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XXXCDFEVDBSSPMM @>OOLIIP@ELLIPGG J>K>DBJBKQ 5 Financial 7PM*TTVF]%FDFNCFS What’s all the NOISE about? 10 Private Equity and Hedge Funds - Is Convergence Inevitable? )FEHFGVOETBOEQSJWBUFFRVJUZGVOETUIFUXP IPUUFTUJOWFTUNFOUHSPXUITFDUPSTJOUIF64 TFFNUPCSFBLJOUPFBDIPUIFS±TUFSSJUPSZ ¬#Z+JBSVJ8FOH 12 Private Equity in Emerging Markets: The Comeback ¬#Z.BSJB%F-PT"OHFMFT3FOHJGPBOE#FUUJOB%JY 19 The Art of Venture Capital Valuation ¬#Z.BSL)PWFSNBOO 22 Law & Private Equity ¬#Z)BHHBJ4,MPSNBO&SBRJ 16 Inside the Profession 24 A Career Path in the Private Equity Industry 0OMJOFBOE0G»JOF4PVSDFT 1SJWBUFFRVJUZQSP+BNFT8VTIBSFTIJTFYQFSJFODF 0OFPG0VS0XO¬1"6-:A/( BOEJOTJHIUXJUI#$'SFQPSUFS+VTUJO.FEPGG 27 Readers’ Corner A Word from Dean Taggart & Professor Marcus PL@F>I>KAB@LKLJF@DIL?>IFW>QFLKKBTQB@EKLILDFBPBOEUIFFWPMWJOH SFHVMBUPSZMBOETDBQFBSFBNPOHUIFNBOZESJWFSTPGDIBOHFJOUIFºOBODJBMFOWJSPONFOU "TQBSUPGUIFºOBODJBMDPNNVOJUZUIFHSBEVBUFQSPHSBNTJO'JOBODFBU#PTUPO$PMMFHF BMTPNVTUNBOBHFBOEBUUFNQUUPCFOFºUGSPNUIFTFDIBOHFT*OGBDUXFDPOUSJCVUFUP DIBOHFUISPVHIPVSSFTFBSDIJOOPWBUJPOBOEBEWBODFNFOUPGLOPXMFEHF 'PSZFBST#PTUPO$PMMFHFIBTCFFOBMFBEFSJOUIFºOBODJBMTFSWJDFTJOEVTUSZQSPWJEJOH FEVDBUJPOBOEFUIJDBMHVJEBODFUPJUTNFNCFSTBOEUIFJOEVTUSZBUMBSHF5PEBZXFBSF EFMJHIUFEUPBOOPVODFUIFJOBVHVSBUJPOPGJUTºSTUºOBODJBMNBHB[JOF#PTUPO$PMMFHF '*/"/$*"-XJMMCSJEHFUIFHBQCFUXFFOºOBODJBMSFTFBSDIBOEQSBDUJDFQSPWJEJOHB QSBDUJDBMQFSTQFDUJWFPOUIFºOBODJBMJOEVTUSZUISPVHICBDLHSPVOEBSUJDMFTBTXFMMBTJOUFS WJFXTUIBUTIFEMJHIUPODPOUFNQPSBSZJTTVFTBOEUSFOET "WFOUVSFPGPVSHSBEVBUFTUVEFOUT#PTUPO$PMMFHF'*/"/$*"-XJMMTFSWFJOTQJSFBOE JOGPSNUIFHSBEVBUFQPQVMBUJPO­ºOBODFDPODFOUSBUPSTBTXFMMBTUIPTFXJUIBNPSFHFOFSBM JOUFSFTUJOCVTJOFTT5IFNBHB[JOFXJMMQSPWJEFBQMBUGPSNGPSTUVEFOUTUPQVCMJTIUIFJS XPSLBOEQSPWJEFUIFTDIPPMXJUIBOBEEJUJPOBMXBZUPDPNNVOJDBUFXJUIJUTBMVNOJ #PTUPO$PMMFHF'*/"/$*"-XJMMCVJMEBTXFMMPOUIF$BSSPMM4DIPPM±TSFNBSLBCMF'JOBODF %FQBSUNFOUGBDVMUZ*UXJMMIFMQVTTVTUBJOBOEFOIBODFUIFSFQVUBUJPOPGPVSHSBEVBUF QSPHSBNTJOºOBODF#ZQVSTVJOHJUTPCKFDUJWFTXJUIWJTJPOBOEJOUFHSJUZXFBSFDPOºEFOU UIBUUIJTOFXTUVEFOUWFOUVSFXJMMTFSWFUPFTUBCMJTIBMFBSOJOHDPNNVOJUZBOEXJMMIBWFB EFFQJNQBDUPOTUVEFOUT±DBSFFST 3PCFSU5BHHBSU1I% "MBO.BSDVT1I% "TTPDJBUF%FBOGPS(SBEVBUF1SPHSBNT 1SPGFTTPS¬'JOBODF%FQBSUNFOU >KOPKJ?KHHACA ÄdWdY_Wb Financial 5 7PM*TTVF]%FDFNCFS 10 16 Private Equity Inside the Profession Long Term Strategy 5 16 24 What’s all the Noise About? Private equity pro James Wu shares IJT A Career Path in the Private Equity Industry 1SJWBUFFRVJUZIBTCFDPNFUIFUBMLPGUIF FYQFSJFODFBOEJOTJHIUXJUI#$'SFQPSUFS 25 0OMJOF4PVSDFT ºOBODJBMNBSLFUTBTNBOZPGUIFTFDUPS±T ¬+VTUJO.FEPGG 0G»JOF4PVSDFT 26 0OFPGPVSPXO¬1"6-:A/( USBOTBDUJPOTUFOEUPBUUSBDUCPUIDBQJUBMBOE NFEJBBUUFOUJPO Valuation ¬#Z#FUUJOB%JY 19 Readers’ Corner The Art of Venture Capital Valuation 27 10 FMBCPSBUFTPOIPXUPTVDDFTTGVMMZWBMVFB Private Equity and Hedge Funds – Is Convergence Inevitable? WFOUVSFDBQJUBMJOWFTUNFOU Our recommendation of books on private equity ¬#Z.BSL)PWFSNBOO 27*NQPSUBOU+PVSOBMT )FEHFGVOETBOEQSJWBUFFRVJUZGVOETUIF UXPIPUUFTUJOWFTUNFOUHSPXUITFDUPSTJO Law UIF64TFFNUPCSFBLJOUPFBDIPUIFS±T 22 UFSSJUPSZ Law & Private Equity ¬#Z+JBSVJ8FOH "MFHBMCBDLHSPVOEJTPOFPGUIFNPTUDPN NPOGFBUVSFTJOUIFCJPHSBQIJFTPGGVOE GPVOEFSTBOEQBSUOFST5IFMFHBMJTTVFT BSFQMFOUJGVMBOEDPNQMFYEFNBOEJOHUIF BUUFOUJPOPGEFEJDBUFEMFHBMUFBNTUIBUUSBDL BMMCVTJOFTTUSBOTBDUJPOT Emerging Markets 12 Private Equity in Emerging Markets: The Comeback ¬#Z)BHHBJ4,MPSNBO&SBRJ "GFXZFBSTBGUFSUIFEJTBQQPJOUJOHVOEFS QFSGPSNBODFTPGFNFSHJOHNBSLFUTQSJWBUF FRVJUZGVOETQSJWBUFFRVJUZTIPQTBSFBHBJO UVSOJOHUIFJSFZFTUPFNFSHJOHNBSLFUT ¬#Z.BSJB%F-PT"OHFMFT3FOHJGPBOE #FUUJOB%JY @A?AI>AN Financial NEW BEGINNINGS #PTUPO$PMMFHF'*/"/$*"- JTZPVSNBHB[JOFGPSZPVSFEVDBUJPOZPVS D E C E M B E R 2 0 05 DBSFFSBOEJOUFMMFDUVBMQMFBTVSF VO L U M E 1 I SS U E 1 8FMDPNFUPUIFºSTUJTTVFPG#PTUPO$PMMFHF'*/"/$*"-UIFPGºDJBM#PTUPO EDITORS Haggai S. Klorman-Eraqi, MSF / MBA ‘06 (FOUNDER) $PMMFHF4UVEFOU'JOBODF.BHB[JOF0VSHPBMJTUPTFSWFZPVXJUIJOTJHIUT PODVSSFOUºOBODJBMJTTVFTBOEJOGPSNBUJPOUIBUBQQFBMTUPUIFºOBODJBM Bettina Dix, MSF ’05 DBSFFSJTU*OFWFSZJTTVFXFXJMMGPDVTPOBTQFDJºDQBSUPGUIFºOBODJBM Jiarui Weng, MSF ‘06 JOEVTUSZHJWJOHPVSSFBEFSTBDPNQSFIFOTJWFPWFSWJFX*OUIJTºSTUJTTVF Maria De Los Angeles Rengifo, MSF ‘05 XFIBWFDIPTFOUPGPDVTPOQSJWBUFFRVJUZBOBSFBUIBUIBTCFFOHSBCCJOH Tanya Taneva, MBA ‘06 IFBEMJOFTJOFWFSZNBKPSºOBODJBMQVCMJDBUJPO*OPVSºSTUBSUJDMF®8IBU±T BMMUIFOPJTFBCPVU ¯#FUUJOB%JYTUBSUTVTPGGXJUIBOFYQMBOBUJPOPGXIBU REPORTERS