Private Equity E-Book

Harry Cendrowski

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 617

Veröffentlichungsjahr: 2011

Beschreibung

Praise for Private Equity "Private Equity: History, Governance, and Operations is an invaluable guide to understanding the world of private equity investing. Harry Cendrowski and his colleagues have drawn on their extensive experience and expertise to produce a book that is remarkably comprehensive and authoritative." --Robert Larson, Chairman, Lazard Real Estate Partners LLC and Larson Realty Group Managing Director, Lazard Alternative Investments "Private Equity: History, Governance, and Operations is an essential text for any business/finance professional's library. Applicable to both seasoned private equity gurus and students of the industry, its in-depth analysis of 'Best Practices' is well researched and clearly written." --William Campbell, Managing Director, W.Y. Campbell & Company "This is an interesting and very well-written book. It not only clearly describes the history and techniques of private equity investing, it also provides a thorough examination of the rarely appreciated relationships among internal control design and operation, corporate governance and sound investment decision-making and management. It is an important contribution to the literature of finance." --Barry Epstein, PhD, CPA, Partner, Russell Novak & Company, LLP, and author of Wiley GAAP 2008, The Handbook of Accounting and Auditing, and Wiley IFRS 2008 "Harry Cendrowski really hits a homerun with his newest book about the private equity (PE) industry. A definitive, authoritative text on the subject, it answered all my questions, plus some, and gave me a complete frame of reference where I now feel well informed on PE. I would recommend this book to anyone connected to the PE industry, business advisors, academics, and business owners." --Parnell Black, MBA, CPA, CVA, Chief Executive Officer, National Association of Certified Valuation Analysts (NACVA) "The timing could not be better to learn more about the current best practices and governance in the world of private equity. What was once an exclusive asset class reserved for the largest, most sophisticated investors has now become a mainstream alternative investment option for investors of all sizes. Still, many investors do not fully understand how the business works. Private Equity: History, Governance, and Operations endows its readers with an A-to-Z education on this emerging asset class, irrespective of their previous experiences." --Maribeth S. Rahe, President and Chief Executive Officer, Fort Washington Investment Advisors, Inc. & Fort Washington Capital Partners "As a private equity practitioner in the financial services space, I found this book to be a comprehensive-and comprehendible-resource covering all relevant aspects of the business of private equity. This book provides valuable 'how-to's' for improving the likelihood of having successful portfolio companies, with successful exits. Furthermore, both veteran and prospective PE investors now have a resource available to help them screen PE opportunities that best fit with their risk and return objectives." --Scott B. McCallum, Principal, Resource Financial Institutions Group, Inc. "For years, private equity has been a misunderstood asset class. Harry Cendrowski's book defines private equity in clear, concise terms. Anyone in the financial world will benefit from the insights, guidelines, and experiences detailed in Private Equity: History, Governance, and Operations." --Bob Clone, Senior Portfolio Manager, Alternative Investments Division, Michigan Department of Treasury

Leseprobe

Table of Contents

Title Page

Copyright Page

About the Authors

Preface

Acknowledgements

MODULE I - The History of Private Equity

CHAPTER 1 - The Private Equity Process

INTRODUCTION

GENERAL TERMS AND BRIEF OVERVIEW

UNDERSTANDING PRIVATE EQUITY

PRIVATE EQUITY FUND-RAISING

CHAPTER 2 - Characteristics of the Private Equity Arena

A BRIEF HISTORY OF PRIVATE EQUITY

GEOGRAPHICAL DISTRIBUTION OF PRIVATE EQUITY INVESTMENTS

HISTORICAL PRIVATE EQUITY INVESTMENT LEVELS

HISTORICAL PRIVATE EQUITY RETURNS

A NONMAINSTREAM SECURITY?

