Private Equity

Introduction
What is Private Equity?
Private equity is ownership or interest in an entity that is not
publicly listed or traded. A source of investment capital, private
equity comes from high-net-worth individuals and firms that
purchase stakes in private companies or acquire control of public
companies with plans to take them private, eventually delisting
them from stock exchanges. The private equity industry is
comprised of institutional investors such as pension funds, and
large private equity firms funded by institutional investors and/or
accredited investors*.

*For more detailed definition of Private Equity please see Appendix #1.
*For the definition of Accredited Investor please see the Appendix #2.
Why Invest in Private Equity?
Roughly $3.9 trillion in assets were held by private equity firms
as of 2019, and that was up 12.2 percent from the year before.

The fondness for private equity among institutional investors is

easy to explain: It comes down to high returns, low volatility, and
a lack of correlation to traditional asset classes.

Private equity returns in the United States have outperformed

various equity and bond benchmarks over the long term,
according to data from Cambridge Associates.
Why Invest in Private Equity?

*For more discussion on Private Equity historical return please see the Appendix #3.
Why Wouldn’t Someone Invest in PE?
Ø Long lock-up Period – Once you invest, your investment will typically be
locked up for the entire lifespan of the PE fund which is usually 10 years
(Secondary Market does exist but very illiquid).

Ø Because private equity entails direct investment—often to gain influence

or control over a company's operations—a significant capital outlay is
required, which is why funds with deep pockets dominate the industry. The
minimum amount of capital required for investors can vary depending on
the fund. Some funds have a $250,000 minimum entry requirement, while
others can require millions more.

Ø With more concentrated portfolios, small companies, companies with low

multiples and high debt levels, PE funds contain higher risk.
Investing in PE

So does that mean small retail investors cannot invest in Private

Equity? The answer is No.
Investing in PE
Some of the largest and most prestigious private equity (PE) funds
trade their shares publicly. For instance, the Blackstone Group,
which has been involved in the buyouts of companies such as
Hilton Hotels and MagicLab, trades on the New York Stock
Exchange (NYSE). This gives average investors the opportunity to
own a slice of the private equity pie. Along with the Blackstone
Group there is Apollo Global Management, Carlyle Group, and
Kohlberg Kravis Roberts (KKR), best known for its massive
leveraged buyout of RJR Nabisco in 1989.
Investing in PE
Mutual Funds can invest indirectly by buying these publicly-listed
private equity companies, too. These mutual funds are typically
referred to as funds of funds. Average investors can also purchase
shares of an exchange-traded fund (ETF) that holds shares of
private equity companies, such as ProShares Global Listed Private
Equity ETF.
Limited Partners/General Partner
Relationship
Limited Partners-Funders of Private Equity, typically made of
pension funds, charitable organizations, university endowments,
family offices, fund of funds, and accredited investors. Usually
get little to no say in investment decisions.

General Partners-The actual PE firm. Decision makers and

investors of LP money.
Private Equity Fund and Return Structure
Fund - Buyout fund, Growth Fund, Mezzanine Fund.

Ø Buyout Fund – The Buyout Fund is a type of PE fund that is used to

acquire companies with a controlling stake (at least 50% + 1 share) or
take a publicly traded company private. Those PE firms usually
consider themselves active investors. That is, they provide operational
support to management to help build and grow a better company.
Private Equity Fund and Return Structure
Fund - Buyout fund, Growth Fund, Mezzanine Fund.

Ø Growth Fund – The Growth Fund is a type of PE fund that is used to

acquire a minority stake in the company, where PE firms take no debt
of a small amounts of debt and invest in companies that exhibit high
growth and capital appreciation. Those PE firms are usually also
passive investors wholly dependent on management to grow the
company and generate returns
Private Equity Fund and Return Structure
Fund - Buyout fund, Growth Fund, Mezzanine Fund.

Ø Mezzanine Fund - The Mezz Fund is a type of PE fund that invests in

mezzanine debt opportunities for acquisitions, recapitalization or
leveraged buyouts, where it is a unique kind of debt that can be
converted into equity if a certain event takes place and the firm fails
to pay the principal or interests.