QSJWBUFFRVJUZJTBMMBCPVU*O®*OTJEFUIF1SPGFTTJPO¯PVSWFSZPXO+VTUJO Justin Medoff, MSA ‘05 .FEPGGJOUFSWJFXTQSJWBUFFRVJUZQSPGFTTJPOBM+BNFT8VBCPVU IJTFYQFSJ Mark Hovermann, MSF ‘05 FODFTBT(FOFSBM1BSUOFSBU%VCJMJFS$PNQBOZ*OPVSIBMMNBSL®-POH 5FSN4USBUFHZ¯PVSTUBGGDPNQPTFEBMJTUPGTPVSDFTUPTUBSUZPVPVUJO ART DIRECTOR / DESIGNER Kul Thapa PHOTOGRAPHY / ILLUSTRATIONS Corbis Veer QVSTVJOHBDBSFFSJOQSJWBUFFRVJUZ"MMUIJTBOENVDINPSFJOPVSWFSZºSTU QVCMJDBUJPO 8FBSFDPVOUJOHPOZPVUPIFMQ#PTUPO$PMMFHF'*/"/$*"-FWPMWFBOE JNQSPWF.BLFTVSFUPESPQVTBMJOFXJUIDPNNFOUTDSJUJDJTNBOE TVHHFTUFETVCKFDUNBUUFSTBU#$'JOBODJBM!CDFEV Microsoft Kul Thapa :PVSTUSVMZ &EJUPSJBM4UBGG Please send editorial correspondence to BCFinancial@bc.edu. This publication expresses the personal opinions and thoughts of the BCF staff and its interviewees. The opinions expressed do not constitute the official position of Boston College or the Carroll School of Management. Copyright 2005 Boston College FINANCIAL Printed in the U.S.A. All publications rights reserved. BCF is distributed free of charge to alumni, faculty and staff of the Carroll School of Management. >KOPKJ?KHHACAÄdWdY_Wb 13*7"5&&26*5: What’s all the Noise About? 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Players in the private equity industry 5IFO UIFSF JT BOPUIFS HSPVQ PG JOWFTUPST CVTJOFTT BOHFMT 5IFTF #SPBEMZ TQFBLJOH UIFSF BSF UISFF MBSHF DBUFHPSJFT PG QMBZFST JO UIF BSF IJHIOFU XPSUI JOEJWJEVBMT PGUFO XJUI FYUFOTJWF FYQFSJFODF JOEVTUSZ QSJWBUF FRVJUZ ºSNT WFOUVSF DBQJUBM ºSNT BOE CVTJOFTT BOEFYDFMMFOUDPOUBDUTJOUIFJOEVTUSZUIFZBSFJOWFTUJOHJO$MFBSMZ BOHFMT "OHFMTJOWFTUTNBMMFSBNPVOUTDPNQBSFEUPCJHQSJWBUFFRVJUZGVOET 1SJWBUFFRVJUZºSNTSBOHFGSPNTNBMMMPDBMCPVUJRVFTXJUIBIBOEGVM UIJTTPVSDFJTNVDIMBSHFSUIBOGSPNQSJWBUFFRVJUZºSNT *OUFSFTUJOHMZ IPXFWFS UIF BDDVNVMBUFE TVN PG JOWFTUNFOUT GSPN PGFYQFSUTUPMBSHFJOUFSOBUJPOBMºSNTXJUIBEWJTPSTJOFWFSZNBKPS FDPOPNZJOUIFXPSME0WFSBMMUIFJOWFTUNFOURVBMJUZPGUIFTFºSNT The deal EJGGFST TVCTUBOUJBMMZ 4NBMMFS ºSNT FTQFDJBMMZ ºOE UIFNTFMWFT JO 5IF EFBM PG B QSJWBUF FRVJUZ JOWFTUNFOU JODMVEFT UIF JEFOUJºDBUJPO UIF EJMFNNB PG ºOEJOH B CVTJOFTT GPDVT JO PSEFS UP TUBZ WJBCMF JO PGBQPUFOUJBMJOWFTUNFOUPQQPSUVOJUZBUIPSPVHIWBMVBUJPOPGUIJT UIJTIJHIMZDPNQFUJUJWFFOWJSPONFOU DPNQBOZPQFSBUJPOBMTVQQPSUUISPVHIFYQFSUJTFWBMVBCMFCVTJOFTT DPOUBDUTBOEBQSPºUBCMFFYJUGPSUIFJOWFTUPS Distributions by US Private Equity Funds 1990-09/30/2003 *OPSEFSGPSBQSJWBUFFRVJUZºSNUPJOWFTUJOBDPNQBOZUIFDPNQBOZ NVTU CF WBMVFE B ºOBODJOH BNPVOU NVTU CF BHSFFE VQPO BOE 90,000 Distributions ($mill) 80,000 JO TPNF DBTFT B DPSSFTQPOEJOH FRVJUZ TUBLF GPS UIF QSJWBUF FRVJUZ Buyouts Venture 70,000 60,000 JOWFTUPSJOFYDIBOHFGPSUIFDBQJUBMNVTUCFEFUFSNJOFE5IFJOJUJBM WBMVBUJPO EFQFOET OPU POMZ PO EVF EJMJHFODF PG IJTUPSJDBM ºOBODJBM 50,000 40,000 EBUB CVU NPSF JNQPSUBOUMZ PO UIF BTTFTTNFOU PG GVUVSF FYQFDUFE 30,000 DBTI »PXT 'VSUIFS UIF JOWFTUPS SFRVJSFT B DFSUBJO SFUVSO PO JUT 20,000 JOWFTUNFOUXIJDIXJMMEFQFOEPOUIFTUBHFPGUIFDPNQBOZBOEUIF 10,000 0 1990 1992 1994 1996 1998 2000 2002 Year FYQFDUFEBEWBOUBHFEFSJWFEGSPNFDPOPNJDXFMMCFJOHVQPOUIFDBTI JOGVTJPO#PUIQBSUJFTJOWFTUPSBOEDPNQBOZQSPKFDUDBTI»PXTBOE QFSGPSN UIFJS PXO WBMVBUJPOT (JWFO UIFTF GPSFDBTUT JODMVEJOH B 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TUFBEJMZEFDSFBTFEUISPVHIVUJMJ[BUJPOPGPQFSBUJOHDBTI»PXT NVTU CF PQFO UP OFXDPNFST UBMFOU NVTU OPU POMZ CF XFMM DIPTFO 6QPO DPNQMFUJPO PG JOWFTUNFOU UIF JOWFTUPS °FYJUT± UIF DPNQBOZ CVUBMTPDBSFGVMMZEFWFMPQFECFDBVTFTFOJPSMFWFMTBSFBDIJFWFEPOMZ CZTFMMJOHPGGPGUIFFRVJUZ"OPUIFSUZQFPGQSJWBUFFRVJUZPS BGUFSBMPOHUJNF WFOUVSFDBQJUBMJOWFTUNFOUDBOCFPCTFSWFEXIFOUIFJOWFTUPSFOUFST Distributions by European Distributions by European PrivatePrivate EquityEquity Funds Funds 1990 to 2003 1990 to 2003 preliminary preliminary Five Year Performance Trends US Venture vs Private Equity as of 3/31/2003 90 All Venture All Private Equity 80 All Priv Equity 70 S&P 500 60 50 40 30 20 10 0 Buyouts Venture 10,000 8,000 5–year IRR Distributions ($mill) 12,000 6,000 4,000 2,000 0 1990 1992 1994 1996 Year >KOPKJ?KHHACAÄdWdY_Wb 1998 2000 2002 8800 1199 8822 1199 8844 1199 866 11998 888 11998 900 11999 922 11999 Year 944 11999 96 6 19199 03 98 8 00 0 02 2 19199 20200 20200 20 B DPNQBOZ UFNQPSBSJMZ BOE PQFSBUFT UIF DPNQBOZ 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Private Equity & Hedge Fun Funds: Funds nds: Is Convergence Inevita Inevitable? evitabl ble? By Jiarui Weng, MSF ‘05 ‘ * O UIF QBTU ºWF ZFBST IFEHF GVOET BOE QSJWBUF FRVJUZ GVOET *O TPNF SFTQFDUT IFEHF GVOET BOE 1& GVOET BSF