Monitoring Fees
Private equity firms often ask acquired company to sign a management agreement, obligating it to pay “monitoring fees” to the private equity firm for periods of ten years or longer. The fees, which can exceed hundreds of millions of dollars, are supposedly paid in exchange for monitoring, financial, and consulting services. If the management agreement is terminated, the private equity firm is often entitled to receive the full value of the contract even though its obligation to perform any services ceases. Portfolio companies typically deduct these fees as ordinary business expenses, a move that reduces their taxes.
Private equity firms often ask acquired company to sign a management agreement, obligating it to pay “monitoring fees” to the private equity firm for periods of ten years or longer. The fees, which can exceed hundreds of millions of dollars, are supposedly paid in exchange for monitoring, financial, and consulting services. If the management agreement is terminated, the private equity firm is often entitled to receive the full value of the contract even though its obligation to perform any services ceases. Portfolio companies typically deduct these fees as ordinary business expenses, a move that reduces their taxes.
The investment objectives of real estate private equity funds can generally be divided into two categories:
1. Capital appreciation
2. Income.
Funds focusing on capital appreciation — also called opportunity funds in the USA — offer high risks for high returns.
Income-oriented funds offer greater stability, but with lower internal rates of return. Within these two categories are a wide variety of investment strategies, ranging from equity investments (including direct acquisitions of real estate and investments in public and private real estate operating companies) to originations of real estateloans that stand subordinate to bank mortgages (so called ‘mezzanine’ finance structures).
The investment cycle of a real estate private equity fund will very according to the strategy of the fund, the target assets and the needs of the investors.
1. Capital appreciation
2. Income.
Funds focusing on capital appreciation — also called opportunity funds in the USA — offer high risks for high returns.
Income-oriented funds offer greater stability, but with lower internal rates of return. Within these two categories are a wide variety of investment strategies, ranging from equity investments (including direct acquisitions of real estate and investments in public and private real estate operating companies) to originations of real estateloans that stand subordinate to bank mortgages (so called ‘mezzanine’ finance structures).
The investment cycle of a real estate private equity fund will very according to the strategy of the fund, the target assets and the needs of the investors.
Private Equity 101 pinned «🅵🅸🆁🆂🆃 🅿🅾🆂🆃 ... .. . Private equity typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded. Wikipedia»
I have pinned the first message, so that you can click on that pinned message & get directly to the top of this channel. 😊
Secondaries
If investing in private equity funds is by nature illiquid, it is no surprise that we have seen the development of a secondary market.
Over a ten-year horizon, the number of events that can occur to generate the desire or need to exit investments is virtually infinite.
Changes in strategy, shifts in asset allocation, reallocation across fund managers, balance-sheet pressures, mergers, and regulatory changes are among the many valid reasons investors might want to exit their investments at times when the funds in their portfolios still have years to run.
Secondary buyers are adding value to private equity as an asset class by boosting its liquidity and, therefore, its attractiveness to investors.
If investing in private equity funds is by nature illiquid, it is no surprise that we have seen the development of a secondary market.
Over a ten-year horizon, the number of events that can occur to generate the desire or need to exit investments is virtually infinite.
Changes in strategy, shifts in asset allocation, reallocation across fund managers, balance-sheet pressures, mergers, and regulatory changes are among the many valid reasons investors might want to exit their investments at times when the funds in their portfolios still have years to run.
Secondary buyers are adding value to private equity as an asset class by boosting its liquidity and, therefore, its attractiveness to investors.
Two ways an LP can approach co-invest strategy:
1. Direct Co-Investing
The first way to co-invest is directly with an operating company or holding company, often without any fees or carry. This simple structure can produce better economic returns and give LPs better control over their investment.
2. Sidecar Vehicles
If an LP is merely looking to reduce fees, rather than take active control, they can co-invest using a sidecar vehicle, also known as a special purpose vehicle. With a sidecar, an LP gives full discretion to the GP to pick up co-investments.
The advantages of a sidecar -
1. It provides LPs with better fee economics.
2. LP doesn't need to scrutinize every single co-investment opportunity.
#sidecar
1. Direct Co-Investing
The first way to co-invest is directly with an operating company or holding company, often without any fees or carry. This simple structure can produce better economic returns and give LPs better control over their investment.
2. Sidecar Vehicles
If an LP is merely looking to reduce fees, rather than take active control, they can co-invest using a sidecar vehicle, also known as a special purpose vehicle. With a sidecar, an LP gives full discretion to the GP to pick up co-investments.
