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Herausgeber: John Wiley & Sons
Kategorie: Fachliteratur
Sprache: Englisch

Beschreibung

**50,000+ copies of the first edition sold**

**Mastering Private Equity – Second Edition: Navigating New Horizons in Private Markets**

Mastering Private Equity, the definitive guide to private equity (PE) since 2017, has been fully updated to reflect the current state of the industry, the latest market data, and the innovation reshaping the private capital industry.

Written for a professional audience, the Second Edition of Mastering Private Equity is a valuable and unique reference for investors, finance professionals, students, and business owners looking to engage with PE firms or invest in PE funds.

**What's New**

While preserving its core focus on education, the Second Edition highlights the latest industry developments, including:

A more measured and resilient Venture Capital space, following steep repricing of risk in 2021 and 3x increase in downrounds in 22-23
the rapid expansion of Private Debt, catalysed by a high-interest rate environment and the strategy’s edge in a traditional fixed income portfolio
Buy-and-Build Strategies, and PE investor’s ability to create category leading businesses and grow platforms via acquisition
PE Secondaries are de jour, as the market delivered liquidity in an inflationary and low exit environment
the step-change in responsible and impact investing, from “interesting” in 2017 to “essential” in 2025
the Democratization of Private Capital, introducing high-net-worth individuals to the asset class

Join the authors and two dozen senior industry contributors for a masterclass on the essentials of private equity and the trends driving the industry’s sustained growth.