TJNJMBS *O CPUI 1& IBWF CFFO UIF UXP IPUUFTU JOWFTUNFOU HSPXUI TFDUPST JO UZQFT PG DPNQBOJFT GVOE NBOBHFST UZQJDBMMZ SFDFJWF DPNQFOTBUJPO UIF 6OJUFE 4UBUFT UIJT DBO CF BUUSJCVUFE UP »BU TUPDL NBSLFU CZLFFQJOHBTIBSFPGUIFGVOE±TJOWFTUJOHQSPºUTPS®DBSSZ¯#PUI1& SFUVSOT BOE EFDMJOJOH CPOE ZJFMET .BOZ TFF ®B IFEHF GVOE BT B BOEIFEHFGVOETJOWPMWFSFMBUJWFMZVOSFHVMBUFEQPPMTPGDBQJUBMXIJDI WFIJDMFUIBUEPFTOPUMJNJUUIFºOBODJBMUPPMTUIBUBNBOBHFSIBTBU IBWFUIFQPUFOUJBMUPBDIJFWFJNQSFTTJWFQPTJUJWFSFUVSOTFWFOXIFO IJTEJTQPTBMUPNBLFBQSPºU¯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hen Texas Pacific Group wanted to refinance its buyout NBKPS FYDIBOHFT UIF QFSGPSNBODF PG 1& GVOET NBZ OPU DPSSFMBUF of retailer J. Crew Group Inc. late last year, Black Canyon XJUIUIFQVCMJDNBSLFUTBOEUIVTUIFZPGGFSBOBUUSBDUJWFNFBOTPG Capital LLC, an entity largely funded by Los Angeles-based JOWFTUNFOUEJWFSTJºDBUJPO hedge fund Canyon Capital Advisors LLC, provided a 10-year loan of $275 million. 1 Neufeld, Renata, The Hedge Fund Lady. >KOPKJ?KHHACA ÄdWdY_Wb KUL THAPA 13*7"5&&26*5: SJTLT -JRVJEJUZ SJTL GPS FYBNQMF JT POF PG UIF NFEJVN UFSNT BOE UIFZ DBO PGGFS B NPSF DPNQSFIFOTJWF BOE NBKPSEJGGFSFODFTXJUIIFEHFGVOET5IFMFOHUI BUUSBDUJWFEFCUQBDLBHFXIJDIJTBCJHUISFBUUPQSJWBUFFRVJUZºSNT PG UIF DPNNJUNFOU PG JOWFTUNFOU JO QSJWBUF .BOZ MBSHF CVZPVU ºSNT TBZ UIFZ IBWF SFDFJWFE PGGFST GSPN IFEHF FRVJUZ JT MPOHFS UZQJDBMMZ PWFS ºWF ZFBST JO GVOETUPNFFUUIFJSºOBODJOHOFFET®8BMM4USFFUJTOPMPOHFSXIFSF DPOUSBTU IFEHF GVOE JOWFTUPST UZQJDBMMZ BSF UIF NPTU TPQIJTUJDBUFE DBQJUBM PS UIF NPTU SJTLZ BQQFUJUF SFTJEFT¯ BMMPXFEUPXJUIESBXUIFJSNPOFZUIFJOWFTUFE TBZT 3PCFSU 4UFFM B GPSNFS WJDF DIBJSNBO PG (PMENBO 4BDIT NPOFZPODFBRVBSUFSBGUFSBMPDLVQQFSJPE ®)FEHFGVOETUBLFSJTLNPSFRVJDLMZBOEXJUINPSFVOEFSTUBOEJOH FYQJSFT UIBO 8BMM 4USFFU 5IFZ BSF HPPE BU QJDLJOH CVTJOFTTFT XIFSF UIFZ DBOSFDFJWFFYDFTTSFUVSOTGPSUIFJSDBQJUBM¯)PXFWFSUIFTVDDFTT $PNQBOJFT FOHBHFE JO UIFTF BMUFSOBUJWF PGQSJWBUFFRVJUZJOWFTUNFOUTDBOPOMZCFKVEHFEPOFYJUZFBSTMBUFS JOWFTUNFOU GVOET IBWF CFFO DPNQFUJOH GPS TPPOMZUJNFXJMMUFMMJGIFEHFGVOETIBWFXIBUJUUBLFTUPNBLFNPOFZ UXPLFZSFTPVSDFTNPOFZBOEUBMFOU"MUIPVHI GSPNUIFN JO UIF QBTU IFEHF GVOET BOE 1& GVOET IBWF PQFSBUFE TFQBSBUFMZ JO UIFJS EJTUJODU BSFB PG FYQFSUJTF XF OPX TFF UIFTF WFIJDMFT CSFBLJOH JOUPFBDIPUIFS±TUFSSJUPSZ 4PNF QSJWBUF FRVJUZ ºSNT BSF BMTP HFUUJOH JOUP UIF IFEHF GVOE CVTJOFTT0GGFSJOHIFEHFGVOETJTNPSFUIBOKVTUBXBZUPFYQBOE UIFJSQSPEVDUMJOFTJUBMTPFOBCMFTUIPTFºSNTUPEJWFSTJGZUIFTUSFBNT PGSFWFOVFCZQSPWJEJOHTUBCMFGFFJODPNF 3FDFOUMZUIFOVNCFSPGIFEHFGVOETIBTCFFOSJTJOH BUBTVSQSJTJOHSBUFBOEUIFPOHPJOHJO»PXPGDBQJUBMIBT 4PNF QSJWBUF FRVJUZ ºSNT TFF BEEFE CFOFºU JO IBWJOH JOIPVTF CSPVHIUSFUVSOTEPXOGPSDJOHGVOETUPTFFLOFXJOWFTUNFOU FYQFSUTJOQVCMJDMZUSBEFENBSLFUT#VUDSJUJDTEPVCUUIBUUIJTTUSBUFHZ TUSBUFHJFT *O DPOUSBTU MBSHFDBQ QSJWBUFFRVJUJFT IBWF NBEF XJMMQBZPGG5IFNBKPSSFBTPOJTUIBUUIFIJTUPSJDBMCFODINBSLTUIBU FYUSFNFMZ HPPE QSPºUT EVSJOH SFDFOU ZFBST 5BLF &VSPQF GPS GVOENBOBHFSTVTFUPBOBMZ[FQVCMJDDPNQBOJFTEPO±UBQQMZUPQSJWBUF FYBNQMF BDDPSEJOH UP 5IPNTPO 'JOBODJBM±T 7FOUVSF9QFSU UIF DPNQBOJFT QPPMFEJOUFSOBMSBUFPGSFUVSOTJODFJODFQUJPOUP%FDFNCFS GPSUIFUPQRVBSUFSPGCVZPVUGVOETJO&VSPQFXBTDPNQBSFE *GUIFSFJTPOFUIJOHFWFSZPOFMJLFTJUJTPOFTUPQTIPQQJOH$BOZPV UPUIFQPPMFE*33GPSUIFXIPMF JNBHJOFXIBUXJMMIBQQFOUPUIFºOBODJBMXPSMEJGUIPTFUXPEJTUJO &VSPQFBO HVJTIFEJOWFTUNFOUBMUFSOBUJWFTNFSHFUPHFUIFS 8FXJMMTFF Hedge funds take risk more quickly and with more understanding than Wall Street. They are good at picking businesses where they can receive excess returns for their capital. –Robert Steel, former vice chairman of Goldman Sachs NBSLFU±T CVZPVU GVOET PG "T QSJWBUF FRVJUZDPOUJOVFTUPPVUQFSGPSN UIF QVCMJD FRVJUZ NBSLFU JU±T OPUTVSQSJTJOHUIBUIFEHFGVOET BSF OPX BHHSFTTJWFMZ FOUFSJOH UIF QSJWBUF FRVJUZ NBSLFU *O Last summer, Texas Pacific Group set up TPG-Axon Capital, an in-house proprietary hedge fund that plans to raise up to $3 billion this year. In the first quarter, Carlyle announced BEEJUJPO IFEHF GVOET IBWF its plans to set up two hedge funds. “This year we are set-t MBSHFS DBQJUBM QPPMT BOE UIFJS ting up our own proprietary hedge fund, to allow us to be SFUVSO SFRVJSFNFOUT BSF MPXFS more competitive,” says Rubenstein, managing director of 5IFSFGPSF IFEHF GVOET BSF The Carlyle Group. “We are also setting up a hedge fund of CFDPNJOH NPSF BDUJWF BU BMM funds—which will allow us, among other things, to put our EFBM MFWFMT 5IFZ BSF ®OPU UPP QJDLZ¯ BCPVU UIF DPNQBOJFT OPX4PNFPGUIFCJHHFTUIFEHFGVOETBSFMFOEJOHNPOFZPGUFOGPS BMPOHFSQFSJPEUIBOVTVBM"SVTIPGIJHIQSPºMFUBLFPWFSBUUFNQUT investors’ cash into good-returning vehicles while we wait to deploy it in private equity.” Bain Capital is also already in the hedge fund business, via Sankaty Advisors. IBTFOTVFE­TPNFPGXIJDITVDIBT$FSCFSVT±TCJMMJPOCVZPVU PG.FBE8FTUWBDPUIJTZFBS­IBWFCFFOTVDDFTTGVM )FEHF GVOET OPX DBO QMBZ BDSPTT EJGGFSFOU QBSUT PG UIF DBQJUBM TUSVDUVSF 5IFTF GVOET IBWF NPSF »FYJCJMJUZ PWFS UIF TIPSU BOE 2 From Wall Street Journal 5/26/05 @A?AI>AN &.