and fi nancial Portland Capital LLP, and Bridges Ventures private equity.
I
service providers to the private equity industry. He and
“Private equity fund investing is often viewed as more art than science, though in reality it With Inside Private Equity, four experienced fi nancial
his team designed Private i, the world’s most popular D
requires an even blend of both skills. This book focuses on the science behind the art. It covers
professionals—James Kocis, James Bachman, Austin
program for private equity portfolio management. all the major concepts while introducing some great new ones, and must be required reading
Long, and Craig Nickels—share their broad range of
Private i is used to manage in excess of $1 trillion of for serious private equity market participants.” E
private equity experience to help demystify this asset
private equity investments. —Chihtsung Lam, founder and Managing Director of
class.
Axiom Asia Private Capital
P
JAMES C. BACHMAN IV, CAIA, is the Head of Re-
Divided into four comprehensive parts—Setting the
search at the Burgiss Group. In this role, he is principally “The authors have created a simple and pragmatic handbook for a very complex asset class.
R Foundation, Measurements and Comparisons, Topics
responsible for research-related initiatives as well as Their collective experience is invaluable. This is a fantastic read for new private equity investors
on Risk, and Conclusions—Inside Private Equity opens
expanding the technology platform’s portfolio manage- as well as experienced portfolio managers looking for additional tools that can be used in
I with a brief introduction to this discipline and sets the
ment capabilities. monitoring their current investments and in the process of screening new opportunities. Inside
stage for more technical discussions to follow. Here,
Private Equity is a great foundation for investors looking to improve their analysis of an exciting V
you’ll become familiar with everything from traditional
AUSTIN M. LONG III, JD, CPA, is the Head of Align- asset class.”
A industry measurements to a structured approach to
ment Capital, a private equity consultancy. He has been —Timothy B. Moore, Director of Alternative Investments, PERA of Colorado
portfolio management.
active in the private markets since 1987, when he co-
T
founded what was to become the University of Texas “A real practitioner-focused contribution bringing performance measurement down from the
To discover this more structured approach, Inside Private
Investment Management Company (UTIMCO) private theoretical to the practical.” E
Equity:
investment group. —Jesse E. Reyes, Reyes Analytics

E (cid:127) Provides an exhaustive review of internal rate of
CRAIG J. NICKELS, CFA, is the Director of Private
“Inside Private Equity clearly explains, without oversimplifying, the hard work of managing
return (IRR) calculations
Markets for Washington University in St. Louis, where private equity portfolios. Full of cogent advice from an experienced team. Great work!”
Q (cid:127) Outlines various peer universes and benchmarks
his responsibilities include the oversight and manage-
—Lawrence M. Unrein, Managing Director and Head of (cid:127) Presents tools that will help you uncover both how
ment of the university’s private market investments the Private Equity Group for J.P. Morgan Asset Management
U and where wealth was gained and lost
within the multi-billion dollar endowment.
(cid:127) Examines the effect portfolio size has on performance
“A handy guide to address the pitfalls and issues of investing in private equity that most James M. Kocis James C. Bachman IV Austin M. Long III Craig J. Nickels
I expectations
Jacket Design: Loretta Leiva institutional investors have wrongly ignored. Well done!”
T (cid:127) Explores two different modeling techniques for cash
Jacket Illustration: © Getty Images —Dory Wiley, President and CEO of Commerce Street Capital
management
and Trustee and Chairman of the Investment Committee Y
(cid:127) And much more
at Teachers Retirement System of Texas
By providing straightforward explanations and detailed
examples of the concepts covered, Inside Private Equity
demystifi es many of the common assumptions about this
asset class and puts the various pieces of the private
equity puzzle in perspective.
wileyfi nance.com
(continued on back flap)
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Inside
Private Equity
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Inside
Private Equity
The Professional
Investor’s Handbook
JAMES M. KOCIS
JAMES C. BACHMAN IV
AUSTIN M. LONG III
CRAIG J. NICKELS
John Wiley & Sons, Inc.
iii
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Copyright(cid:1)C 2009byJamesM.Kocis,JamesC.BachmanIV,AustinM.LongIII,andCraigJ.Nickels.All
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LibraryofCongressCataloging-in-PublicationData:
Insideprivateequity:theprofessionalinvestor’shandbook/JamesM.Kocis[etal.].
p.cm.–(Wileyfinanceseries)
Includesbibliographicalreferencesandindex.
ISBN978-0-470-42189-5(cloth)
1.Privateequity. 2.Venturecapital. 3.Portfoliomanagement. 4.Investments.
I.Kocis,JamesM.
HG4751.I572009
332.63(cid:2)22–dc22
2008045556
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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To Nick Vallario
and in memory of Shao Xin Kai
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Contents
Foreword xi
Preface xvii
Acknowledgments xxi
HowtoUseThisBook xxiii
AbouttheAuthors xxv
PARTONE
SettingtheFoundation
CHAPTER1
Background 3
CHAPTER2
PrivateEquityPerspectives 13
CHAPTER3
ManagingtheInvestmentProcess 29
CHAPTER4
CapturingaPortfolio 51
CHAPTER5
TrackingPortfolioHoldings 63
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viii CONTENTS
PARTTWO
MeasurementsandComparisons
CHAPTER6
StandardMeasures 79
CHAPTER7
TheIRR 89
CHAPTER8
UniverseComparisons 111
CHAPTER9
FlawedResearchMethodologies 129
CHAPTER10
VisualizingPrivateEquityPerformance 137
CHAPTER11
TheIRRandthePublicMarkets 153
PARTTHREE
TopicsonRisk
CHAPTER12
PerformanceAttribution 165
CHAPTER13
TheConcentrationofWealth 175
CHAPTER14
TheDiversificationofPortfolios 185
CHAPTER15
CashManagementModels 193