AA- Ireland Netherlands Canada Belgium Germany United States France Bermuda Switzerland Luxembourg Hong Kong AA- Ireland Netherlands Canada Belgium Germany United States France Bermuda Switzerland Luxembourg Hong Kong INVESTMENTS DIVESTMENTS & DEALS & DISTRIBUTIONS INVESTMENTS DIVESTMENTS CUSTOMISED REPORTING FUNDRAISING& DEALS LIQUIDATION& DISTRIBUTIONS VALUE-ADDED SERVICES CUS TOMIS ED RISK MANAGEMENT & FUNDRAISING LIQUIDATION COMPLIANCE SERVICES V ALUE-ADDE INVESTMENTS DIVESTMENTS & DEALS & DISTRIBUTIONS INVESTMENTS DIVESTMENTS CUSTOMISED REPORTING FUNDRAISING& DEALS LIQUIDATION& DISTRIBUTIONS VALUE-ADDED SERVICES CUS TOMIS ED RISK MANAGEMENT & FUNDRAISING LIQUIDATION COMPLIANCE SERVICES V ALUE-ADDE 1.1 1.2 1.3 FOREWORD Despite the recent slowdown experienced by the industry, private equity continues to play a key role in the economy. It notably represents a fundamental source of support to non-listed 2.1 companies during their whole lifecycle. It also contributes directly towards the creation of companies, the promotion of innovation and new technologies, growth, employment and re- newal of the economic landscape. However, as an asset class, private equity is probably one of the less well understood seg- ments of the current financial markets. It is also certainly one of the most specialised. Com- 2.2 pared to other investment funds, private equity funds differ in strategy, operating model, structure and objective. As a clear understanding of the mechanisms of private equity is required, we thought it appropriate to develop this comprehensive brochure which covers the different aspects of 3.1 the industry. This guide will provide the reader with an insight into the main concepts and features of private equity, a market overview and a presentation of the main industry players, legal frameworks and vehicles. It also addresses fiscal aspects and operational issues, as well as the perspectives for the industry. 3.2 As an experienced player in Europe and in North America, with a full range of services to pri- vate equity firms, CACEIS has a deep understanding of this vast and ever-evolving industry. It is this experience, expertise and know-how, gained through supporting many clients over the years that we share in this brochure. 4.1 We trust you will find this publication both relevant and informative. 4.2 4.3 4.4 1.1 1.2 EXECUTIVE SUMMARY The term private equity is a broad description of an industry which encompasses a wide range of activities that can differ in a number of fundamental ways, where funds can have different investment strategies and operating models. Private equity funds are generally formed as limited partnerships 1.3 or a legally similar structure, which varies from country to country. This concept of limited partnership among others, as well as the roles and responsibilities of the dif- ferent players involved (General and Limited Partners, placement agents, depositary banks, adminis- 2.1 trative agents, registrar and transfer agents, auditors, legal and tax advisers), must be well under- stood in order to gain a clear comprehension of this complex asset class. One should keep in mind that private equity funds deeply differ from other types of investment funds in terms of governance, risk, structure, assets and liquidity, valuation, reporting and rewards to fund managers. 2.2 Fiscal aspects and adequate structuring are crucial in the private equity business. Together with tax and legal advisers, the General Partner shall determine the ideal investment structure after a thor- ough analysis of all important elements of the project. Furthermore, as the operational model of pri- vate equity funds has little in common with traditional funds, there are a number of operational issues to address at the different stages of the fund lifecycle, namely with regard to assets valuation, report- 3.1 ing and complex waterfall distributions. In this framework, the right skills, experience and resources are vital to succeed and expert service providers play a key role. In the wake of the global economic downturn, what are the perspectives for the private equity indus- try? A few points can be highlighted: 3.2 • The acceleration of the industry’s globalisation (although North America is historically and by far the largest private equity market worldwide, recent years have already seen a rise in the importance of the Asia-Pacific region and emerging markets as investment destinations); • A time of challenges, as shown by the very tough fund raising conditions experienced by private 4.1 equity firms at the moment, but also of opportunities, the best returns being usually made in troubled times; • The evolution of the partners relationship in favour of investors, which finds expression in enhanced selection, financial negotiations and in the request for more transparency and information; • Last but not least, the increased level of government regulation could have major impacts on 4.2 the industry, in particular the AIFM draft directive currently under discussion at the European Union level. 4.3 4.4 1. INDUSTRY OVERVIEW ........................................................................................................................................ 9 1.1 Introduction to private equity ................................................................................................................. 9 1.1.1 Definition ............................................................................................................................................... 9 1.1.2 A brief history of private equity ............................................................................................... 10 1.1 1.1.3 Main concepts of private equity ............................................................................................. 12 1.1.4 Comparison between private equity funds and traditional funds ........................... 20 1.2 Private equity strategies and sectors ............................................................................................. 22 1.2.1 Venture capital .............................................................................................................................. 22 1.2.2 Buyouts .............................................................................................................................................. 23 1.2.3 Mezzanine financing ..................................................................................................................... 19 1.2 1.2.4 Distressed debt ............................................................................................................................ 23 1.2.5 Private equity real estate ......................................................................................................... 24 1.2.6 Clean technologies ........................................................................................................................ 25 1.2.7 Infrastructure ................................................................................................................................ 26 1.3 Market overview ......................................................................................................................................... 27 1.3 1.3.1 The North American private equity market ...................................................................... 28 1.3.2 The Western European private equity market ................................................................ 30 1.3.3 The Asian and rest of the world private equity market ............................................... 33 2. MAIN ACTORS AND STRUCTURES ........................................................................................................... 35 2.1 Roles and responsibilities of main actors ..................................................................................... 35 2.1 2.1.1 General Partner ............................................................................................................................. 35 2.1.2 Limited partner .............................................................................................................................. 36 2.1.3 Placement agent ........................................................................................................................... 37 2.1.4 Depositary ....................................................................................................................................... 37 2.1.5 Administrative agent (fund administrator) ........................................................................ 38 2.1.6 Registrar and transfer agent .................................................................................................. 38 2.2 2.1.7 Auditor ................................................................................................................................................ 38 2.1.8 Legal adviser .................................................................................................................................. 39 2.1.9 Tax adviser ...................................................................................................................................... 39 2.2 Overview of main legal frameworks and vehicles ....................................................................... 41 2.2.1 Luxembourg ..................................................................................................................................... 42 3.1 2.2.2 France ................................................................................................................................................