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COVER

TABLE OF CONTENTS

TITLE PAGE

DEDICATION

LIST OF CONTRIBUTORS

FOREWORD

PREFACE TO THE SECOND EDITION

A NOTE FROM CLAUDIA ZEISBERGER

NOTE

HOW TO USE THE SECOND EDITION OF THIS BOOK

SECTION I: Private Equity Overview

1 PRIVATE EQUITY ESSENTIALS

PRIVATE EQUITY FUNDS DEFINED

THE GP PERSPECTIVE

THE LP PERSPECTIVE

THE FEE STRUCTURE AND ECONOMICS OF PE

CLOSING

REFERENCES AND ADDITIONAL READING

INDUSTRY REPORTS

ACADEMIC PAPERS

NOTES

2 VENTURE CAPITAL

VENTURE CAPITAL DEFINED

START‐UP DEVELOPMENT

THE VENTURE CAPITAL INVESTMENT PROCESS

FOR THE FIRST‐TIME ENTREPRENEUR

CLOSING

REFERENCES AND ADDITIONAL READING

INDUSTRY REPORTS

ACADEMIC PAPERS

NOTES

3 GROWTH EQUITY

GROWTH EQUITY DEFINED

GROWTH EQUITY TARGETS

THE GROWTH EQUITY INVESTMENT PROCESS

MINORITY SHAREHOLDER RIGHTS

CLOSING

REFERENCES AND ADDITIONAL READING

NOTES

4 BUYOUTS

BUYOUTS DEFINED

MANAGEMENT TEAMS IN A BUYOUT

TYPES OF BUYOUT TRANSACTIONS

CLOSING

REFERENCES AND ADDITIONAL READING

NOTES

5 ALTERNATIVE PRIVATE MARKET STRATEGIES

REAL ASSETS

DISTRESSED PRIVATE EQUITY

CLOSING

REFERENCES AND ADDITIONAL READING

INDUSTRY REPORTS

ACADEMIC PAPERS

NOTES

SECTION II: Doing Deals in PE

6 DEAL SOURCING & DUE DILIGENCE

GENERATING DEAL FLOW

DUE DILIGENCE CONSIDERATIONS

THE DUE DILIGENCE PROCESS

DUE DILIGENCE AREAS

CLOSING

REFERENCES AND ADDITIONAL READING

INDUSTRY REPORTS

ACADEMIC PAPERS

NOTES

7 TARGET VALUATION

THE VALUATION TOOLKIT

VENTURE CAPITAL

GROWTH EQUITY AND BUYOUTS

List of Illustrations

Chapter 1

Exhibit 1.1 Limited Partnership PE Fund Structure

Exhibit 1.2 Key Relationships GPs Must Manage

Exhibit 1.3 Lifecycle of a PE Fund

Exhibit 1.4 PE Dry Powder, Grouped by Fund Vintage Year

Exhibit 1.5 Lifecycle of a Successful PE Firm

Exhibit 1.6 PE Fund Cash Flow J‐curve

Exhibit 1.7 PE Fees and Carried Interest

Exhibit 1.8 PE Fund Distribution Waterfall

Chapter 2

Exhibit 2.1 Defining Characteristics of Venture Capital

Exhibit 2.2 Start‐up Development and Funding

Exhibit 2.3 Global VC Investment by Geography

Exhibit 2.4 PE is not VC

Exhibit 2.5 Fundraising Considerations for Entrepreneurs

Chapter 3

Exhibit 3.1 Defining Characteristics of Growth Equity

Exhibit 3.2 Value Creation in Growth Equity

Exhibit 3.3 Minority Shareholding Dynamics

Chapter 4

Exhibit 4.1 Defining Characteristics of Buyouts

Exhibit 4.2 Sources and Uses of Funds in a Buyout

Exhibit 4.3 Buyout Valuation and Return

Exhibit 4.4 Buyout Value Drivers

Exhibit 4.5 PE Value‐add: P2P

Exhibit 4.6 PE Value‐add: Carve‐out

Exhibit 4.7 PE Value‐add: Privatization

Exhibit 4.8 PE Value‐add: Family Business

Exhibit 4.9 PE Value‐add: Secondary Buyout

Chapter 5

Exhibit 5.1 Private Markets Assets Under Management

Exhibit 5.2 Real Assets Project Stage

Exhibit 5.3 Typical Turnaround Process

Exhibit 5.4 Distressed Debt‐to‐Control

Chapter 6

Exhibit 6.1 Annual PE Deal Funnel

Exhibit 6.2 PE Deal Sources

Exhibit 6.3 PE Due Diligence Process

Exhibit 6.4 PE Due Diligence Areas

Chapter 7

Exhibit 7.1 Enterprise and Equity Valuation

Exhibit 7.2 Valuing Early‐stage Companies

Exhibit 7.3 Valuing Mature Companies

Exhibit 7.4 Valuation Football Field

Exhibit 7.5 LTM Valuation Multiples across Sectors

Chapter 8

Exhibit 8.1 Leverage, LBO Pricing and Return

Exhibit 8.2 Two‐stage Auction Process

Exhibit 8.3 Net Debt and Target Working Capital Definitions

Exhibit 8.4 Public‐to‐Privates as a Share of Total Buyouts

Chapter 9

Exhibit 9.1 Characteristics of PE Financing Instruments

Exhibit 9.2 Simple PE Investment Structure

Exhibit 9.3 Complex PE Investment Structure

Exhibit 9.4 Equity Vehicles in PE Investment Structure

Chapter 10

Exhibit 10.1 Key Transaction Documentation in a Buyout

Exhibit 10.2 Cash Flow Cover—Cash Flow to Debt Service

Exhibit 10.3 Key Provisions in Equity Documentation

Chapter 11

Exhibit 11.1 Core Governance Principles in a Buyout

Exhibit 11.2 Active Ownership in PE

Exhibit 11.3 Corporate Governance Principles in Minority Settings

Chapter 12

Exhibit 12.1 Assessing and Incentivizing Management Teams in Buyouts

Exhibit 12.2 The PE Owner's Role: Two Views

Exhibit 12.3 Two‐tiered “Sweet Equity” Structure

Exhibit 12.4 Cash Flow and “Sweet Equity” Returns at Exit

Chapter 13

Exhibit 13.1 Operational Value Creation Levers

Exhibit 13.2 Operational Value Creation Support

Exhibit 13.3 Standard Measures of PE Value Creation

Exhibit 13.4 IVC 2.0 Value Creation Drivers

Exhibit 13.5 IVC 2.0—Isolating Alpha

Exhibit 13.6 Add‐ons Account For the Majority of Buyout Deals in Recent Year...

Exhibit 13.7 Elements in a Buy‐and‐Build Strategy

Chapter 14

Exhibit 14.1 ESG Evolution: From Risk to Opportunity

Exhibit 14.2 ESG Share of Fundraising in 2024

Exhibit 14.3 Responsible Investment Continuum

Exhibit 14.4 Three Categories of ESG

Chapter 15

Exhibit 15.1 Unrealized Value in PE Funds, Grouped by Vintage Year

Exhibit 15.2 PE Exit Preparation

Exhibit 15.3 Share of Buyout Exits by Type and Exit Volume

Exhibit 15.4 Exit Alternatives and Considerations

Chapter 16

Exhibit 16.1 PE Primary Fund and Complementary Vehicles

Exhibit 16.2 PE Primary Fund and Complementary Vehicles

Exhibit 16.3 Fund Investments

Exhibit 16.4 All Capital First Waterfall

Exhibit 16.5 Deal‐by‐deal Waterfall

Chapter 17

Exhibit 17.1 PE Fundraising Process

Exhibit 17.2 PE Fundraising Timing and Success

Exhibit 17.3 PE Fund Term Sheet

Chapter 18

Exhibit 18.1 PE in an Institutional Investor's Portfolio

Exhibit 18.2 PE Target Allocation by Investor Type

Exhibit 18.3 LP PE Portfolio J‐curves

Exhibit 18.4 LP PE Portfolio Evolution

Exhibit 18.5 PE Fund Performance Quartiles by Vintage Year

Exhibit 18.6 LP Fund Manager Selection Process

Exhibit 18.7 LP Ballooning PE Portfolio

Chapter 19

Exhibit 19.1 Evaluating PE Fund Performance

Exhibit 19.2 Gross Performance Statistics

Exhibit 19.3 Performance Comparison: IRR versus MIRR

Exhibit 19.4 Net Performance Statistics

Exhibit 19.5 Distinct Cash Flows of Gross and Net Performance

Exhibit 19.6 Global PE Versus Public Market Returns

Chapter 20

Exhibit 20.1 Winding Down a PE Fund

Exhibit 20.2 Options to Address Tail‐End Funds

Exhibit 20.3 Lifecycle of a Zombie Fund

Chapter 21

Exhibit 21.1 Overview—Ways to Market

Exhibit 21.2 Breakdown of LPs by Current Co‐investment Activity

Exhibit 21.3 LP's Perceived Benefits of Co‐investing

Exhibit 21.4 GPs' Perception of Offering LP Co‐investment Rights...

Chapter 22

Exhibit 22.1 How LPE Vehicles Generate Revenue

Exhibit 22.2 Listed PE Firm IPO and Use of Proceeds

Exhibit 22.3 Listed PE Fund

Chapter 23

Exhibit 23.1 PE Risk for Limited Partners

Exhibit 23.2 Global PE versus Public Market, Risk & Return

Exhibit 23.3 Idiosyncratic Risks Posed by PE Funds

Exhibit 23.4 PE Risk for General Partners

Chapter 24

Exhibit 24.1 PE Secondary Investment Volume, By Strategy

Exhibit 24.2 Limited Partnership Secondary Transaction

Exhibit 24.3 Structured Secondary Transaction

Exhibit 24.4 Continuation Fund Transaction Structure

Exhibit 24.5 PE Direct Secondary: Strip Sale

Exhibit 24.6 Secondary Market Pricing

Exhibit 24.7 Percentage of funds with net TVPI < 1x (2003–2022)...

