Private Equity

This final thesis analyzes and evaluates current techniques used in attribution analysis of the private equity funds. The first section defines all the relevant parameters and relationships. The second section provides the reader with a historical overview of the private equity industry together with a unique typology of private equity funds. Description of the current situation in the private equity industry is based on my discussions with investment professionals. These two sections are followed by a chapter describing the private equity investment process and the leveraged buyouts. Analysis is focused on value creation during buyouts, buyout price negotiations and the role of investment banks. I define individual phases of the private equity investment process and various valuation techniques used during the life cycle of the investment. Special attention is given to the private equity valuation process and its differences to the traditional and formal legal valuation. A special reaction function of cost of equity was derived from the traditional discounted earnings methods. Separate section is dedicated to calculation of return and efficiency of private equity funds. I analyze various methods used in the return/efficiency evaluation process, including the most frequently used Internal Rate of Return (IRR) approach. I then propose an adjustment (or several adjustments) to the IRR method and I test my proposals on several real-life case studies. In the same manner I theoretically derive and then practically prove major factors affecting the return of private equity investments. Special attention is given to the effect of company's indebtedness and operational improvements on total return of the private equity investment.