Nick Bloom, 149, 2015 The Modern Firm in Theory & Practice Nick Bloom (Stanford Economics and GSB) Lecture 11: Private Equity 1

Nick Bloom, 149, 2015 PE Example A private equity fund - Stanford Capital - borrows $5bn from a bank. It also puts in $1bn of its own equity – money from its own partners and from limited partners (investors - pension funds, endowments, rich individuals, etc.). With this $6bn it buys all the shares of an terribly underperforming company (a real dud frankly) – Berkeley Chemicals - after due diligence (checking the books). It replaces the senior management in BC, slims workforce, closes poor plants, opens new plants etc. After 8 years the company is sold for $11bn (IPO or a private sale). How much does Stanford make (stand to lose?)

Nick Bloom, 149, 2015 Simplified PE fund set-up Explain the fees and distribution waterfall? Can the GP invest in anything it wants? Explain this chart

Nick Bloom, 149, 2015 Example PE fund

Nick Bloom, 149, 2015 Some major asset classes (guess) Public Equity (Domestic and Overseas) Fixed income (bonds, money market, loans) Real Estate Commodities (gold, silver, platinum etc) Private Equity (traditional PE and Venture Capital) Other (art, wine etc)

Nick Bloom, 149, 2015 Ten largest firms in 2013 (guess) 1.TPG Capital 2.The Carlyle Group 3.The Blackstone Group 4.Kohlberg Kravis Roberts 5.Warburg Pincus 6.Goldman Sachs Principal Investment Area 7.Advent International 8.Apollo Global Management 9.Bain Capital 10.CVC Capital Partners Source: Private Equity International magazine (2013)

Nick Bloom, 149, 2015 How might a PE firm make money, and who should it target? 1.Buy an under priced firm (make money on tradingl) 2.Improve value of firm (turn-around) Given point (2) in particular should aim for badly run firms…

Nick Bloom, 149, 2015 Who might be opposed to PE firms? Often seen as cut-throat capitalist, so opponents can include Unions Left-leaning politicians: Franz Müntefering, then chairman of the ruling Social Democratic party (SPD), accused private equity firms in 2005 of being “locusts” chewing up good companies before spitting them out again Environmental groups

Nick Bloom, 149, 2015 PE Wrap Up Important part of the landscape for improving management and productivity – good for society But part of this process as Davis et al. (2014) show involves layoffs, plant closings (as well as plant openings) As a result PE firms can be controversial My own view is very positive, but in creating value, they do create losers as well as winners