Investment Banking by Rosenbaum Joshua Pearl Joshua & Joshua Pearl
Author:Rosenbaum, Joshua,Pearl, Joshua & Joshua Pearl [Rosenbaum, Joshua & Pearl, Joshua]
Language: eng
Format: epub
ISBN: 9781118421611
Publisher: John Wiley & Sons, Inc. (trade)
Published: 2018-09-06T00:00:00+00:00
EXHIBIT 4.1 LBO Fundamentals
KEY PARTICIPANTS
This section provides an overview of the key participants in an LBO (see Exhibit 4.2).
EXHIBIT 4.2 Key Participants
Financial Sponsors
The term “financial sponsor” refers to traditional private equity (PE) firms, merchant banking divisions of investment banks, hedge funds, venture capital funds, and special purpose acquisition companies (SPACs), among other investment vehicles. PE firms, hedge funds, and venture capital funds raise the vast majority of their investment capital from third-party investors, which include public and corporate pension funds, insurance companies, endowments and foundations, sovereign wealth funds, and wealthy families/individuals. Sponsor partners and investment professionals may also invest their own money into the fund(s) or in specific investment opportunities.
Capital raised from third-party investors and the sponsor partners and investment professionals is organized into funds that are usually structured as limited partnerships. Limited partnerships are typically established as a finite-life investment vehicle with a specific total capital commitment, in which the general partner (GP, i.e., the sponsor) manages the fund on a day-to-day basis and the limited partners (LPs) serve as passive investors.4 LPs subscribe to fund a specific portion of the total fund's capital (“capital commitment”). These vehicles are considered “blind pools” in that the LPs subscribe to their capital commitment without specific knowledge of the investments that the sponsor plans to make.5 However, sponsors are often limited in the amount of the fund's capital that can be invested in any particular business, typically no more than 10% to 20%.
Sponsors vary greatly in terms of fund size, focus, and investment strategy. The size of a sponsor's fund(s), which can range from tens of millions to tens of billions of dollars (based on its ability to raise capital), helps dictate its investment parameters. Some firms specialize in specific sectors (such as industrials or media, for example) while others focus on specific situations (such as distressed companies/turnarounds, roll-ups, or corporate divestitures). Many firms are simply generalists that look at a broad spectrum of opportunities across multiple industries and investment strategies. PE firms are staffed with investment professionals that fit their strategy, many of whom are former investment bankers or management consultants. They also typically employ (or engage the services of) operational professionals and industry experts, such as former CEOs and other company executives, who consult and advise the sponsor on specific transactions.
In evaluating an investment opportunity, the sponsor performs detailed due diligence on the target, often through an organized M&A sale process (see Chapter 6). Due diligence is the process of learning as much as possible about all aspects of the target (e.g., business, industry, financial, accounting, tax, legal, regulatory, and environmental) to discover, confirm, or discredit information critical to the sponsor's investment thesis. Detailed information on the target is typically stored in an online data room, such as those provided by Intralinks. Sponsors use due diligence findings to develop a financial model and support purchase price assumptions (including a preferred financing structure), often hiring accountants, consultants, and industry and other functional experts to assist in the process. Sponsors typically engage
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