Chapter 25

Exhibit 25.1 Private Debt Assets Under Management, by Strategy

Exhibit 25.2 Defining Characteristics of Private Debt

Exhibit 25.3 Credit spreads: Private Debt vs. Leveraged Loan MarketSource: F...

Exhibit 25.4 Transaction Characteristics: Sponsored vs. Independent

Exhibit 25.5 Key Terms of a Private Debt Transaction

Chapter 26

Exhibit 26.1 Global AUM by Channel

Exhibit 26.2 Global Wealth by Investor Type

Exhibit 26.3 Closed‐end and Evergreen Funds Side by Side

Exhibit 26.4 Liquidity Mechanisms

Section I

Exhibit A Total PE Industry Capital Deployed by Strategy

Section II

Exhibit B PE Value Chain

Guide

Cover

Table of Contents

Title Page

Dedication

List of Contributors

Foreword

Preface to the Second Edition

How to Use the Second Edition of this Book

Begin Reading

Acknowledgments

About the Authors

Glossary

Index

End User License Agreement

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Mastering Private Equity

Transformation via Venture Capital, Minority Investments and Buyouts

Second Edition

Claudia ZeisbergerBowen WhiteMichael Prahl

Edition History

First Edition published in 2017.

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The right of Claudia Zeisberger, Bowen White, and Michael Prahl to be identified as the authors of has been asserted in accordance with law.

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Limit of Liability/Disclaimer of WarrantyWhile the publisher and authors have used their best efforts in preparing this work, they make no representations or warranties with respect to the accuracy or completeness of the contents of this work and specifically disclaim all warranties, including without limitation any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives, written sales materials or promotional statements for this work. This work is sold with the understanding that the publisher is not engaged in rendering professional services. The advice and strategies contained herein may not be suitable for your situation. You should consult with a specialist where appropriate. The fact that an organization, website, or product is referred to in this work as a citation and/or potential source of further information does not mean that the publisher and authors endorse the information or services the organization, website, or product may provide or recommendations it may make. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Library of Congress Cataloging‐in‐Publication Data is Available:

ISBN 9781394310470 (Cloth)ISBN 9781394310333 (ePUB)ISBN 9781394310432 (ePDF)

Dedicated to Professor Phil Anderson

Scholar. Builder. Mentor. Friend.A brilliant mind, a generous heart,and a champion of students and ideas.

LIST OF CONTRIBUTORS

Our distinguished Guest Authors made time to share their experiences and at times critical comments, thereby adding a practical perspective to our writing. We are grateful for their support and list them in order of appearance.

A Look Back at the Last 50 Years

By T. Bondurant French, Executive Chairman, Adams Street Partners (page 15)

The Rise of Solo General Partners: Redefining Venture Capital

By Gopi Rangan, Founding Partner,

Sure Ventures

Oren Zeev, Founding Partner, Zeev Ventures (page 31)

Creating Value Through Genuine Partnerships

By J. Frank Brown, (Retired) Former Managing Director and Chief Operating Officer, General Atlantic (page 41)

A Differentiated Approach—“Mining the Hidden Gems”

By Andrew Sillitoe, Co‐CEO, Apax Partners LLP (page 56)

Evolution of Private Infrastructure

By Dr. Dmitriy Antropov, Head Infrastructure Partnerships, Partners Group (page 69)

Hunting for Deals in Emerging Markets

By Nicholas Bloy, Founding Partner, NAVIS Capital Partners (page 85)

The Due Diligence “Conspiracy”

By Richard Foyston, Founding Partner, NAVIS Capital Partners (page 89)

Understanding Enterprise Value

By Graham Oldroyd, former Partner, Bridgepoint Private Equity (page 100)

What Really Matters Beyond Deal Pricing?

By Kurt Björklund, Executive Chairman, Permira (page 111)

Deal Structuring

By Michael Phillips, Managing Partner, Castik Capital (page 124)

Deal Documentation — “Clean Exit” vs. Purchaser Protection

By Heiner Braun, Partner, Freshfields Bruckhaus Deringer LLP (page 135)

Private Equity: Governance as a Value Driver

By Jeff Schlapinski, Managing Director, Research;Global Private Capital Association (GPCA) (page 153)

Management Teams and Leveraged Buyouts

By Adam Coffey, Founder & Managing Member, The Chairman Group (page 166)

More than Private Equity—Building Better Businesses

By Anne Arlinghaus, Partner and Co‐Head of KKR Capstone, Americas; Kohlberg, Kravis, Roberts & Co. (page 176)

It is Possible to Do Well and Do Good

By Roy Swan, Head of Mission Investments, Ford Foundation (page 196)

The Proof is in the Exit

By Marco De Benedetti, Managing Director and Co‐Head of European Buyouts, The Carlyle Group (page 211)

Not on the Side

By Andy M. Ostrognai, Retired Partner and Shawn Yang, Partner, Debevoise & Plimpton LLP (page 230)

Raising a First‐time Fund

By Javad Movsoumov, Managing Director, Head of APAC Private Funds Group, UBS (page 238)

The Role of Private Equity in a Multi‐Asset Class Portfolio

By Arjun Raghavan, Chief Executive Officer, Partners Capital (page 254)

Measuring Performance—A Contentious Issue

By Jennifer Choi, CEO, Institutional Limited Partner Association (ILPA) (page 269)

Unlocking Private Equity for All

By Helen Steers MBE and Charlotte Morris, Partners at Pantheon and Co‐lead Managers of Pantheon International Plc (page 306)

Currency Hedging: Moving to the Mainstream

By Rob Ryan, Market Risk Manager, EQT Private Capital Asia (page 319)

The Secondaries Era?

By Francois Aguerre, Co‐Head of Investment, Global Head of Origination,Coller Capital (page 329)

Misconceptions about Private Debt

By Roger Zhang, Partner,Granite Asia (page 343)

Henry Kravis and George Roberts, Co‐founders and Co‐Executive Chairmen of KKR, kindly agreed to write the foreword for this book and we appreciate their thoughtful contribution on the evolution of private equity over the years.