The advantages of a sidecar -
1. It provides LPs with better fee economics.
2. LP doesn't need to scrutinize every single co-investment opportunity.
#sidecar
Direct Lending
Direct lending is a route to access capital as an alternative to the syndicated loans or senior floating-rate capital traditionally provided by banks. Direct lending loans are provided by "non-bank" lenders, such as institutional investors.
Direct lending loans are primarily first lien, senior secured floating-rate loans, but can also be second lien, revolvers, or accordion/delayed-draw facilities. They have flexible amortization profiles and final maturities that usually range from 5 to 6 years.
The direct lending market has become a permanent source of capital for borrowers. It is largely a leveraged buyout-driven, sponsor-led market, but relies on private placement-style credit and terms underwriting.
Direct lending is a route to access capital as an alternative to the syndicated loans or senior floating-rate capital traditionally provided by banks. Direct lending loans are provided by "non-bank" lenders, such as institutional investors.
Direct lending loans are primarily first lien, senior secured floating-rate loans, but can also be second lien, revolvers, or accordion/delayed-draw facilities. They have flexible amortization profiles and final maturities that usually range from 5 to 6 years.
The direct lending market has become a permanent source of capital for borrowers. It is largely a leveraged buyout-driven, sponsor-led market, but relies on private placement-style credit and terms underwriting.
“BLIND-POOL” Investing
When committing to a private equity fund, an investor is essentially committing to a team of professionals, since in many cases private equity is “blind-pool” investing (i.e., the investor does not know the composition of the portfolio because funds are raised first and thereafter invested in portfolio companies). “Blind-pool” investing underscores the importance of conducting thorough and rigorous manager due diligence before making an investment.
When committing to a private equity fund, an investor is essentially committing to a team of professionals, since in many cases private equity is “blind-pool” investing (i.e., the investor does not know the composition of the portfolio because funds are raised first and thereafter invested in portfolio companies). “Blind-pool” investing underscores the importance of conducting thorough and rigorous manager due diligence before making an investment.
In most fund structures, the manager receives a fee from the fund vehicle (traditionally a limited partnership). This is usually in the form of annual fees based on the size of investor commitments, assets or net assets of the fund, fees for specific transactions, and fees (carried interest) based on the performance of the fund. The manager is often referred as the general partner of the fund, but in reality the roles are different and the general partner is often a wholly-owned subsidiary of the fund manager and ring-fenced as a special purpose vehicle company with few or no assets of its own. This is due to the fact that the general partner has unlimited liability for the debts of the partnership fund. For this reason each separate fund will have its own general partner, so as not to run the risk of cross-default across different funds, whereas the fund manager may be engaged to advise multiple funds at any one time.
Ten years ago, managers of PE funds were largely not involved in the secondary market, except to approve the buyer as an acceptable replacement LP. Today, managers actively work with the secondary market to generate liquidity solutions for their investors and themselves. Manager-led or GP-led secondaries make up more than one-third of the market and will continue to grow.
How Did Mitt Romney Get So Obscenely Rich? Robert Reich Explains
https://youtu.be/rodifJlis2c
https://youtu.be/rodifJlis2c
YouTube
How Did Mitt Romney Get So Obscenely Rich? Robert Reich Explains
How exactly did Mitt Romney Get So Obscenely Rich? Robert Reich explains The Magic of Private Equity in 8 Easy Steps
Here are Reich's 8 steps (as per 👆👆👆 video ):
1. Build a PE fund of other people's money.
2. Target a company they think they can "squeeze" profits from.
3. "Squeeze" those companies by cutting costs — firing workers, cutting benefits etc.
4. Use company as collateral to borrow money from banks. Interest payments from this debt are deducted so the company shows bigger profits.
5. "Get the company to issue a special dividend to pay the original investors so everything else is gravy" (this is a dividend recapitalization).
6. Sell the company at a profit.
7. Pocket 20% of the gains for that sale.
8. Pay 15% tax (capital gains) on the profit from this sale.
1. Build a PE fund of other people's money.
2. Target a company they think they can "squeeze" profits from.
3. "Squeeze" those companies by cutting costs — firing workers, cutting benefits etc.
4. Use company as collateral to borrow money from banks. Interest payments from this debt are deducted so the company shows bigger profits.
5. "Get the company to issue a special dividend to pay the original investors so everything else is gravy" (this is a dividend recapitalization).
6. Sell the company at a profit.
7. Pocket 20% of the gains for that sale.
8. Pay 15% tax (capital gains) on the profit from this sale.
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