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Gone are the days when “being in PE”1 meant buying assets with steady cash flows in heavily leveraged transactions and riding the investments out to a successful exit. Despite the evolution, growth and increasing diversity of PE, this dated image persists, but no longer does the industry justice.

So, what does modern PE look like? The main difference from the activities of the '70s and '80s is that PE firms have developed into transformation agents that impact businesses at critical junctures of their development. PE funds are no longer just hands-off financial investors seeking to profit through changes to the capital structure or by selling off parts of a business; as the industry has matured, PE firms increasingly engage via active ownership to drive value creation in their portfolio companies. Indeed, a partnership with PE can provide portfolio companies with the edge to remain relevant in the hypercompetitive age of globalized markets.

Although PE has become synonymous with exceptional growth and wealth generation, the industry has endured its share of challenges. In particular, each financial crisis has opened the door to controversy. The spotlight focused on the performance of leveraged buyouts in times of highly visible defaults and then switched to venture investors' ambitious start-up valuations when valuations slipped and follow-on transactions took on a distinct pass-the-parcel flavour. There are ongoing debates about the fairness of profit-sharing between limited partners and general partners (and taxation of the latter) as well as the industry's impact on its investee companies and on the economy at large.

Will the value-added focus of the PE industry become a model for the financial markets of tomorrow? Will the limited partnership model itself require dramatic changes to survive? How can we better communicate the benefits professional PE can bring to companies and not only to investors? These are some of the relevant questions being asked by senior industry players as we set out to write this book.

As PE works its way into the economies of the 21st century, board members, senior executives, finance professionals and entrepreneurs are well advised to follow the industry's development carefully. After all, whether venture funds, super angels, growth equity funds, turnaround investors or buyout funds, we are talking about gatekeepers and agents who are entrusted with the capital of their investors to find the best entrepreneurial opportunities possible, whether in developed, emerging or frontier markets.

As for students of the industry and junior PE professionals, developing a solid understanding of the overall business model of PE will enable them to develop new ways to differentiate their firms in the eyes of investors. Attractive target companies in search of funding can choose from more than 8,000 professional PE firms worldwide to find those who meet their expectations and can deliver worthwhile partnerships.

A NOTE FROM CLAUDIA ZEISBERGER

As a professor at INSEAD, one of the leading global business schools, I am fortunate to be part of a diverse, young, dynamic and entrepreneurial community. As the academic director of the school's Global Private Equity Initiative, I am often the first port of call for students, alumni, senior executives and entrepreneurs for a multitude of PE related issues, including career transitions, start-up ideas, fundraising and access to industry professionals.

For years I have been asked for a resource that would enable them to deepen their knowledge on a specific topic of PE or VC. Every class has a group of students keen to dive deeper into a variety of niche topics that cannot be addressed within the time constraints of an MBA course. To satisfy those questions and to complement my classes, I started to write “Private Equity Primers” – short, concise class notes that focused on topics that deserved more detailed coverage.

The book you are about to explore started as a collection of those primers, often written in response to conversations with industry players at conferences to shed light on areas of PE that are, by their nature, not easy to understand. The notes have been fine-tuned over many years of class use.

Supporting this book with a selection of INSEAD case studies (published in Private Equity in Action – Case Studies from Developed and Emerging Markets) was an easy decision. They add context to the theoretical concepts, and allow the reader to consider the potential conflicts, controversies and challenges those PE funds face when deploying capital to deserving firms in both developed and emerging markets.

News coverage of the PE industry, often embellished for dramatic effect, does a good job of fueling the imagination of anyone from laymen to seasoned financial professionals. PE, with its wide variety of colorful characters and at times unconventional strategies, is often portrayed as the boogeyman of the financial services industry – deservedly or not – depending on whom you ask. To my frustration, much of the criticism of these private investment vehicles shows a lack of understanding of the basic principles of PE and VC. Admittedly, this is a function of a traditionally opaque industry that could have done a much better job of educating the broader public on the mechanics of and benefits behind its investment activities.

This book aims to create clarity, increase the level of understanding of PE and help interested professionals not only to connect the dots, but also to support them in the process of executing that first deal, whether as a PE professional or as a board member courting the first external investor.

Two INSEAD alumni join me as co-authors for this book. Over the years, we have collaborated on various research projects at INSEAD's PE center and, through their work in the alternative investing space globally, they add another perspective to the industry.

Asking senior professionals in our network to add their thoughts to each chapter in brief guest comments and also to review our writing, was a natural extension of this principle of marrying academic rigor with the real-life challenges facing PE professionals. Our guest authors provide a candid counterpoint to our arm's length discussion and raise critical points.

The authors' views and biases of course play into the reflections; they shape the lens through which we view the world. In my case, more than 20 years in the now fully emerged markets of Asia have certainly given me a vantage point away from the standard western PE model. I have had the opportunity to observe PE firms professionalize and improve young businesses, revamp their operations and allow them to launch into an accelerated growth phase, despite owning a minority equity stake. Overall I have seen PE effect real change in the fast-growing markets of Asia and Latin America. My co-authors balance this out through their experience.

Writing this book was a fascinating journey that brought several points to light:

● PE and VC, while popular topics, are rarely, if ever, examined in the context of the broader economy.

● Industry players are often frustrated by the lack of understanding of their craft within the business community, which leads to misinterpretation and misrepresentation and at times to a backlash or unfair accusations.

● Research papers – both of the applied and academic kind – more often than not take a closer look at narrow and specific areas of PE, thereby ignoring the contextual issues. Resources to help one understand the big picture, covering the spectrum from venture to growth equity to buyouts, are few and far between.

There was room for a book to step in and fill some of the gaps to prepare all parties for an informed discussion.

1

In the context of this book, PE is defined broadly and includes venture capital (VC), growth equity and buyout funds. More about this later in the book.