This document provides an overview of private equity, including: 1) It defines private equity and distinguishes it from public equity, noting that it is less liquid and long-term in nature. 2) It categorizes private equity into different players like angels, venture capital, and hedge funds that invest at different stages. 3) It explains that traditional private equity primarily engages in leveraged buyouts where they take public companies private using borrowed money to increase returns.

1. Private Equity
An Overview
Clark L. Maxam, Ph.D.
Director of Research – Braddock Financial Corporation
and
El Pomar Professor of Entrepreneurial Finance – University of Colorado,
Colorado Springs

2. Private Equity – Broadly Defined
• Technically refers to any type of equity
investment in an asset in which the equity
is not freely tradable on a public market.
• Less liquid
• Long Term in nature

3. Private Equity – Categories and Players
• Angel
– Early Stage: Seed, Start-up
• Professional Venture Capital
– Early Stage, Expansion, Later Stage
• Private Equity
– Later Stage, Buyout, Special Situations
• Hedge Funds
– All Stages

4. The Private Equity Market

5. Venture Capital
Private Equity Hedge Funds
Angel
Key Player Overlap

6. Traditional Private Equity – Primary Activity
• Professional pools of capital that buy all
the publicly traded equity of target
companies = “Go Private”
• Usually done with borrowed money
– High degree of leverage
• Aka : Leveraged Buyout

7. The Basic Value Creation Formula
Fundamental Ideas
1) Re-focuses acquired businesses resulting in lower
costs and improved efficiency.
2) Value is created through basic finance that says debt
can increase firm value if you can afford it!
• Exploits corporate aversion to debt (Henry McVey,
Morgan Stanley).
3) Regulatory Arbitrage – Sarbanes-Oxley

8. The Basic Value Creation Formula
Debt can increase Value
Dupont Equation
Equity
Assets
Total
X
Assets
Total
Sales
X
Sales
NI
Equity
NI
ROE 

Leverage – Debt as % of Assets
 Equity  Multiplier  ROE

9. The Basic Value Creation Formula
Debt can increase Value
ROE
Equity
Assets
Total
X
Assets
Total
Sales
X
Sales
NI

%
16
100
16
100
100
100
160
160
16


X
X
Consider a company that takes on debt at a cost of $3 in Net Income, but
changes NOTHING ELSE.
Could drop NI to 4.8 and still match the previous ROE!!
%
40
30
12
30
100
100
160
160
12


X
X

10. The Basic Value Creation Formula
An Example – Carlyle Group
Leveraged Buyout
Case 1 (5 years) – No Profit Increase Case 2 (5 years) – Profit Increase

11. Source: International Financial Services
Regional Breakdown of Private Equity Investments
Funds Raised
69%
52%
17%
38%
7% 8%
7% 2%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
2000 2005
North America Europe Asia/Pacific Other

12. Source: International Financial Services
Private Equity Investments by Country

13. Source: National Venture Capital Association,Thomson Venture Economics

15. Source: National Venture Capital Association,Thomson

16. Source: Cambridge Associates, LLC
Cambridge Associates U.S. Private Equity Index
(period ending 9/30/2006)
0
5
10
15
20
25
30
35
1Yr
2Yr
3Yr
4Yr
5Yr
6Yr
7Yr
8Yr
9Yr
10Yr
11Yr
12Yr
13Yr
14Yr
15Yr
16Yr
17Yr
18Yr
19Yr
20Yr

17. • PE as a new Model of General Management (Jensen)
– Overcomes entrenched thinking, management and
disjoint between manager incentives and capital
markets.
– Problematic Trends
• Publicly held Private Equity – oxymoron
• Fee Structures not tied to exit
• Hedge funds in the PE business – not a transaction
business.
Private Equity Issues Going Forward

18. • 2007 estimate of$160B in dry powder 
$750B  $590B in debt appetite.
– Banking capacity is finite and already
extended.
– Potential regulatory limits
Private Equity Issues Going Forward

19. • PE Boom has been fueled by
– Historically low rates
– Regulatory arbitrage
• Both could reverse quickly and change the metrics
dramatically
Private Equity Issues Going Forward