&3(*/(."3,&54 Private Equity in Emerging Markets: the Comeback Private Equity in Emerging Markets: The Comeback By Maria De Los Angeles Rengifo, MSF’05 and Bettina Dix, MSF ‘05 # Z UIF FBSMZ ±T UIF TVDDFTTGVM QSJWBUF FRVJUZ FYQFSJNFOUUIBUHBWFCJSUIUPTPNFPGUIFNPTU UISJWJOHDPNQBOJFTJOUIF64XBTCFJOHSFQMJ DBUFEBDSPTTFNFSHJOHNBSLFUT8JUIQSPTQFDUTPGIJHI EFWFMPQFENBSLFUTBSFWFSZPGUFOESJWFOVQCZDPNQFUJOHCJEEFSTJO FNFSHJOHNBSLFUTUIJTJTOPUUIFDBTFUIFQSJWBUFFRVJUZNBSLFUJT OPUPWFSDSPXEFEZFUXIJDIDSFBUFTNBOZPQQPSUVOJUJFTGPSCVZJOHBU MPXFSQSJDFTBOEUIFSFGPSFJODSFBTJOHUIFDIBODFGPSBCPWFBWFSBHF SFUVSOT SFUVSO JOWFTUNFOUT BOE QPSUGPMJP EJWFSTJºDBUJPO QSJWBUF FRVJUZJOWFTUPSTSVTIFEJOUPUIFTFNBSLFUT-BUJO"NFSJDB &BTUFSO&VSPQFBOE"TJBFYDMVEJOH+BQBO XJUIUIFDPOº *OQBSUJDVMBS*OEJB$IJOB3VTTJBBOE#SB[JMIBWFTVSGBDFEBTOFX JOWFTUNFOU IVCT PGGFSJOH PQQPSUVOJUJFT JO B XJEF SBOHF PG JOEVT USJFT TVDI BT OBUVSBM SFTPVSDFT NBOVGBDUVSJOH PVUTPVSDJOH BOE EFODFUIBUUIFJSFYQFSJFODFJOEFWFMPQFEFDPOPNJFTXPVME UFDIOPMPHZ1MBZFSTMJLF#MBDLTUPOF(SPVQ$BSMZMF(SPVQBOE"DUJT TVGºDFUPTVDDFFEJOUIFEFWFMPQJOHXPSME'SPNUP 1BSUOFST QPVSFE BSPVOE CJMMJPO JOUP DPSQPSBUF *OEJB EVSJOH NPSFUIBO-BUJO"NFSJDBOGVOETXFSFFTUBC 8BSCVSH 1JODVT BOE NBOZ PUIFST BSF BDUJWFMZ QSPWJEJOH BEWJTPSZ TFSWJDFT BOE ºOBODJOH UP DPNQBOJFT BDSPTT *OEJB BOE MJTIFEBOEUIFWBMVFPGOFXQSJWBUFFRVJUZDBQJUBMSPTFCZ $IJOBBOEBDDPSEJOHUPUIF#SB[JMJBO7FOUVSF$BQJUBM"TTPDJBUJPO BOOVBMMZGSPNPWFSNJMMJPOUPPWFSCJMMJPO UIFWBMVFPGQSJWBUFFRVJUZBOEWFOUVSFDBQJUBMJOWFTUNFOUJO#SB[JM *O"TJBXJUINPSFUIBOGVOETQSJWBUFFRVJUZSBJTFE BSPVOECJMMJPOJODBQJUBMJOMFTTUIBOBEFDBEF JODSFBTFECZJO A bumpy road ahead %FTQJUFUIFQPUFOUJBMGPSIJHISFUVSOTUIJTOFXJOWFTUNFOUXBWFJO UI DFOUVSZ BQQSPBDIFE UIF JMMVTJPO FNFSHJOH NBSLFUT JT OPU XJUIPVU JUT SJTLT­TPNF TQFDJº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»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ºOBODJBM SFQPSUJOH TUBOEBSET ESBXJOHJOWFTUPSTCBDL"EEJUJPOBMMZXIJMFQSJDFTPGJOWFTUNFOUTJO 1SJWBUF FRVJUZ GVOET JO UIFTF NBSLFUT IBWF UP DBSSZ PVU FYUFOTJWF 1 Leeds, Roger, and Sunderland, Julie. Private Equity, Investing in Emerging Markets. Johns Hopkins University. 2 Kripalani, Manjeet. BusinessWeek Online. 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Private equity shops that went local were able to outpace those that stayed in New York or London. 1200 Building local teams with decision making power has proven 1000 to be more effective given the high level of involvement that can be achieved and the 800 market expertise that local partners bring along. He states that local teams with the 600 right networking capacity can also play a key role in attracting local investors, which 400 has proven to be difficult in the past. Many private equity powerhouses are setting up 200 offices in Mumbai (Bombay), Seoul, and Shanghai. Others, like Advent International, have long-established teams across Eastern 0 North America Europe Asia Pacific Middle East & Central and Africa South America Europe, Asia Pacific, and Latin America. In this sense the size of the private equity firm problems are predominant in emerging plays an important role, as only the bigger markets, private equity funds will favor, if shops can afford the expense of opening a not insist on, a controlling stake, which is branch. a condition precedent to enforce changes in operations and management. A second determining factor, according to Johnen, is capital structure: while private Above all, the key issue that marks the equity funds in Europe and the U.S usually difference between succeeding and failing use debt multiples between 3.5x and 6.0x in the emerging world is understanding that EBITDA or even higher depending on one size does not fit all; what works in the the industry and cash flow profile of the U.S and Europe will not necessarily work in company, banks usually lock in leverage for other places. Emerging markets demand emerging markets companies at a minimal unique and creative investment strategies level—given the higher systematic risk that