*For more information on Mezzanine Fund please see the Appendix #4.
Private Equity Fund Fee Structure
The fee structure for private-equity firms varies but typically consists of a
management and performance fee. A yearly management fee of 2% of
assets to “keep the lights on” (paying all fixed expenses) and 20% of
gross profits upon sale of the company is common, though incentive
structures can vary considerably.

Given that a private-equity firm with $1 billion of asset under

management (AUM) might have no more than two dozen investment
professionals, and that 20% of gross profits can generate tens of
millions of dollars in fees, it is easy to see why the industry attracts top
talent.
Private Equity Deal Sourcing
Ø Intermediary: Deal origination involves creating, maintaining, and
developing relationships with mergers and acquisitions (M&A)
intermediaries, investment banks, and similar transaction professionals to
secure both high-quantity and high-quality deal flow: prospective
acquisition candidates referred to private-equity (PE) professionals for
investment review.

Ø Proprietary : Some firms hire internal staff to proactively identify and reach
out to company owners to generate transaction leads. In a competitive M&A
landscape, sourcing proprietary deals can help ensure that funds raised
are successfully deployed and invested. Additionally, internal sourcing
efforts can reduce transaction-related costs by cutting out the investment
banking middleman's fees.
The Importance of the Lower to Middle
Market
Ø The big Invest Banking professionals typically focus their efforts on deals
with Enterprise Value worth billions of dollars. However, the vast majority
of transactions reside in the middle market at the $100 million to $500
million range, and the lower-middle market below $100 million.
Ø Because the best gravitate toward the larger deals, the lower-middle and
the middle market are significantly underserved markets. There are more
sellers than there are highly seasoned and positioned finance
professionals with extensive buyer networks and resources to manage a
deal.
The Importance of the Lower to Middle
Market
Ø Flying below the radar of large multinational corporations, many of these
small companies often provide higher-quality customer service, and/or
niche products and services that are not being offered by the large
conglomerates. Such upsides attract the interest of private-equity firms, as
they possess the insights and savvy to exploit such opportunities and take
the company to the next level.
Independent Sponsor and Search Fund
An independent sponsor, also referred to as a fundless sponsor, is an
individual or capital group seeking to acquire a company, who does not have
the equity/debt financing needed for the transaction in advance. The
independent sponsor recognizes a target company and then seeks investors
that can provide equity/debt to acquire the company.

An independent sponsor is GP without LPs(what BMP is), raises funds from

typical LPs and/or PEs. (LP likes it because they can individually choose what
deal they invest in instead of investing in a fund and putting their trust in GPs
for a long period of time.)
Independent Sponsors and Search Funds
A search fund is an investment vehicle through which an entrepreneur
raises funds from investors in order to acquire a company in which they wish
to take an active, day-to-day leadership role. The model offers relatively
inexperienced entrepreneurs with limited capital resources a quick path to
managing a company in which they have a meaningful ownership position.

*For more information on Search Fund please see the Appendix #5.
Current Issues in Private Equity
-Private Equity has the best returns causing many PE funds to
rise up as more investors have gained interest. More money in
private equity has caused deal scarcity, and the deals out there
to get more expensive. Each investment is becoming riskier

-Private Equity needs alternative sources of deal flow aside from

opportunities represented by banks to keep up returns and keep
money to work
How Blackmore Adds Value
-Blackmore Partners is an independent sponsor that funds its
deals from the money that Private Equity firms have not put to
work (dry powder)
-Money in a fund that has not been invested is burning a hole in
PE groups pockets and making LPs understandably mad. PE
groups would rather take a hit on the deals returns than allow
the money to not go to work at all
What We Do
-We source exclusively proprietary deals by reaching out to
business owners as well as our network of executives after
developing a deal thesis and strategy in the industry with one of
our 35k databased executives
-We then pitch the deals to LPs and/or PE firms to see who wants
to fund it and execute
Appendix
1. What is Private Equity: https://www.investopedia.com/articles/financial-careers/09/private-
equity.asp
2. Definition of Accredited Investor: https://www.investopedia.com/terms/a/accreditedinvestor.asp
3. Private Equity Returns: https://blogs.cfainstitute.org/investor/2018/12/03/private-equity-the-
emperor-has-no-clothes/
4. Mezzanine Fund: https://www.prudentialprivatecapital.com/perspectives/what-is-mezzanine-
financing
5. Search Fund: https://en.wikipedia.org/wiki/Search_fund