Preqin’s support, through access to its comprehensive research platform on private equity and venture capital, is gratefully acknowledged. Their extensive data and analytical tools played a key role in creating the visuals for this book.

FOREWORD

By Henry Kravis and George Roberts, Co‐founders and Co‐Executive Chairmen of KKR

When we founded KKR in 1976, our ambitions were modest.

After leaving Bear Stearns that year, we and Jerry Kohlberg cobbled together US$120,000 and sublet a small office in Manhattan with grey wall‐to‐wall carpeting, used desks and a few pieces of inexpensive artwork. The private equity (PE) industry did not exist, but we thought we could build a successful enterprise by making a handful of what we then called “bootstrap acquisitions.”

Today, thousands of firms worldwide manage trillions of dollars across several asset classes that encompass what is now known as the private markets industry. It employs millions of people and often provides returns far exceeding traditional equity and debt investments. But the PE story is more than a tale of financial growth and performance. It is the story of an ever‐increasing number of people and institutions benefiting from the value created by private capital.

PE expanded from a niche business specializing in leveraged buyouts to an ecosystem of private capital covering many sectors and companies of all sizes and stages of growth. The beneficiaries include the businesses receiving capital and support to achieve their goals, the management teams running them, the employees working for them and investors spanning pension funds, endowments, insurance companies, sovereign wealth funds, family offices and individuals. Through pension funds, over 30 million teachers, firefighters, police officers and other public employees in the US alone count on private market investments to help support their retirements. At KKR, we always begin and end our firmwide meetings by discussing who we work for—the millions of retirees and organizations counting on our investments to secure their financial future.

But what exactly is PE?

PE investing involves acquiring companies and creating long‐term value by transforming good businesses into great ones. Once a company has reached its potential and a PE firm exits the investment, that value creation generates returns for investors who have committed their capital.

The first principle of PE has always been the alignment of interests, specifically between company management, the PE firm and the limited partners—like pension funds—who entrust firms with their capital.

When investing in a company, we ask ourselves: How can we improve it? What do we bring to this investment—besides capital—that will enable us to create value for the company, its employees, its customers and our investors?

Of course, the corporate landscape has evolved significantly since the advent of the private equity industry in the 1970s. The United States towered over other economies for decades after World War II and, by 1965, accounted for 38% of global economic output. By the time we founded KKR, a generation of American business managers had come of age when robust economic growth was taken for granted, and companies lacked meaningful global competition. Management often held little or no financial ownership of their companies. It lacked alignment with shareholders, resulting in less concern for increasing efficiencies and seizing opportunities to increase the value of the business.

That all ended with an oil shock and recession in the early 1970s, which revealed that many US companies needed to become leaner, more competitive and more productive. Corporate reform was in order, and long‐term PE capital was well‐positioned to facilitate it.

From our first deals, we instituted management ownership programs, an uncommon concept in the 1970s. Running a company as an owner, not just as a manager, dramatically changes things. We learned early on that people care much more about a company's performance when personally invested in its success.

Over the decades, we continued adding to our investor toolkit amid the globalization of business, talent and innovation. Our expansion into Europe in the late 1990s and Asia in the 2000s positioned us to invest in the best global opportunities while building the tools and local relationships to help our portfolio companies achieve their own international ambitions.

Since KKR's founding, we have also aimed to provide our companies with “patient capital”—meaning a longer‐term investment horizon—so our partners know we are invested in their long‐term success, not just an immediate return. One question we always like to ask the CEO of a public company is: “OK, this is your company today. But what will it be like five years from now?”

As our own business evolved, we both took a notable quote to heart. General Eric Shinseki, the former US Army Chief of Staff, once said, “If you dislike change, you're going to dislike irrelevance even more.” For KKR, this meant having a willingness to change, innovate and reinvent ourselves.

In the early 2000s, we realized we wanted to be able to say “yes” to more companies seeking a capital partner, regardless of the type of investment required. Many companies don't want to sell but still need capital. That led us to expand beyond traditional PE and enter the credit market in 2004.

This marked a significant evolution in our business. If a company wasn't interested in selling, we could now provide alternative capital solutions without needing to control the asset. This strategic flexibility increased our opportunities, much like a soccer team getting more shots on goal. Since then, our investment scope has broadened to include core PE, growth equity, infrastructure, real estate, insurance and capital markets.

Today, PE represents around a third of KKR's assets under management. This shift didn't happen overnight; it has taken nearly five decades of deliberate and strategic growth, a highly collaborative culture and creativity to respond to the needs of the businesses we invest in.

The growth of the private capital industry would not have been possible without the confidence of the limited partners who entrust their capital with us. We can both recall our elation in 1981 when the Oregon State Treasury Fund became the first public pension fund to invest with us. It was a breakthrough for KKR and a leap of faith for Oregon because pension funds at that time invested almost exclusively in public stocks and bonds. Now, on average, nearly nine in ten US public pension funds have a private equity allocation, accounting for 14% of their portfolio (according to the American Investment Council).

Although large institutions are still the primary investors in private market investments, our universe of investors is growing, especially as more individuals become responsible for their own retirement security. Financial advisors and accredited investors increasingly access investment vehicles focused on private credit, private equity, private real estate and infrastructure. This is another step in our industry's evolution toward serving a more diversified set of stakeholders.

So, too, is expanding ownership in PE investments beyond the management team.

We always knew that transforming a business required aligning with management, who were depended on to engage and motivate employees. But Pete Stavros, a KKR partner who previously ran our US team focusing on industrial investments, had an idea. He wondered: What if we deployed broad‐based ownership programs in which all employees could participate if the company performed well?