adjust to their particular setting. embedded in these markets. He estimates Whether the new harvest of deals across that “in emerging markets debt multiples emerging markets proves to be successful rest around 1.0x EBITDA.” Although a largely depends on the skill of private equity lower level of leverage provides more cash investors to generate such strategies, and flow flexibility, it also implies that companies understand the intricate dynamics of a part have to show extraordinary growth to achieve of the world that is still “emerging.” the high internal rates of return characteristic of the private equity sector. “Winners” usually have to be international players in order to lever growth and justify such risky investment. One additional key success factor mentioned by Johnen is the size of the equity stake controlled by the investor. Given that agency Graph Source: The PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™Survey / Buyout Newsletter / Private Equity Analyst / CVCA Annual Statistical Review / EVCA Yearbook / AVCJ Guide to Venture Note: * The data for Eastern Europe, Middle East & Africa and Central & South America has been up-weighted to account for under-reporting in those areas december 2005 15 */5&37*&8 Inside the Profession Private equity pro James Wu shares his experience and insight with BCF reporter Justin Medoff Boston College FINANCIAL (BCF): How do you approach a deal? DPVOUJOHBOEMBXºSNUPCSJOHCBTFEPOBOVNCFSPGGBDUPSTTVDI James Wu (JW): "U %VCJMJFS $PNQBOZ PVS JOWFTUNFOU TUSBUFHZ JT BTJOEVTUSZMPDBUJPOPGQPUFOUJBMUBSHFUBOETJ[FPGUSBOTBDUJPO CBTFE PO ºOEJOH PQQPSUVOJUJFT XIFSF XF DBO DSFBUF WBMVF *O UIF "DDPVOUJOHBOEMFHBMEVFEJMJHFODFXPVMEJODMVEFBSFWJFXPGUIF FBSMZEBZTPG-#0TUIFTFUSBOTBDUJPOTXFSFNBJOMZBCPVUBSCJUSBHF­ DPNQBOZ±TDPOUSBDUTºOBODJBMTUBUFNFOUTUBYºMJOHTFUD TQFDJºDBMMZCSJOHJOHMFWFSBHFBOEDBQJUBMUPEFBMTXIFSFFBTZSFUVSOT DPVMECFNBEF(JWFOUIFBNPVOUPGDBQJUBMJOUIFNBSLFUUPEBZUIBU BCF: What are the major “dos” and “don’ts” during the acquisition process? TJUVBUJPO OP MPOHFS FYJTUT 4P XF USZ UP ºOE JOWFTUNFOUT XIFSF XF JW: 5IFºSTU®EP¯GPSVTJTUPCFQBUJFOUBOETUJDLUPBTFUPGSVMFT IBWF B VOJRVF QFSTQFDUJWF FJUIFS UISPVHI BO PQFSBUJOH QBSUOFS PS BOECPVOEBSJFTUIBUEFºOFPVSJOWFTUNFOUQSBDUJDF*UIJOLUIBU UISPVHIQBTUFYQFSJFODFXIJDIXJMMFOIBODFSFUVSOT FWFSZCVZPVUºSNOFFETBTFUPGSVMFTUPXIJDIUIFZTIPVMEBEIFSF "U%VCJMJFS$PNQBOZTPNFPGUIF®EPT¯BSFNBLJOHTVSFUIBUXF BCF: Where do potential deals come from? BMXBZTFOUFSJOUPEFBMTXJUIHPPENBOBHFNFOU0OFPGUIFPUIFS JW: -FWFSBHFECVZPVUºSNTXJMMTPVSDFUIFJSEFBMTGSPNBOVN ®EPT¯JTUPIBWFºSNEJTDJQMJOFPOUIFQVSDIBTFQSJDFUIBUXFXJMM CFSPGEJGGFSFOUQMBDFT4PNFEFBMTXJMMDPNFGSPNXIBUBSFDBMMFE QBZGPSBDFSUBJOBTTFU ®CVTJOFTT¬CSPLFST¯$PNQBOJFTSFUBJOCVTJOFTTCSPLFSTUPTFMMUIF CVTJOFTTPOUIFPXOFST±CFIBMG#VTJOFTTCSPLFSTDPOUBDUMFWFSBHFE 0OUIF®EPO±U¯TJEF­BOE*UIJOLUIJTJTXIFSFTPNFGVOETIBWFIBE CVZPVUºSNTXJUIPQQPSUVOJUJFT5IFCVTJOFTTCSPLFSTGPSMBSHFS EJGºDVMUZ­UIFSF±TBDFSUBJOBNPVOUPGVSHFODZUIBUIBWJOHBGVOE TDBMFPQQPSUVOJUJFTBSFUZQJDBMMZJOWFTUNFOUCBOLTTVDIBTUIF DBODSFBUF5ZQJDBMMZGVOETSBJTFDBQJUBMGPSBDFSUBJOUFSNMFOHUI (PMENBO4BDITBOE.PSHBO4UBOMFZTPGUIFXPSME5IPTFCBOLT *GBZFBSHPFTCZBOEUIFGVOEEPFTOPUNBLFBOZJOWFTUNFOUTJUT TFMMUPUXPDPNNVOJUZHSPVQTPOFPGXIJDIUIFZDBMM®TUSBUFHJD MJNJUFEQBSUOFSTNJHIUTUBSUHFUUJOHBOYJPVT&WFOXPSTFUIFGVOE CVZFST¯UIFPUIFSPGXIJDIUIFZDBMM®ºOBODJBMCVZFST¯-FWFSBHFE NJHIUOPUHFOFSBUFFOPVHIGFFTUPNFFUJUTPXODPNQFOTBUJPO CVZPVUHSPVQTGBMMVOEFSUIF®ºOBODJBMCVZFS¯DBUFHPSZ FYQFDUBUJPOT5IJTQSFTTVSFDBOJO»VFODFBGVOEUPDIBTFEFBMTPS QVUNPOFZPVURVJDLMZKVTUUPTUBZBDUJWF*OSFBMJUZUIFSFNJHIUCF 5IFPUIFSQMBDFTXIFSFºSNTDBOTPVSDFEFBMTBSFBDUVBMMZUISPVHI BMPOHQFSJPEXIFSFBGVOEEPFTOPUºOEBOBUUSBDUJWFJOWFTUNFOU JOEVTUSZDPOUBDUTPSUISPVHIDPNQBOJFTXIFSFUIFSFJTBOFYJTUJOH *U±TEJGºDVMUCVUPOFPGUIFCJHHFTU®EPO±UT¯JTDSFBUJOHBGBMTFTFOTF SFMBUJPOTIJQ XJUI UIF PQFSBUPS PS NBOBHFNFOU UFBN 5IJT JT IPX PGVSHFODZUPEPBEFBM%VCJMJFS$PNQBOZBEESFTTFTUIJTJTTVF XFBU%VCJMJFS$PNQBOZMJLFUPTPVSDFPVSEFBMT8FJOGSFRVFOUMZ CZGPDVTJOHPOPUIFSBMUFSOBUJWFJOWFTUNFOUDBUFHPSJFTOPUKVTU QBSUJDJQBUFJOBOBVDUJPOQSPDFTTGPSUSBOTBDUJPOT CVZPVUT4PJGXFEPOPUºOEBOZBUUSBDUJWFNJEEMFNBSLFUBDRVJTJ UJPOTXFDBOGPDVTPVSFGGPSUTPOFBSMZTUBHFJOWFTUJOHPSFWFO BCF: What comes next in the acquisition process? IFEHFGVOET JW: "GUFSXFIBWFGPVOEBEFBMUIBUJTXPSUIJOWFTUJHBUJOHB%V CJMJFS$PNQBOZQSJODJQBMXJMMFWBMVBUFUIFDPNQBOZ5ZQJDBMMZ "OPUIFS®EPO±U¯JTEPJOHBQPUFOUJBMMZVOBUUSBDUJWFEFBMKVTUCFDBVTF XIBUXFEPJTNFFUXJUIUIFNBOBHFNFOUUFBNBOEIFBSUIFTUPSZ ZPVIBWFTVOLBMPUPGUJNFBOEGVOETJOUPUIFEVFEJMJHFODF PGUIFDPNQBOZ0VSºSNWJFXTUIFNBOBHFNFOUUFBNBTCFJOHUIF