SUMMARY

NOTES

CHAPTER 3 - Trends in Private Equity

INTRODUCTION

OVERALL INDUSTRY TRENDS

THE BUYOUT ARENA

THE VENTURE CAPITAL ARENA

NOTES

CHAPTER 4 - Harvesting Private Equity Investments through IPO

INITIAL PUBLIC OFFERINGS

NOTES

CHAPTER 5 - Harvesting Investments through Mergers and Acquisitions

M&A BASICS

TYPES OF TAKEOVERS

REVERSE TAKEOVERS

THE TAKEOVER PROCESS AND FINANCIAL ADVISOR SELECTION

ANALYZING POTENTIAL BUYERS

THE SALE PROCESS

THE BIDDING PROCESS

REACHING AN AGREEMENT

HISTORICAL M&A TRENDS

NOTE

MODULE II - Governance Structures in Private Equity

CHAPTER 6 - The Private Equity Governance Model

INTRODUCTION

A NEW MODEL FOR CORPORATE GOVERNANCE

CONCLUSION

NOTES

CHAPTER 7 - Value of Internal Control

INTRODUCTION

INTRODUCTION TO COSO AND INTERNAL CONTROL

COMPONENTS OF INTERNAL CONTROL

CONTROL OBJECTIVES AND CONTROL COMPONENTS

INTERNAL CONTROL AND THE PE FIRM

CONCLUSION

NOTES

CHAPTER 8 - Internal Control Evaluation

INTRODUCTION

PCAOB AUDITING STANDARD NO. 5

PHASE 1: PLANNING THE AUDIT

PHASE 2: USING A TOP-DOWN APPROACH

PHASE 3: TESTING CONTROLS

PHASE 4: EVALUATING IDENTIFIED DEFICIENCIES

PHASE 5: WRAPPING UP

PHASE 6: REPORTING ON INTERNAL CONTROLS

CHAPTER 9 - Financial Statement Fraud and the Investment Decision

MONEY LAUNDERING

CATEGORIES OF FRAUD

WHAT IS FRAUD?

THE REQUIRED ELEMENTS OF FRAUD

FINANCIAL STATEMENT ATTESTATION

RECOMMENDATIONS

FRAUD AND DUE DILIGENCE PROCEDURES

CONCLUSIONS

NOTES

CHAPTER 10 - Professional Standards

INTRODUCTION

FEDERAL TRADE COMMISSION (FTC)

SECURITIES AND EXCHANGE COMMISSION (SEC)

“PRIVATE” EQUITY GOING PUBLIC

PCAOB STANDARDS

AICPA AUDITING STANDARDS

AICPA ACCOUNTING AND REVIEW STANDARDS

INSTITUTE OF INTERNAL AUDITORS (IIA) STANDARDS

INFORMATION SYSTEMS AUDIT AND CONTROL ASSOCIATION

NOTES

CHAPTER 11 - Contemporary Business and Competitive Intelligence

INTRODUCTION

CONTEMPORARY BUSINESS INTELLIGENCE

COMPETITIVE INTELLIGENCE AND THE EXTERNAL ENVIRONMENT

NORMALIZING PERFORMANCE

COST OF CAPITAL AND THE OPTION TO INVEST

DEVELOPING “IDIOSYNCRATIC ACUMEN”

AN ECONOMIC VIEW OF QUALITY

DEVELOPING RELATIONSHIPS AND NAVIGATING CRISES

APPLICATION TO PRIVATE EQUITY

NOTES

MODULE III - Understanding Operations

CHAPTER 12 - Organizations as Humans

INTRODUCTION

ORGANIZATIONS AS HUMANS

NOTES

CHAPTER 13 - Beginning the Lean Transformation

INTRODUCTION

NOTES

CHAPTER 14 - Manufacturing Due Diligence: How to Perform Operations Assessments

INTRODUCTION

PERFORMING THE ASSESSMENT

OPERATIONAL DATA AND COST OF SALES

CONCLUSION

NOTES

MODULE IV - Special Considerations in Private Equity Investments

CHAPTER 15 - Private Equity Fund and Portfolio Company Investment

UNDERSTANDING INVESTORS AND THE INVESTMENT PROCESS

MEZZANINE FINANCING

PRIVATE EQUITY INVESTMENT IN DISTRESSED COMPANIES

CHAPTER 16 - Legal Considerations in Exit Strategies: IPO vs. Sale

IPO vs. SALE TRANSACTION

INITIAL PUBLIC OFFERING (IPO)

SALE TRANSACTIONS

CHAPTER 17 - Raising Capital through Exempt Offerings of Securities

INTRODUCTION

EXEMPTIONS FROM SECURITIES ACT REGISTRATION

STATE SECURITIES (“BLUE SKY”) LAWS

ANTIFRAUD PROVISIONS

BROKER-DEALER AND AGENT REGISTRATION EXEMPTIONS

RESTRICTIONS ON RESALES OF RESTRICTED SECURITIES

NOTE

Glossary

Index

This book is printed on acid-free paper.