While many companies have equity programs, most require that you buy into them. Pete believed we could build stronger businesses by investing in the workforce and taking some of the equity and giving it to the employees (without cost to them or diminishing their compensation or benefits). This was part of cultivating an ownership culture where companies shared information and financial results with employees and gave people a more significant say in running the business. After trying with a few of our investments in the manufacturing space, it's now a norm for our control investments in the US.

These broad‐based ownership programs have dramatically increased growth, profitability and employee engagement, enhancing the performance of our portfolio companies and fueling some of KKR's most successful exits. The data suggest this approach is additive for everyone involved: workers, management and our limited partners. We call this shared success.

Consider the example of CHI Overhead Doors, a garage door manufacturer in rural Arthur, Illinois. When KKR purchased CHI in 2015, just 18 senior executives owned equity in the firm. We then supported the management team in creating an equity program, giving equity to all 800 employees—from factory workers to truck drivers—and launching a robust employee engagement initiative.

With all 800 employees thinking like owners, drivers started devising more fuel‐efficient routes. Floor workers developed faster, safer ways to move materials down the assembly line. The purchasing team discovered better ways to buy.

As worker engagement and enthusiasm rose, they helped create exceptional value at CHI. Between 2015 and 2022, profit margins increased by 67%, while workforce injury rates fell by almost 80%. By aligning the incentives of nearly everyone involved, KKR was able to sell CHI to the steel giant Nucor for ten times the equity value KKR had invested seven years earlier. The sale created a payout of US$360 million for workers, with the newest employees receiving US$20,000 each and some long‐serving truck drivers receiving more than US$800,000.

To make this model more pervasive in businesses, KKR helped found Ownership Works, a non‐profit organization that shares best practices, data and other information throughout the alternatives industry. Subsequently, dozens of financial institutions, including many PE firms, joined the initiative and committed to introducing shared ownership across at least a portion of their portfolio companies.

As we reflect on half a century spent in this industry, we have learned that aligning interests to create long‐term value is still the foundation upon which great private capital firms are built. We also think the historic core business of PE—identifying enterprises with untapped potential to invest in and finding ways to improve them—will always be a great business that benefits the company, its workers, their families and their communities. But some things certainly have changed since we started, most notably the size, scale and impact of this now multi‐trillion‐dollar global industry. This offers the next generation of private market leaders an opening to meaningfully address significant societal challenges, like financing the energy transition, helping secure retirements and ensuring more people have a stake in the free enterprise system.

In short, private capital is a force for good.

Innovation and transformation are accelerating everywhere, and these periods of transition are when private capital has historically added the most value to the array of stakeholders we serve. We have no doubt this dynamic industry is equipped to do it once more.

PREFACE TO THE SECOND EDITION

When Mastering Private Equity was first published in 2017, the industry was in the midst of significant transformation. Private equity1 had long since moved beyond its early reputation as a game of leveraged buyouts and financial engineering. Instead, it had evolved into a more sophisticated and diversified asset class, where active ownership, operational expertise and long‐term strategic guidance became the real drivers of value creation.

Much has changed since then.

Private markets are expanding exponentially at the expense of public or traditional ones. Private debt has gone from fringe to mainstream and continues to expand. Infrastructure is in its second coming—this time revolving around themes like digitization and decarbonization as opposed to utilities and toll roads. Real estate funds are investing in PropTech to future‐proof their portfolios. The buyout universe has segmented into six or seven major subcategories. Venture capital has broadened and deepened and grown in size. Specialized secondary markets have developed for all of these.

Large, diversified private markets managers have emerged alongside the expanding opportunity set, often evolving beyond a single core strategy to participate across multiple investment strategies. At the same time, regulatory change and the rapid growth of evergreen fund offerings have opened the asset class to retail investors via the private wealth channel.

Of course, as we write in 2025, the past years have been marked by an unprecedented confluence of global events: the rise and fall of market cycles, pandemic‐driven economic shocks, geopolitical upheaval upending the political and economic order of the last decades, the acceleration of digital transformation and the growing importance of sustainability and ESG considerations in investment decisions. Through it all, the private markets industry has continued to expand, with more funds, more capital and more complexity than ever before.

Throughout these shifts, the core principles of private equity remain steadfast. The industry still thrives on disciplined capital allocation, entrepreneurial partnerships and the ability to create value through strategic intervention. However, new questions have emerged.

Will the traditional limited partnership model adapt to the changing expectations of investors and regulators?

How can private capital navigate a world of higher interest rates, geopolitical uncertainties and AI‐driven disruption?

Will venture capital recover from the excesses of recent years, and can it continue to foster innovation in a more cautious investment climate?

How will private markets evolve to meet the funding needs of emerging economies, particularly in regions like the Middle East and Africa?

This second edition builds on the foundation of the first, while addressing these pressing questions and incorporating insights from recent industry developments.

A NOTE FROM CLAUDIA ZEISBERGER

The first edition of this book was born out of demand. Over the years, students, alumni and industry professionals—whether at INSEAD or in my broader network—frequently asked for a resource that would demystify private equity and venture capital beyond what could be covered in an MBA course. The overwhelming success of Mastering Private Equity confirmed that there was a real need for a structured, practical and comprehensive guide to the industry.

Since then, my conversations with investors, entrepreneurs and policymakers have only reinforced the importance of education in this evolving space. Misconceptions about private equity persist, often fueled by media portrayals that fail to capture the nuances of how the industry operates. The reality is more complex. Whether we are discussing venture capital's role in funding groundbreaking innovation, the value‐creation strategies of growth equity or the challenges of managing a leveraged buyout in uncertain times, one thing is clear: private equity remains an essential force in shaping the global economy.

To reflect this evolving landscape, this edition brings fresh perspectives, updated chapters and new contributions from industry practitioners. As before, my co‐authors—both INSEAD alumni and seasoned investors—bring their own experiences and insights, ensuring that this book remains grounded in the realities of today's private markets.

Continuing to expand this book remains a fascinating journey, one that underscores a few key lessons.