QSPDFTT *UIJOLUIBUOPNBUUFSIPXGBSEPXOUIFSPBEZPVHFU DSJUJDBMTVDDFTTGBDUPSJOCVJMEJOHBTVDDFTTGVMCVTJOFTT0WFSBMMJU XJUIUIFOFHPUJBUJPOTPSIPXGBSEPXOUIFSPBEZPVHFUJOUFSNTPG JTDSJUJDBMUIBUXFHFUUPLOPXUIFDPNQBOZBOEJUTTUSBUFHJDQBUI EPMMBSTJOWFTUFEZPVTIPVMEBMXBZTIBWFUIFDPVSBHFUPTBZ®OP¯BOE "GUFSFWBMVBUJOHUIFTUSBUFHJDQBUIBOEBOVNCFSPGPUIFSDSJUFSJB UPTUFQBXBZGSPNUIFEFBM JGXFGFFMMJLFXFTIPVMEUBLFUIFOFYUTUFQXFHPUISPVHIXIBU±T DBMMFEUIFEVFEJMJHFODFBTTFTTNFOU BCF: What is the dream deal? JW: 'JSTUPGBMMUIFFDPOPNJDTIBWFUPCFBUUSBDUJWF ­TPNFUIJOHIBT BCF: What does the due diligence assessment entail? UPCFQSJDFEJOBSBOHFXIFSFCZBEEJOHPVSFYQFSUJTFBOEJOTJHIU JW: 5IFEVFEJMJHFODFQSPDFTTDPOTJTUTPGCVTJOFTTMFHBMBOEBD XFDBOHFOFSBUFBHPPESFUVSOGPSFWFSZPOFJOWPMWFE5IFTFDPOE DPVOUJOHEVFEJMJHFODF'PSCVTJOFTTEVFEJMJHFODFXFXJMMFJUIFS QBSUJTUIBUXFBMXBZTMJLFUPFOKPZUIFUSBOTBDUJPOTUIBUXF±SFEPJOH DPOEVDUUIFQSPDFTTJOUFSOBMMZPSSFUBJOBOPVUTJEFDPOTVMUBOUGPS 4PXFMJLFUPXPSLXJUINBOBHFNFOUUFBNTXIPTFWBMVFTBSFWFSZ BEEJUJPOBMBOBMZTJT#VTJOFTTEVFEJMJHFODFXPVMEJODMVEFWBMJEBUJOH NVDIBMJHOFEXJUIPVSPXO8FMJLFXPSLJOHXJUIFUIJDBMQFPQMF UIFTUSBUFHJDQMBOWFSJGZJOHDVTUPNFSTBOEºOEJOHBOZQPUFOUJBM 8FMJLFIBWJOHGVO8FMJLFEPJOHEFBMTXJUIQFPQMFUIBUXFHFU FYQPTVSFT0OUIFMFHBMBOEBDDPVOUJOHTJEFXF±MMCSJOHJOPOFPG BMPOHXJUI4PUIFESFBNEFBMXJMMNBLFFYDFMMFOUSFUVSOTCVUBMTP PVSFTUBCMJTIFESFMBUJPOTIJQT8FNBLFPVSEFDJTJPOPOXIJDIBD D JOWPMWFJOUFSBDUJOHBOEXPSLJOHXJUIHSFBUQFPQMF @A?AI>AN */5&37*&8 Inside the Profession BCF: What is an acquirer’s worst nightmare? DPNQBOZ*UIJOLQFPQMFSFBMMZOFFEUPVOEFSTUBOEUIFJSDBQBCJMJUJFT JW: *UIJOLPOFPGUIFXPSTUOJHIUNBSFTXPVMECFUPCVZBOBTTFU BOETFSJPVTMZBTTFTTXIFUIFSPSOPUUIJTJTTPNFUIJOHUIBUUIFZXJMM UIBUUVSOTPVUUPCFB®MFNPO¯+VTUMJLFBDBSXIFSFZPVQVSDIBTFJU FOKPZEPJOH BOEBEBZMBUFSZPVºOEPVUUIBUUIFPXOFSQVUTBOEJOUIFUSBOT NJTTJPOUPRVJFUUIFFOHJOF8IFOZPVQVSDIBTFBDPNQBOZZPV 0OFUIJOHUIBUBMTPEJTUJOHVJTIFTBMFWFSBHFECVZPVUTIPQGSPNBO IBWFUPNBLFTPNFBTTVNQUJPOTBOEQBZPOFYQFDUBUJPOT:PVUSZ JOWFTUNFOUCBOLPSBOBDDPVOUJOHºSNJTUIFTJ[FPGTUBGG*OWFTUNFOU UPQSPUFDUZPVSTFMGUISPVHIBHPPEEVFEJMJHFODFQSPDFTTBOEBHPPE CBOLT BOE BDDPVOUJOH ºSNT BSF MBSHF FOUJUJFT XJUI B EJWFSTF TUBGG QVSDIBTFDPOUSBDU8FBMXBZTIPQFUIBUXFEPO±UNJTTBOZUIJOH QSJWBUF FRVJUZ ºSNT BSF UZQJDBMMZ UFO UP UXFOUZ JOEJWJEVBMT XJUI B GVOEBNFOUBMCVUJUJTBMXBZTBDPODFSO TUSPOHBOEVOJRVFDVMUVSF:PVIBWFUPNBLFTVSFUIBUZPVKPJOB HSPVQPGQFPQMFUIBUZPVGFFMDPNGPSUBCMFXJUI BCF: How, in your opinion, has the PE investment profession changed between when you first became involved in the field and the present time? 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IBWF UP EFQFOE PO SFWFOVF HSPXUI 'JOBMMZ * UIJOL IBWJOH QSJDF JW: 4PNFCPEZX EJTDJQMJOF JO BOZ NBSLFU XIFUIFS PS OPU XF±SF JO BO VQDZDMF PS B XIFFMJTO±UHPJOH EPXODZDMFJTHPJOHUPCFJODSFEJCMZJNQPSUBOU"OE*UIJOLUIJTJT TPNFUIJOHUIBUSJOHTUSVFOPXNPSFUIBOFWFSHJWFOUIBUUIFSF±TTP NVDIDBQJUBMPVUUIFSFDIBTJOHEFBMT BCF: What’s the single most important piece of professional advice that someone has given you to date? JW: ®/PUIJOHHP BCF: What should someone seriously consider before deciding that he or she wants to go to work for a private equity firm? JW: *UIJOLTPNFCPEZOFFETUPSFBMMZFWBMVBUFIJTPSIFSTLJMMTFUBOE TFFXIFUIFSPSOPUJU±TUIFBQQSPQSJBUFUZQFPGQSPGFTTJPOGPSIJNPS IFS5IFSFJTBDFSUBJOBNPVOUPGQSFTTVSFUIBU±TJOWPMWFEJOXPSL JOHGPSBMFWFSBHFECVZPVUTIPQ5IFBDDPVOUBCJMJUZJTBCTPMVUFBOE JUJTEJSFDU*GZPV±SFPXOJOHBDPNQBOZBOEUIFDPNQBOZHPFTCBOL SVQUBTTPNFDPNQBOJFTJOBQPSUGPMJPEPUIFSFSFBMMZJTO±UBOZPOF FMTFUPCMBNFFYDFQUZPVSTFMGCFDBVTFZPV±WFCFFOJODPOUSPMPGUIBU >KOPKJ?KHHACAÄdWdY_Wb QBUIZPVUBLFHF CFTU 7"-6"5*0/ The Art of Venture Capital Valuation THE ART OF VENTURE CAPITAL VALUATION By Mark Hovermann, MSF ‘05 " MM WBMVBUJPOT FWFOUVBMMZ MFBE UP B RVBOUJUBUJWF PVUDPNF )PXFWFS UIF SPBE USBWFMFE JT ºMMFE XJUI RVBMJUBUJWF UFSSBJO *O GBDU KVTU BT JO BOZ WBMVBUJPOUIFRVBMJUBUJWFKVEHNFOUFYFSDJTFEMBSHFMZEFUFS NJOFTJUTTVDDFTT4PIPXEPFTPOFTVDDFTTGVMMZWBMVFB WFOUVSFDBQJUBMJOWFTUNFOU 5IF HFOFSBM WFOUVSF DBQJUBM GSBNFXPSL JO BOE PG JUTFMG TIPVME OPU CMPX BOZ SFBEFST BXBZ "MUIPVHI EJTDPVOUFE DBTI »PX NPEFMT BSF TPNFUJNFT VTFE UP WBMVF ºSNT UIF NPTU DPNNPO NFUIPE JT SFGFSSFEUPBTUIFWFOUVSFDBQJUBMNFUIPE&BSOJOHTBSFGPSFDBTUFE UPBGVUVSFZFBSXIFOBMJRVJEJUZFWFOUJTFYQFDUFE"MJRVJEJUZFWFOU PDDVSTXIFOUIFWFOUVSFDBQJUBMJTUQMBOTUPFYJUUIFJOWFTUNFOUBOE SFBMJ[FBHBJOPSMPTT&YBNQMFTJODMVEFJOJUJBMQVCMJDPGGFSJOHTCVZ CBDLT USBEF TBMFT BOE TFDPOEBSZCVZPVUT"OFBSOJOHT NVMUJQMF @A?AI>AN 7"-6"5*0/ The Art of Venture Capital Valuation GSPNBDPNQBSBCMFQVCMJDMZUSBEFEºSNJTBQQMJFEUPEFUFSNJOFUIF