Copyright © 2008 by John Wiley & Sons, Inc. All rights reserved.

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Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Private equity : governance and operations assessment / Harry Cendrowski . . . [et al.].

p. cm.

Includes index.

ISBN 978-0-470-17846-1 (cloth)

1. Private equity. I. Cendrowski, Harry.

HG4751.P744 2008

332′.041—dc22

2008002748

About the Authors

Brad B. Arbuckle

Senior Principal, Miller, Canfield, Paddock and Stone PLC, Detroit, MI

Mr. Arbuckle practices in the Corporate & Securities Group of Miller Canfield, and his practice focuses on the areas of corporate finance, corporate governance, public company reporting, and public and private company mergers and acquisitions. His transaction experience includes public offerings and private offerings of both equity and debt securities (including 144A private placement offerings) and general corporate, securities, and commercial matters. Mr. Arbuckle joined the Firm in 1984 after graduating magna cum laude from Wayne State University Law School. Mr. Arbuckle is a member of the American Bar Association and the State Bar of Michigan.

Richard M. Bolton

Member, Dickinson Wright PLLC, Detroit, MI

Mr. Bolton leads the firm’s Private Equity Practice and his practice concentrations include private equity, corporate finance, mergers and acquisitions, and securities. Mr. Bolton is a graduate of Michigan State University (with highest honors) and Northwestern University School of Law. Mr. Bolton represents numerous private equity clients in the organization of private equity funds, acquisition and divestiture of portfolio companies, all kinds of financing transactions, and as general counsel to portfolio companies.

Dr. David J. Brophy, MBA, Ph.D., Director

Professor David J. Brophy is a member of the Finance Faculty at the University of Michigan School of Business Administration where he teaches courses in venture capital and private equity finance. He is Director of the UMBS Center for Venture Capital and Private Equity Finance (CVP), and is a member of the executive committee for the Zell-Lurie Institute for Entrepreneurial Studies (ZLI).

He has published extensive research on venture capital and private equity finance and has twice won the National Association of Small Business Investment Companies Research Award. He is the author of a book titled Finance, Entrepreneurship, and Economic Development, and has published a large number of research papers in this and other aspects of finance. He is a founding member of the editorial board of the Journal of Business Venturing, the Journal of Private Equity Finance, and the International Venture Capital Journal.

He has been a director of several public companies and is a director and advisor to a number of banks, money market funds, and financial services firms including NightHawk Radiology (Coeur d’Alene, ID), Compass Technology Partners (a venture capital firm in Palo Alto, CA), Munder Capital Management (Birmingham, MI), Continental Capital (OH), River Place Holdings (Detroit, MI), and General Motors Acceptance Corporation Wholesale Auto Receivables Corporation. He also is an investor in and an advisor to a number of emerging technology-based firms.

William T. Burgess

Member, Dickinson Wright PLLC, Detroit, MI

Mr. Burgess’ practice is concentrated in the areas of restructurings and workouts, bankruptcy and creditors’ rights, finance, and commercial transactions. Mr. Burgess is a graduate of the University of Michigan (with high honors) and the Yale Law School. Since 1985 he has served as an Adjunct Professor at the University of Detroit Mercy School of Law in the areas of commercial law and payment systems.

Harry Cendrowski, CPA/ABV, CFE, CVA, CFD, CFFA President, Cendrowski Corporate Advisors, LLC, Bloomfield Hills, MI

Since 1976 Harry has provided consulting relating to business valuations, mergers, due diligence, complex commercial litigation support, forensic accounting, and fraud examinations. Harry is also President of the Prosperitas Group, LLC, an independent multi-client family office providing coordinated planning and administrative management services to individuals and families of significant wealth.