Private equity and venture capital are often misunderstood

—both in the broader economy and within the business community itself.

Industry players still struggle to communicate their value proposition

, leading to misinterpretations, backlash and regulatory scrutiny.

There remains a shortage of resources that connect the dots across the private markets landscape

, from venture to growth equity to buyouts; and certainly for the growing secondary and private debt markets.

This book aims to bridge those gaps, equipping investors, entrepreneurs and finance professionals with the knowledge they need to engage with private equity confidently—whether as industry insiders or informed observers.

As private equity continues to evolve, so too must our understanding of it. I hope this second edition serves as a valuable resource in that ongoing learning process.

NOTE

. In the context of this book, PE is defined broadly and includes venture capital (VC), growth equity and buyout funds as well as secondaries, co‐investments and LP direct investment. More about this later in the book.

HOW TO USE THE SECOND EDITION OF THIS BOOK

This book was written with a professional audience in mind and carefully structured to accommodate both graduate students and experienced professionals. It makes a solid attempt at reflecting on its central themes without judgment, by relating the facts and ensuring that readers are well prepared to participate in an intelligent discussion about the pros and cons of private equity (PE) and venture capital (VC). In the second edition we added insights into the fast‐growing private debt markets, expanded our coverage of secondary investments and updated market data as per December 2024.

For novices to the field of PE, our book provides clear insights into the workings of the industry. While the book assumes a sound understanding of basic finance, accounting techniques and risk–return concepts, it offers links to literature and research to ensure clarity for those rusty in the theoretical concepts behind today's investment markets and portfolio management.

Graduate and postgraduate students will find the book an invaluable companion for their private equity, venture capital and entrepreneurship courses; it will allow them to connect the dots and ensure that an understanding of the dynamics in the industry is maintained as they explore the respective chapters in greater detail.

For seasoned financial professionals, the book includes guest comments from industry experts and links to advanced literature that provides a nuanced view of the industry and will allow them to engage with other professionals, be they lawyers, bankers, consultants or partners of PE firms, in a meaningful way.

Ensuring that our readers develop a sound understanding of private market funds before diving into more controversial aspects of the industry was a clear goal from the outset; it defined the flow and the logic of the chapters. The book's structure allows the expert reader to use the book as a quick reference with easily retrievable highlights of the best practices employed in the industry; it also allows observers of the industry and students to work through the topics step by step and take advantage of the many resources and cross‐references to other finance topics at the end of each chapter.

Overall the chapters are grouped into five sections.

SECTION I offers a high‐level introduction to PE to ensure that we speak the same language and use appropriate industry terms and definitions throughout the book. It puts venture capital, growth equity and leveraged buyouts into context and describes several alternative private market strategies, such as private infrastructure, private real estate and distressed debt investing.

SECTION II looks in greater detail at PE investment processes, starting with deal sourcing, due diligence and target valuation before exploring deal pricing considerations and the actual structuring of PE deals. It also includes a thorough coverage of transaction documentation.

SECTION III asks: what do private equity and venture funds do with their portfolio companies during the holding period? How will they transform these businesses and prepare them for exit?

SECTION IV describes the key dynamics involved in raising a PE fund. We step into the shoes of global institutional investors in private capital to examine their demands with regard to reporting and portfolio customization.

SECTION V builds on the understanding gained in the previous chapters and takes a closer look at recent developments in the industry, from direct and co‐investment programs to the rapidly expanding secondaries markets and the recent rise of listed PE funds. A full chapter was dedicated to Private Debt markets, given their expansion and growth in the last decade. The final chapter focuses on the democratization of PE and how semi‐liquid evergreen funds have opened private markets to retail investors.

This second edition of Mastering Private Equity can well be used together with the case book Private Equity in Action—Case Studies from Developed and Emerging Markets (1st edition 2017); the cases bring the learning points to life and offer readers a ringside seat to the day‐to‐day challenges facing partners in PE and VC funds.

Professor Claudia Zeisberger’s YouTube channel is a new feature designed to keep readers informed about the latest developments in the dynamic world of Private Capital. The channel features fireside chats with fund managers, investors, entrepreneurs and financial professionals, offering timely insights and expert perspectives.

https://www.youtube.com/c/claudiazeisberger

SECTION IPrivate Equity Overview

The first section of the book provides readers with a high‐level introduction to the institutional private equity (PE) market—from early‐stage venture capital to growth equity and buyouts, plus a brief description of several alternative private market strategies. While buyouts have historically accounted for the vast majority of global PE capital deployed,1 venture capital investment activity has steadily increased as the industry matured over the past decades (see Exhibit A).

Section I is by far the least technical part of this book, intended to familiarize newcomers with the asset class and the concept of investing institutional capital in private companies in return for equity stakes. While crucial for readers new to PE, professionals familiar with the industry may choose to move directly to later sections of the book.

Exhibit ATotal PE Industry Capital Deployed by Strategy

Source: Preqin

Section Overview

Chapter 1. Private Equity Essentials:

This chapter defines the traditional limited partnership fund model, specifically the players involved, a fund's investment lifecycle and typical fund economics and fee structures. To be clear, our work refers to the organized PE market—that is, professionally managed equity investments by specialized intermediaries (PE firms) and their institutional backers; it excludes other forms of “informal” private capital investments.

Chapter 2. Venture Capital:

Venture capital (VC) generally flows into early‐stage companies—start‐ups—that offer high risk/high return investment opportunities. We introduce the different types of venture investors (business angels, start‐up incubators and accelerators, VC funds and corporate VCs) and explain the use of VC at different points in a company's development, from proof‐of‐concept to commercialization and scaling up. Both aspiring entrepreneurs as well as future venture investors will find this chapter useful.