BSUJTUEFUFSNJOFXIFUIFSJUJTXPSUIZPGNBTUFSQJFDFDPOTJEFSBUJPO UFSNJOBMWBMVFBOEUIFFBSOJOHTBSFEJTDPVOUFEUPQSFTFOUWBMVFBU 5IF TBNF DBO CF TBJE GPS WBMVBUJPOT 5IF RVBMJUZ FYQFSUJTF BOE UIFWFOUVSFDBQJUBMJTU±TUBSHFUSBUFPGSFUVSO5IFUBSHFUSBUFPGSFUVSO NFUIPEPMPHZDPOUBJOFEJOUIFEVFEJMJHFODFIBTKVTUBCPVUFWFSZUIJOH JTTFUNVDIIJHIFSUIBOUIFUSBEJUJPOBMDPTUPGFRVJUZGPSUIFºSN*U UPEPXJUIXIFUIFSUIFWFOUVSFDBQJUBMJTUXJMMCFDIFDLJOHJOUPUIF OPSNBMMZFYDFFET EPHIPVTFPSHSBDJOHUIFOFYUDPWFSPG#PTUPO$PMMFHF'*/"/$*"- "UºSTUHMBODFJUBQQFBSTUPCFBGBJSMZTJNQMFBOEJOUVJUJWFQSPDFTT 5IFEVFEJMJHFODFGPSWFOUVSFDBQJUBMJOWFTUJOHDPNQSJTFTUIFTFBSDI UIF DMBTTJD QSJDF UP FBSOJOHT NVMUJQMF 5IBU DPVMEO±U CF GVSUIFS GSPN UIF USVUI 7FOUVSF DBQJUBMJTUT EFBM XJUI NBOZ GPHHZ BTTVNQUJPOT OPU UP NFOUJPO PCTUBDMFT TVDI BT BSSPHBOU BOE CVTJOFTTJNQPUFOUFOUSFQSFOFVSTBOETFBSDIJOH UISPVHI IFBQT PG VOPSHBOJ[FE PS JODPNQMFUF JOGPSNBUJPOUIBUDBOUVSOMPPLJOHGPSBOFFEMF JO B IBZTUBDL JOUP MPPLJOH GPS B OFFEMF JO B TUBDLPGOFFEMFT5IFZXJMMMPPLBUUIFUBSHFU GPSGBDUPSTUIBUDBOUVSOUIFºSNJOUPBDBTITQJHPU5IFSF So who retires with BSFNBOZRVFTUJPOTXIFOJOWFTUJOHJOºSNTUIJTFBSMZJO UIFMJGFDZDMF5IFZIBWFDBTICVSOSBUFTUIBUXPVMENBLF legend status? As it FWFO(FPSHF4UFJOCSFOOFSDSZ.PTUPGUIFºSNTNBJOMZ turns out, legends are DPOTJTUPGBOJEFBBOEOPUIJOHNPSF%PFTBNBSLFUFYJTU GPSUIJTJEFB *GTPIPXMVDSBUJWFJTUIFNBSLFU artists and valuation 5IJTJTUIFºSTURVFTUJPONBOZWFOUVSFDBQJUBMJTUTDIPPTFUP is a form of art. 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Levin, Martin D. Ginsburg, Donald E. Rocap. 2 Going forward this situation should change as all 50 states have adopted Limited Liability Company (LLC) structures and more PE funds are beginning to employ such an entity. @A?AI>AN -0/(5&3.453"5&(: A Career Path in Private Eqity Industry Long term strategy: A Career Path in the Private Equity Industry PLVLRQLLT>KQQL?B>HFKDLC@>MFQ>I #VZBOE FRVJUZGVOETOFFEUPOPUPOMZSBJTFBDPOTJEFSBCMFBNPVOUPGNPOFZ TFMMDPNQBOJFTBUBXIJNBOECBTLJOUIFTFYBQQFBMPGUIFQSJWBUF VTVBMMZJOUIFCJMMJPOT UPCFWJBCMFCVUBMTPSBJTFJUGBTU)FSFJTXIFSF FRVJUZJOEVTUSZ UIFSFQVUBUJPOBOEDPOOFDUJPOTPGUIFGVOE±TQBSUOFSTQMBZBLFZSPMF 0GDPVSTFZPVEPCVUXIFSFBOEIPXEP*TUBSU ¬:PVBTLZPVSTFMG 5IFSFBSFBOVNCFSPGFOUSZMFWFMQPTJUJPOTJOQSJWBUFFRVJUZGVOET )BWFOPGFBSZPVSEFWPUFE #PTUPO$PMMFHF'*/"/$*"-FEJUPSJBMTUBGG .PTU PG UIFN IBWF BO ®"OBMZTU¯ TPNFXIFSF JO UIF KPC UJUMF 4PNF IBTDPNFVQXJUIBHBNFQMBOUPTUBSUZPVPOZPVSXBZ .#"THPUISPVHITUSBUFHZDPOTVMUJOHºSNTCFGPSFMBOEJOHBKPCJO .PTU QSJWBUF FRVJUZ QBSUOFST NPWF JOUP B GVOE BGUFS TFWFO PS NPSF ZPVBSFUIJOLJOHUIBUUIJTJTUIFQMBDFXIFSFZPVXBOUUPCFCFMPXBSF ZFBST PG FYQFSJFODF JO JOWFTUNFOU CBOLJOH PS TJNJMBS CBDLHSPVOE TPNFTPVSDFTUIBUTIPVMEIFMQZPVKVNQTUBSUZPVSDBSFFS BQSJWBUFFRVJUZºSNPUIFSTUSZUPFOUFSTUSBJHIUBGUFSHSBETDIPPM*G *UJTBMTPUZQJDBMUPTFFFYQFSJFODFE$&0TGPSNJOHUIFJSPXOQSJWBUF FRVJUZ GVOET BGUFS CVJMEJOH B SFQVUBUJPO JO UIFJS JOEVTUSZ 1SJWBUF >KOPKJ?KHHACAÄdWdY_Wb -0/(5&3.453"5&(: Offline / Online Sources Offline Sources Online Sources #FMJFWFJUPSOPUOPUFWFSZUIJOHDBOCFGPVOEPOMJOFTPZPVXJMM Private Equity Network OFFEUPMPPLGPSTPNFPGUIPTFTPVSDFTJOUIF IUUQXXXQSJWBUFFRVJUZDPN "TFBSDIEJSFDUPSZPGPOMJOFJOGPSNBUJPOXFCTJUFMJOLT Boston Public Library BOEBOJOEVTUSZFWFOUDBMFOEBSTFSWJOHWFOUVSFDBQJUBMJTUT Kirstein Business Branch CVZPVUºSNTJOWFTUNFOUCBOLFST."HSPVQTJOTUJUV $JUZ)BMM"WFOVF UJPOBMJOWFTUPSTMBXZFSTBDDPVOUBOUTDPOTVMUBOUTBOEPUIFS #PTUPO.BTTBDIVTFUUT ºOBODJBMJOEVTUSZQSPGFTTJPOBMTJOBEEJUJPOUPQSPTQFDUJWF QPSUGPMJPDPNQBOJFTBOEFOUSFQSFOFVSTTFFLJOHCVTJOFTT .POEBZUP5IVSTEBZ'SJEBZ4BUVSEBZ ºOBODJOH IUUQXXXCQMPSHSFTFBSDILCCLCCIPNFIUN NVST.com: Private Equity Network Plunkett’s Financial Services Industry Almanac IUUQXXXOWTUDPNQOW)PNFBTQ $PWFSTUIFBSFBTPGJOWFTUNFOUTJOTVSBODFCBOLTBOEºOBODJBM 0OUIFUPQJDTPGWFOUVSFDBQJUBMBOENFSHFSTBDRVJTJUJPOT JOGPSNBUJPO JODMVEFTBQSJWBUFFRVJUZEJSFDUPSZMJOLTUPSFTPVSDFTBOE DPOGFSFODFJOGPSNBUJPO The Corporate Finance Sourcebook (VJEFUPDBQJUBMJOWFTUNFOUTPVSDFTBOEºOBODJBMTFSWJDFT The Deal.com JODMVEJOHQSPºMFTPGPWFSºSNTFBDIMJTUJOHDPOUBJOT IUUQXXXUIFEFBMDPN HFOFSBMBEESFTTQFSTPOOFMBOEºOBODJBMJOGPSNBUJPO /FXTBOETUBUJTUJDTPONFSHFSTBOEBDRVJTJUJPOTWFOUVSF DBQJUBMQSJWBUFFRVJUZ*10TBOECBOLSVQUDJFT:PVDBOBMTP Directory of Venture Capital and Private Equity Firms, TVCTDSJCFUPUIFJSGSFFOFXTMFUUFS Domestic and International 'FBUVSFTVQUPEBUFDPNQSFIFOTJWFEBUBPOFBDIºSNJODMVEJOH BEESFTTQIPOFBOEGBYOVNCFSTFNBJMBOEXFCTJUFBEESFTTFT GPSCPUIUIFQSJNBSZBOECSBODIMPDBUJPOT*ODMVEFTEFUBJMT POUIFºSN±T.JTTJPO4UBUFNFOU*OEVTUSZ(SPVQ1SFGFSFODFT (FPHSBQIJD1SFGFSFODFT"WFSBHFBOE.JOJNVN*OWFTUNFOUT Industry and Company News BOE*OWFTUNFOU$SJUFSJB #FGPSFZPVDBOXBMLUIFXBMLMFBSOUPUBMLUIFUBML5IBUNFBOT MFBSOBTNVDIBTZPVDBOBCPVUUIFEFBMTBOEUIFQFPQMFCFIJOE UIFN#FTJEFTUIFFTTFOUJBMSFBEJOHNBUFSJBMPGUIF8BMM4USFFU +PVSOBMUIFSFBSFTPNFTQFDJºDQVCMJDBUJPOTZPVTIPVMEMPPL JOUP.BOZPGUIFTFTPVSDFTDBOCFGPVOEJOUIF8FC$5GVMM UFYU EBUBCBTFT TVDI BT #VTJOFTT 4PVSDF 1SFNJFS 'BDUJWB PS -FYJT/FYJT"DBEFNJD6OJWFSTF @A?AI>AN One of Our Own -0/(5&3.453"5&(: One of our own TEFIBPLJBDO>AR>QBPQRABKQPQ>HBQFJBLCCFKQEBPRJJBOCLO TVO BOE HBNFT PUIFST UBLF BEWBOUBHF PG UIF CSFBL JO TUVEJFT UP FOUFS UIF XPSLGPSDFBTTVNNFSJOUFSOT0VSPXO1BVM:aOHBO.