Harry has been an expert witness at various courts and administrative agencies in the United States and the United Kingdom. After receiving his bachelor’s degree from the University of Detroit, Harry began his professional career in the audit department of Deloitte & Touche (formerly Touche Ross). In addition to being licensed as a Certified Public Accountant /Accredited in Business Valuation, Harry is a Certified Fraud Examiner, a Certified Valuation Analyst, a Certified Fraud Deterrence Analyst and a Certified Forensic Financial Analyst. He is the co-author of The Handbook of Fraud Deterrence published by John Wiley & Sons, Inc. and has authored articles in several professional publications. Harry frequently presents to various professional associations and business conferences.

Theresa B. Mack, CPA, CAMS

Senior Manager, Cendrowski Corporate Advisors, LLC, Bloomfield Hills, MI

During her 22 year career with the Federal Bureau of Investigation, Theresa was instrumental in solving high impact and extensive white collar crime investigations. The majority of her career with the FBI was devoted to the investigation of bank fraud, corporate fraud, money laundering, wire and mail fraud, identity theft schemes, and copyright infringement, as well as bankruptcy fraud. Theresa is a member of the American Institute of Certified Public Accountants (AICPA), the FBI Agents Association, the Association of Certified Anti-Money Laundering Specialists, and the International Association of Financial Crimes Investigators. A graduate of Aquinas College, Theresa’s professional career as a CPA began with Pannell Kerr Forster, CPAs.

R. Austin Marks, CPA, CFFA

Senior Associate, Cendrowski Corporate Advisors, LLC, Bloomfield Hills, MI

R. Austin Marks has diverse work experience in many areas of accounting and finance. Mr. Marks has performed comprehensive risk assessment engagements with emphases on internal control evaluation, business process review, and recommendations for improvement. Mr. Marks has performed fraud investigations for organizations with multi-million dollar misstatements. Additionally, Mr. Marks has worked extensively providing litigation support for partnership, divorce, and bankruptcy proceedings, as well as performing valuation services. Mr. Marks graduated with honors from the Eli Broad College of Business at Michigan State University with a B.A. in accounting.

James P. Martin, CMA, CIA, CFE, CFD, CFFA

Senior Manager, Cendrowski Corporate Advisors, LLC, Bloomfield Hills, MI, Adjunct Professor, the University of Detroit-Mercy, Detroit, MI

Jim specializes in providing comprehensive risk assessments, focusing on the evaluation of operating effectiveness of business processes and the internal control structure, and the development of recommendations for improvement. In many cases, these services were provided to companies where basic internal control lapses had led to financial reporting and operational issues. Jim has performed forensic examinations of numerous business arrangements to determine the accuracy of recorded transactions and presentations, including the healthcare, durable equipment, real estate, and construction industries.

Jim holds a B.B.A in Accounting, and an M.S. in Accounting Information Systems from Eastern Michigan University. Jim has served on the faculty of Davenport University, Walsh College, and the University of Detroit-Mercy, where he instructed courses in Fraud Examination, Managerial Accounting, Internal Auditing, and Information Technology. Jim is a co-author of The Handbook of Fraud Deterrence published by John Wiley & Sons, Inc.

Louis W. Petro, PhD, CPA, CMA, CFE, CIA, CISA, CFM, CCP, PE

Senior Manager, Cendrowski Corporate Advisors, LLC, Bloomfield Hills, MI

Since 1969, Dr. Petro has taught auditing, systems, accounting, and finance courses at a number of colleges and universities in Michigan and Ontario, Canada. He was the Dean of the Lawrence Technological University School of Management from 1979 through 1989.

From 1971 through 1979, Dr. Petro held consulting and auditing positions at the CPA firms of Ernst and Young, Plante and Moran, and Grant Thornton. He was a Management Advisory Services (MAS) Manager at Grant Thornton in Chicago immediately prior to becoming the Dean at LTU.

Prior to his auditing and consulting career, Lou was a manufacturing engineer at the Chevrolet Division of General Motors (GM) and the GM Manufacturing Development Staff. Lou is a co-author of The Handbook of Fraud Deterrence, published by John Wiley & Sons, Inc.