Chapter 3. Growth Equity:

Acquiring minority equity stakes in fast‐growing companies is the focus of growth equity funds. Managing multiple stakeholders without a control position is a key challenge for these funds; establishing a productive working relationship with existing managers and owners is therefore a key determinant of success. This chapter is particularly relevant for readers interested in PE in emerging markets.

Chapter 4. Buyouts:

Buyout funds acquire controlling equity stakes in mature and sometimes listed target companies, often employing ample amounts of debt in leveraged buyouts (LBOs). The skillset required to execute large LBOs and drive value post‐investment differs from that needed for growth equity or VC: it requires both financial and process management skills, combined with the ability to create operational value in the portfolio firms.

Chapter 5. Alternative Private Market Strategies:

In the final chapter of this section, we explore alternative private market strategies focused on investing in real assets and distressed businesses. The former describes a range of strategies (investing in real estate, infrastructure and natural resources) that use a PE operating model and adapt it to distinct asset classes, while the latter requires unique skills to restructure and improve a company's operations (turnaround) or its balance sheet (distressed debt).

NOTE

Buyouts accounted for roughly two‐thirds of industry capital deployed between 2000 and 2024. Source: Preqin.

1PRIVATE EQUITY ESSENTIALS

At some point in their development, all companies will need either a helping hand or a shot in the arm. A fresh injection of capital or external managerial expertise is often necessary to help organizations overcome developmental challenges, realize their full potential and seize the opportunities that lie ahead. Start‐ups hunt for the visionary capital that will enable them to turn a concept into a launched product. Mature companies are increasingly subject to market disruption, increased competition or pressure to update manufacturing processes and corporate governance structures. Companies that have been performing poorly for a prolonged period of time need to identify and then rectify the problems that confront them. Family businesses must honestly address succession planning (“it is only but three generations from shirtsleeves to shirtsleeves”1).

The needs and demands of businesses at such critical inflection points often exceed the capabilities and services provided by the established financial institutions and consulting firms. Capital markets, for instance, are unlikely to offer a solution for small and medium‐sized enterprises (SMEs). Into this void steps private equity (PE) in the form of venture, growth and buyout funds, at its best offering patient and long‐term capital, dedicated expert advice and hands‐on operational support.

Over the last five decades, PE has emerged as the transformation agent of choice for companies seeking change; at times, it is the only choice for a business in need of capital and a risk‐sharing partner to facilitate future growth. The PE ecosystem has grown dramatically during that time; as of 2024, the industry (including its alternative strategies, secondaries and co‐investments) has over US$15 trillion in assets under management, of which more than US$9 trillion is deployed through core PE strategies. This capital is being invested and managed by over 10,000 professional funds globally. Understanding this industry—its drivers and its dynamics—is a must for entrepreneurs, owners of family businesses, board members of multinationals and senior managers.

So, what exactly is PE? PE funds invest long‐term capital in private (or, at times, public) companies in return for an equity stake that is not freely tradable on a public market.2 Our definition of PE includes so‐called “take‐privates” (i.e., delistings of public companies) and private investment in public equity that come with specific governance rights. This book focuses strictly on the activity of professionally managed PE funds advised by highly specialized intermediaries (PE firms) and excludes “informal” private capital, such as investments made by business angels or families who typically draw on their own private wealth.

This first chapter gives our readers a high‐level overview of PE funds, by defining their structure and the motivation of the key players involved. We then explain how PE funds go about their business, both from the general partner's (GP's) and limited partner's (LP's) perspective and shed light on the often complex economics and fee structures in PE.

PRIVATE EQUITY FUNDS DEFINED

A PE fund is a stand‐alone investment vehicle managed by a PE firm on behalf of a group of investors. The capital is raised with a clear mandate to acquire equity stakes in private companies and divest them over time.

Most PE funds globally are set up as closed‐end limited partnerships and operate as “blind pool” vehicles. Closed‐end funds have a finite lifespan and require investors to commit capital for the fund's entire term—typically 10 years—without early redemption (or withdrawal) rights.3 While investors in a PE fund have a clear idea of its broad mandate (for example, mid‐market European buyouts), they have no say in the choice of the individual companies that a fund will invest in, hence the term “blind pool.” Certain jurisdictions use limited liability companies or corporate structures as the vehicle of choice for a PE fund, but they are the exception.

We will start with a closer look at the parties involved in a limited partnership PE fund structure, as shown in Exhibit 1.1.

Exhibit 1.1Limited Partnership PE Fund Structure

PE FIRM:

A PE firm is a company with expertise in executing a venture, growth or buyout investment strategy. It raises and advises a fund—and, if successful, over time a family of funds—generally through two separate yet affiliated legal entities: the GP and the investment manager. Members of a PE firm typically hold all the key directorships and other decision‐making positions of both the GP and the investment manager for every fund raised by the firm. Establishing these separate legal entities insulates the PE firm from liabilities related to, and its principals from any claims on, the PE fund. Examples of notable PE firms are buyout firms Kohlberg Kravis Roberts (KKR) and APAX Partners as well as venture firms Sequoia Capital and Kleiner Perkins Caufield Byers.

LIMITED PARTNERS:

Investors or LPs contribute by far the largest share of capital to any PE fund raised. LPs participate merely as passive investors, with an individual LP's liability limited to the capital committed to the fund. Investors active in PE include private and public pension funds, endowments, insurance companies, banks, corporations, family offices and fund of funds.4 LPs are purely financial investors and cannot be involved in the day‐to‐day operation or management of the fund or its investee companies without running the risk of forfeiting their limited liability rights. LPs legally commit to provide capital for investment when it is drawn down (or “called”) by the PE fund and they receive distributions of capital—including a share of profits—upon successful exit of the fund's investments.