#".4'TUVEFOU JT POF PG UIPTF XIP DIPTF UP GPSHP UIF CFBDI GPS BO "TTPDJBUF QPTJUJPO BU "MFVUJBO$BQJUBM1BSUOFST--$XXXBMFVUJBODBQJUBMDPN B/FX:PSLCBTFE QSJWBUF FRVJUZ DPNQBOZ 1BVM XIP IBT B XJEF CVTJOFTT CBDLHSPVOE UIBU Paul Yang, MBA / MSF '07 KUL THAPA JODMVEFT XPSLJOH BU B OVDMFBS QPXFS TUBUJPO BOE BU B JOUFSOBUJPOBM TUSBUFHZ DPOTVMUJOHCPVUJRVFUPPLUJNFPGGGSPNIJTCVTZTDIFEVMFUPUBMLBCPVUIJT DVSSFOUXPSL Boston College FINAICIAL (BCF): What can you tell us about Aleutian Capital Partners (ACP)? BCF: What do you do? BCF: Describe your recruitment process? Paul: *HPUISPVHIMFBETBOEEFBMMJTUJOHT Paul: *TBXUIFQPTUJOHJOF3FDSVJUJOHTFOU Paul: "$1JTBQSJWBUFFRVJUZDPNQBOZXJUI XIJDIXFPCUBJOGSPNCSPLFSTBOEJOWFTU PVUNZSFTVNFBOEGPMMPXFEXJUIBQIPOF BGVOEPGNJMMJPOUBSHFUJOHNJEEMF NFOUCBOLFST*DBSSZPVUBOJOEFQUI DBMM*XBTUIFOBTLFEGPSBOJOUFSWJFXBOE NBSLFUDPNQBOJFT8FBMTPQSPWJEF BOBMZTJTPGUIFDPNQBOZUPTFFJGUIFZBSF GPSUVOBUFMZSFDFJWFEBOJNNFEJBUFBOTXFS BDRVJTJUJPOTFSWJDFTUPNPSFUIBOPUIFS XPSUIQVSTVJOH*GXFEPºOEUIFNQSPNJT QSJWBUFFRVJUZºSNTTFBSDIJOHGPSQPUFOUJBM JOHBGUFSIBWJOHDPOUBDUFEUIFPXOFSTXF BCF: What do you find most interesting in the work? 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Paul: "OZUJNF 3&"%&34±$03/&3 Books / Journals Books “Everyone who knows how to read has it in their power to magnify themselves, multiply the ways in which they exist, to make their life full, significant, and interesting.” –Aldous Huxley Important Journals Buyouts "WBJMBCMFBTFMFDUSPOJDGVMMUFYUGSPN#VTJOFTT4PVSDF 1SFNJFS-FYJT/FYJT"DBEFNJD6OJWFSTFBOE'BDUJWB European Venture Capital Journal "WBJMBCMFBTFMFDUSPOJDGVMMUFYUGSPN#VTJOFTT4PVSDF 1SFNJFS-FYJT/FYJT"DBEFNJD6OJWFSTFBOE'BDUJWB Below is a short list of suggested books to help you magnify your knowledge of private equity. The Art of M&A: A Merger Acquisition Buyout Guide, by Stanley Foster Reed, Alexandra Reed Lajoux Amazon.com price: $78.75, Hardcover: 1011 pages Technical level: Medium, Background needed: Corporate Finance 101 5IFEFºOJUFDMBTTJDBMCPPLPVUUIFSFGPS."*U±TCJHBOEGVMMPG EJGGFSFOUNFUIPETGPSFWBMVBUJOHBDRVJTJUJPODBOEJEBUFTJTTVFT POCFJOHBUBSHFUPGBOBDRVJTJUJPOBOE."DPOTJEFSBUJPOTXJUI Institutional Investor #VTJOFTT4PVSDF1SFNJFSBMTPTFF IUUQXXXJOTUJUVUJPOBMJOWFTUPSDPNTVCTDSJQUJPOJT SFRVJSFECVUTPNFXFCJUFNTBSFBWBJMBCMFXJUISFHJTUSBUJPO Investment Dealers’ Digest 'JOEUISPVHI#VTJOFTT4PVSDF1SFNJFS Investor’s Business Daily 8BMLFS-JCSBSZIBTUIFQSFWJPVTJTTVFTJOQSJOUTIFMWFE XJUIUIFOFXTQBQFSTTFFBMTPIUUQXXXJOWFTUPSTDPN QVCMJDQSJWBUFBOEFWFOGBNJMZºSNT*GZPVIBWFUPSFBEBCPPL The IPO Reporter POUIJTMJTUSFBEUIJTPOF "WBJMBCMFGSPN#VTJOFTT4PVSDF1SFNJFS-FYJT/FYJT "DBEFNJD6OJWFSTFBOE'BDUJWB The Vulture Investors, by Hilary Rosenberg Journal of Private Equity Amazon.com price: $44.95, Hardcover: 416 pages Technical level: Low, Background needed: Basic Finance "WBJMBCMFGSPN#VTJOFTT4PVSDF1SFNJFS-FYJT/FYJT 5IFCPPLFYQMBJOTCBTJDCBOLSVQUDZBOEEJTUSFTTFEEFBMNBLJOH Latin Finance DPODFQUT*UJOUSPEVDFTUIFSFBEFSUPUIFJOEVTUSZ±TLFZQMBZFSTBOE "WBJMBCMFGSPN#VTJOFTT4PVSDF1SFNJFS-FYJT/FYJT EJTDVTTFTGBNPVTFYBNQMFTTVDIBT8IFFMJOH1JUUTCVSHI4UFFM "DBEFNJD6OJWFSTFBOE'BDUJWB4PNFNBUFSJBMJTGSFFPO $PMFDP5PZT%POBME5SVNQ±TDBTJOPTBOE"MMFHIFOZ*OUFSOB UIFXFCTJUF UJPOBM IUUQXXXMBUJOºOBODFDPNMBUJOºOBODFJOEFYIUNM "DBEFNJD6OJWFSTFBOE'BDUJWB Private Equity Week Structuring Venture Capital, Private Equity, and Entre- "WBJMBCMFBTFMFDUSPOJDGVMMUFYUGSPN#VTJOFTT4PVSDF preneurial Transactions, 2004 Edition, by Jack S. Levin, 1SFNJFS-FYJT/FYJT"DBEFNJD6OJWFSTFBOE'BDUJWB Martin D. Ginsburg, Donald E. Rocap Amazon.com price: $235, Paperback: 1080 pages Technical level: Low, Background needed: Legal understanding Private Equity Online IUUQXXXQSJWBUFFRVJUZPOMJOFDPN/ 5IJTJTBWFSZHPPETPVSDFGPSEFUBJMFECBDLHSPVOEPOUIF UFDIOJDBMBTQFDUTPGUIFEFBMNBLJOHGVOETUSVDUVSJOHBOECBTJD UBYJTTVFT*GZPVBSFTFSJPVTBCPVUMFBSOJOHNPSFJOUIJTBSFBHP ºOEUIJTCPPLJOUIFMJCSBSZ @A?AI>AN @>OOLIIP@ELLIPGJ>K>DBJBKQ