Phillip D. Torrence

Principal, Miller, Canfield, Paddock, and Stone, PLC, Detroit, MI

Mr. Torrence is the Chair of Miller, Canfield’s Venture and Technology Practice. His corporate, finance, securities, and venture capital practice includes private and public securities offerings, public company representation, mergers and acquisitions, financing, venture capital financing, executive compensation planning, corporate restructuring, going-private transactions, various regulatory and compliance matters, entity formation, shareholder relations, and other corporate matters, with a particular emphasis on banks and bank holding companies. He received his law degree from the University of Utah College of Law, and his B.A. in political science from Hope College.

Adam A. Wadecki

Consultant, Cendrowski Corporate Advisors, LLC, Bloomfield Hills, MI

Adam Wadecki is a consultant with Cendrowski Corporate Advisors. He is also a PhD candidate at the University of Michigan, concentrating in financial engineering and supply chain management, a freelance automotive journalist, and an avid collector of vintage automobiles. Adam’s research currently focuses on financial models that describe the private equity arena and risk management. Adam holds a Master’s degree in Industrial and Operations Engineering, and graduated magna cum laude with Bachelor’s of Science degrees in Mechanical and Industrial and Operations Engineering, all from the University of Michigan.

Richard A. Walawender

Senior Principal, Miller, Canfield, Paddock, and Stone, PLC, Detroit, MI

Mr. Walawender is Director of the Corporate Securities Group, and his practice focuses on the areas of mergers and acquisitions, corporate finance, and corporate governance for public companies, private equity funds, and privately held companies. He also specializes in complex, multi-national and international mergers, acquisitions and strategic alliances involving the automotive industry, and heads up the firm’s Automotive Group. Mr. Walawender received his law degree from the University of Michigan Law School, where he also received his B.A. with high distinction. He is a member of the American Bar Association, the State Bar of Michigan, and the International Bar Association.

Preface

Ever since the U.S. Department of Labor’s clarifications to the Employee Retirement Income Security Act (ERISA) in 1979, private equity investments have played an integral role in the portfolios of all investors. From a nadir in the late 1970s, private equity roared to a zenith in June, 2007 with The Blackstone Group’s initial public offering, and a host of megabillion dollar deals in the pipeline.

Private equity (PE) investment is now a staple of the world economy: it reshapes “tired” companies into more agile organizations, while also financing the world’s newest and best ideas so that they may come to market. Although once demeaned by outsiders, private equity has earned its place in the investment community as an asset class that generates wealth for both investors and the employees of companies it reshapes. The mechanisms by which private equity achieves these goals are described herein.

It is no secret that PE investment has skyrocketed in recent years, as an ever-growing number of investors have become attracted to this asset class. However, despite the recent publicity surrounding private equity, few resources exist that comprehensively describe the details of PE investing. This book is designed to fill part of that gap.

The purpose of this book is threefold: to describe the history of private equity, to illustrate how governance structures differ between private equity portfolio companies and those of public corporations, and finally, to explain how the operations of PE portfolio companies can be improved. Along these lines, the text provides valuable information for numerous audiences: students unaccustomed to private equity, private equity professionals, and investors should all find valuable information in this book. Chapters have been designed on a stand-alone basis, although we highly recommend that readers unversed in private equity read the initial three chapters of the book before perusing other sections.

We begin with Module I—The History of Private Equity, a comprehensive introduction to the private equity process: the key players, terms of investment, and historical trends are described in detail. In reading these chapters, the “private equity novice” will become accustomed to the terminology used by industry professionals, and also the roles played by participants in this asset class.

Harvesting plays a pivotal role in PE investments. In this section we also introduce the reader to the harvesting mechanisms of the initial public offering (IPO) and the sale to a strategic or financial buyer—also known as a merger and acquisition (M&A) deal.

From there, the book transitions into Module II—Governance Structures in Private Equity, a discussion of the unique governance structures that the private equity model imparts on portfolio companies. Applicable professional standards, models of internal control, and contemporary business intelligence are also discussed.