GENERAL PARTNER:

A fund's GP is wholly responsible for all aspects related to managing the fund and has a fiduciary duty to act solely in the interest of the fund's investors. It will issue capital calls to LPs and make all investment and divestment decisions for the fund in line with the mandate set out in its Limited Partnership Agreement (LPA). The GP may delegate some of the management functions to the investment manager or a PE firm's investment committee (IC),5 but remains fully and personally liable for all debts and liabilities of the fund and is contractually obligated to invest the fund's capital in line with its mandate.6 A GP—and in turn a PE firm's partners and senior professionals—will also commit capital to the fund to align its interest with that of the fund's LPs by ensuring that the firm's partners have “skin in the game”; the GP stake typically ranges from 1% to 5% and rarely exceeds 10% of a fund's total capital raised.

INVESTMENT MANAGER:

In practice, the investment manager7 conducts the day‐to‐day activities of a PE fund; it evaluates potential investment opportunities, provides advisory services to the fund's portfolio companies and manages the fund's audit and reporting processes. The manager is paid a management fee by the fund for providing these services, some of which may be passed on to a subadvisor. The management fee is typically set at around 1.5−2% of committed capital during the investment period of the fund; after the end of the investment period, it is calculated on invested capital and may step down to a lower rate. More information on fee structures can be found later in this chapter.

PORTFOLIO COMPANY:

Over its lifecycle, a PE fund will invest in a limited number of companies, 10−15 on average, which represent its investment portfolio. These companies are also referred to as investee companies or (during the due diligence process) as target companies. A PE firm's ability to sell its stakes in these companies at a profit after a three‐ to seven‐year holding period will determine the success or failure of the fund.

From the perspective of the PE firm and its affiliated entities, the business of PE comes down to two simple yet distinct relationships: on the one hand, the firm's fiduciary duty towards its LPs and on the other hand its engagement with entrepreneurs, business owners and management teams in its portfolio companies (Exhibit 1.2). Establishing a reputation of professional conduct and value‐add will ensure access to both future fundraising and investment opportunities.

Exhibit 1.2Key Relationships GPs Must Manage

THE GP PERSPECTIVE

LIFECYCLE OF A PE FUND

A traditional PE firm's business model relies on success in both raising funds and meeting its target return by effectively deploying and harvesting fund capital. PE funds structured as limited partnerships are typically raised for a 10‐year term plus two one‐year extensions, commonly referred to as the “10+2” model. Generally speaking, a GP will deploy capital during the first four to five years of a fund's life and harvest capital during the remaining years. The two optional years allow the GP to extend a fund's lifespan at its discretion if and when additional time is needed to prudently exit all investments.

Exhibit 1.3 shows the overlapping timelines for the fundraising, investment, holding and divestment periods of a closed‐end fund.

Exhibit 1.3Lifecycle of a PE Fund

FUNDRAISING:

PE firms raise capital for a fund by securing capital commitments from investors (LPs) through a series of fund closings.8 A PE firm will establish a target fund size from the outset—at times defining a “hard cap” to limit the total amount raised in case of excess investor demand. Once an initial threshold of capital commitments has been reached, the fund's GP will hold a first closing, at which time an initial group of LPs will subscribe to the fund and the GP can start to deploy capital. A fund holding its first closing in 2024 is referred to as a “vintage 2024 fund,” a fund with a first closing in 2025 will be known as a “vintage 2025 fund” and so on. Fundraising will typically continue for a defined period—12 to 18 months—from the date of the first closing until the fund reaches its target fund size and a “final closing” is held. The total amount raised by a PE firm is known as a fund's committed capital.

INVESTMENT PERIOD:

Rather than receiving the committed capital on day one, a GP draws down LP commitments over the course of a fund's investment period. The length of the investment period is defined in a fund's governing documents and typically lasts four to five years from the date of its first closing; a GP may at times extend the investment period by a year or two, with approval from its LPs, when investment pace lags expectation. Once the investment period expires, the fund can no longer invest in new companies; however, follow‐on investments in existing portfolio companies or add‐on acquisitions are permitted throughout the holding period. A fund's LPA may also permit its GP to finance new investments from a portion of fund realizations within a certain limited period after divestment (this is known as the recycling of capital), thus increasing a fund's total investable capital.

In practice, GPs begin investing capital following a fund's first closing and often fully deploy a fund in three to four years or less. A fund is typically considered fully deployed during the investment period when 90% of fund commitments have been invested by the GP, with 10% reserved for follow‐on or add‐on investment.

GPs draw down investor capital by making “capital calls” to fund suitable investment opportunities or to pay fund fees and expenses. LPs must meet capital calls within a short period, typically 10 business days. If an LP fails to meet a capital call, various remedies are available to the GP. These include the right to charge high interest rates on late payments, the right to force a sale of the defaulting LP's interest on the secondaries9 market and the right to continue to charge losses and expenses to the defaulting LP while cutting off their interest in future fund profits. The portion of LPs' committed capital that has been called and invested is referred to as contributed capital. A fund's uninvested committed capital is referred to as its unfunded commitments or “dry powder”; by extension, the total amount of uninvested committed capital across the industry is referred to as the industry's dry powder. Exhibit 1.4 shows the evolution of the industry's dry powder since 2008, grouped into vintage year buckets and totaling in excess of US$2.0 trillion as of year‐end 2024.10

Exhibit 1.4PE Dry Powder, Grouped by Fund Vintage Year

Source: Preqin

HOLDING PERIOD:

Holding periods for individual portfolio companies typically range from three to seven years following investment, but may be significantly shorter in the case of successful companies or longer in the case of underperforming firms. During this time, a fund's GP works closely with portfolio companies' management teams to create value through existing operations, execute add‐on investments where appropriate and prepare the company for exit.11

DIVESTMENT PERIOD:

A key measure of success in PE is a GP's ability to exit its investments profitably and within a fund's term; as a result, exit strategies form an important part of the investment rationale from the start.12 Following a full or partial exit, invested capital and profits are distributed to a fund's LPs and its GP. With the exception of a few well‐defined reinvestment provisions,13

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