The next section, Module III—Understanding Operations, provides information devoted to assessing and improving the operations of portfolio companies. A metaphor for analyzing organizations is introduced in Chapter 12, that of organizations as humans. This philosophical framework provides the reader with a detailed methodology for understanding the complexities of today’s organizations. Subsequent chapters discuss the topics of Lean Manufacturing and operations assessments; they are designed to assist private equity professionals in understanding how to perform operations assessments, and also how to improve the manufacturing operations of portfolio companies.

The book concludes with Module IV—Special Considerations in Private Equity Investments. This topic discusses areas of special considerations in exit strategies and how to raise capital through exempt offerings of securities.

After completing the book, it is our hope that the reader will have gained an understanding of the intricacies within the private equity industry, and also an appreciation for the asset class.

Harry Cendrowski Bloomfield Hills, Michigan February, 2008

Acknowledgements

We are grateful to numerous individuals without whom this publication would never have come to fruition. However, two individuals deserve special recognition for their assistance in the compilation of this text.

Prof. David J. Brophy of the University of Michigan’s Ross School of Business was instrumental in providing access to numerous data sources upon which the analyses in the book are based. His comments during the formative stages of writing also assisted us in developing a cogent manuscript that detailed many of the intricacies of the private equity industry.

Ian Bund of Plymouth Venture Partners (Ann Arbor, MI) also deserves special recognition for his insight, valuable commentary, editing, and support throughout the writing process. Ian’s experience as a private equity investor and professional provided us with great detail surrounding the history of PE investment. Additionally, his insightful comments assisted us in highlighting the differences between the many forms of private equity investment.

MODULE I

The History of Private Equity

CHAPTER 1

The Private Equity Process

Harry Cendrowski Adam A. Wadecki

INTRODUCTION

The institutionalization of private equity is, perhaps, one of the most important advances in the field of modern finance: It is through private equity (PE) that the seeds of new ideas are permitted to germinate and the souls of the withering may be granted rebirth. While the previous expression is perhaps extreme, those intimately connected with the arena would strongly support its assertion.

PE investment is—to put it mildly—a hot issue in today’s marketplace. In the past five years alone, investment in the arena has totaled $832 billion,1 a value roughly equal to the size of Mexico and India’s nominal gross domestic products (GDPs), and 40 times larger than the GDP of Kenya. In the United States private equity investment topped $100 billion in 2007 alone, a particularly strong showing in light of the credit market turmoil that curbed 4th quarter investments. (See Exhibit 1.1 for further information.)

Despite the recent woes, PE is garnering more attention and press than ever before as numerous firms continue to raise capital at previously unheard-of levels. Indeed, the top ten largest PE funds in history have all been raised in the past three years.

To understand the PE arena is to understand the “man behind the curtain” in The Wizard of Oz: Many details of the industry are shrouded in secrecy, and firms are often reluctant to divulge details of their funds to outsiders. However, once understood, the complexities of the industry largely vanish, and the reader is left with a concrete understanding of the motivations that keep such a well-oiled machine running.

EXHIBIT 1.1 Historical Private Equity Investment Levels

Source: Thomson’s VentureXpert database.

Within the PE arena are numerous types of risk capital; however, this book will largely focus on two types of such investments: buyouts and venture capital. Other types of PE investments, including mezzanine financing, private investments in public equity (PIPEs), and fund of funds investments (FoF), will be discussed throughout the work; however, these will not be the primary focus of this text.

Along these lines, this chapter serves to acclimate the reader to common PE terms, while providing a comprehensive introduction to the structure of the industry. Buyout and venture capital funds will be the chapter’s primary focus.

We now begin with a general overview of the private equity arena. This section will introduce many PE terms that will be further defined in subsequent sections.

GENERAL TERMS AND BRIEF OVERVIEW

PE funds are companies that are formed and managed by PE firms. These funds are—for the most part—private investment vehicles that permit investors to combine their capital for investment: This practice allows investors to greatly increase their purchasing power in the marketplace. Additionally, PE funds are frequently unregistered investment vehicles, meaning that, unlike publicly traded securities, their investment and financial reporting policies are not governed by the Securities and Exchange Commission (SEC) or another policing body.