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Investment Banks, Hedge Funds, and Private Equity

Book Description

This description of the symbiotic relationships among investment banks, hedge funds, and private equity firms shows students how firms simultaneously compete and cooperate. The author has captured the ways these firms are reinventing themselves in the post-crash regulatory environment and, through ten extensive cases, the ways in which they are increasing their power and influence.




  • Emphasizes the needs for capital, sources of capital, and the process of getting capital to those who need it.

  • Integrates into the chapters ten cases about recent transactions, along with case notes and questions

  • Accompanies cases with spreadsheets for readers to create their own analytical frameworks and consider choices and opportunities.

Table of Contents

  1. Cover image
  2. Title page
  3. Table of Contents
  4. Front matter
  5. Companion Web Site
  6. Copyright
  7. Dedication
  8. Preface
    1. Target Audience
    2. Distinguishing Features
    3. Cases
    4. The World Has Changed
    5. Structure of the Book
    6. Section One: Investment Banking
    7. Section Two: Hedge Funds and Private Equity
    8. Section Three: Cases
  9. Acknowledgments
  10. Section I: Investment Banking
    1. 1. Overview of Investment Banking
      1. Post-Crisis Global Investment Banking Firms
      2. Other Investment Banking Firms
      3. Investment Banking Businesses
      4. Investment Banking Division
      5. Trading Division
      6. Non-Client-Related Trading and Investing
      7. Asset Management Division
      8. Questions
    2. 2. Regulation of the Securities Industry
      1. Introduction
      2. U.S. History and Regulations
      3. Recent Developments in Securities Regulations
      4. Securities Regulations in Other Countries
      5. Questions
    3. 3. Financings
      1. Capital Markets Financings
      2. Financing Considerations
      3. Financing Alternatives
      4. Fees to Bankers
      5. Distribution Alternatives
      6. Shelf-Registration Statements
      7. Green Shoe Overallotment Option
      8. Questions
    4. 4. Mergers and Acquisitions
      1. The Core of M&A
      2. Creating Value
      3. Strategic Rationale
      4. Synergies and Control Premium
      5. Credit Ratings and Acquisition Currency
      6. Regulatory Considerations
      7. Social and Constituent Considerations
      8. Role of Investment Bankers
      9. Other M&A Participants
      10. Fairness Opinion
      11. Acquisitions
      12. Due Diligence and Documentation
      13. Breakup Fee
      14. Alternative Sale Processes
      15. Cross-Border Transactions
      16. Tax-Free Reorganizations
      17. Corporate Restructurings
      18. Takeover Defenses
      19. Risk Arbitrage
      20. Valuation
      21. Questions
    5. 5. Trading
      1. Client-Related Trading
      2. Equity Trading
      3. Fixed Income, Currencies, and Commodities (FICC) Trading
      4. Market-Making
      5. Proprietary Trading
      6. Risk Monitoring and Control
      7. Value at Risk (VaR)
      8. Questions
    6. 6. Asset Management, Wealth Management, and Research
      1. Asset Management
      2. Wealth Management
      3. Research
      4. Questions
    7. 7. Credit Rating Agencies, Exchanges, and Clearing and Settlement
      1. Credit Rating Agencies
      2. Exchanges
      3. Over-the-Counter Market
      4. Clearing and Settlement
      5. Questions
    8. 8. International Banking
      1. Euromarkets
      2. Japan’s Financial Market
      3. China’s Financial Market
      4. Emerging Financial Markets
      5. Global IPO Market
      6. American Depository Receipt (ADR)
      7. Standardized International Financial Reporting
      8. International Investors
      9. Questions
    9. 9. Convertible Securities and Wall Street Innovation
      1. Convertible Securities
      2. Wall Street Innovation
      3. Nikkei Put Warrants
      4. Accelerated Share Repurchase Program
      5. Questions
    10. 10. Investment Banking Careers, Opportunities, and Issues
      1. Investment Banking
      2. Trading and Sales
      3. Private Wealth Management
      4. Asset Management
      5. Research
      6. Principal Investments
      7. Other Investment Banking Functions
      8. Investment Banking Opportunities and Issues
      9. Questions
  11. Section II: Hedge Funds and Private Equity
    1. 11. Overview of Hedge Funds
      1. Leverage
      2. Growth
      3. Composition of Investors
      4. Industry Concentration
      5. Performance
      6. 2008 Slowdown
      7. Market Liquidity and Efficiency
      8. Financial Innovation
      9. Illiquid Investments
      10. Lock-ups, Gates, and Side Pockets
      11. Comparison with Private Equity Funds and Mutual Funds
      12. High-Water Marks and Hurdle Rates
      13. Public Offerings
      14. Fund of Funds
      15. Questions
    2. 12. Hedge Fund Investment Strategies
      1. Equity-Based Strategies
      2. Macro Strategies
      3. Arbitrage Strategies
      4. Event-Driven Strategies
      5. Summary
      6. Questions
    3. 13. Shareholder Activism and Impact on Corporations
      1. Shareholder-Centric vs. Director-Centric Corporate Governance
      2. Activist Hedge Fund Performance
      3. Activist Hedge Fund Accumulation Strategies
      4. CSX vs. TCI
      5. Changing Rules That Favor Activists
      6. Daniel Loeb and 13D Letters
      7. Lehman Brothers’ Erin Callan vs. David Einhorn of Greenlight Capital
      8. Carl Icahn vs. Yahoo
      9. Bill Ackman vs. McDonald’s, Wendy’s, Ceridian, Target, and MBIA
      10. Summary
      11. Questions
    4. 14. Risk, Regulation, and Organizational Structure
      1. Investor Risks
      2. Systemic Risk
      3. Regulation
      4. Organizational Structure
      5. Questions
    5. 15. Hedge Fund Issues and Performance
      1. Hedge Fund Performance
      2. Fund of Funds
      3. Absolute Return
      4. Benefits Revisited
      5. Transparency
      6. Fees
      7. High-Water Mark
      8. Searching for Returns
      9. Future Developments
      10. Merging of Functions
      11. Questions
    6. 16. Overview of Private Equity
      1. Characteristics of a Private Equity Transaction
      2. Target Companies for Private Equity Transactions
      3. Private Equity Transaction Participants
      4. Structure of a Private Equity Fund
      5. Capitalization of a Private Equity Transaction
      6. Assets Under Management
      7. History
      8. Financing Bridges
      9. Covenant-Lite Loans and PIK Toggles
      10. Club Transactions and Stub Equity
      11. Teaming Up with Management
      12. Leveraged Recapitalizations
      13. Secondary Markets for Private Equity
      14. Fund of Funds
      15. Private Equity Goes Public
      16. Impact of Financial Services Meltdown on Private Equity
      17. Questions
    7. 17. LBO Financial Model
      1. Determining Cash Flow Available for Debt Service and Debt Sources
      2. Determining Financial Sponsor IRR
      3. Determining Purchase Price and Sale Price
      4. LBO Analysis Example
      5. LBO Analysis Post-Credit Crisis
      6. Questions
    8. 18. Private Equity Impact on Corporations
      1. Private Equity-Owned Companies: Management Practices and Productivity
      2. Private Equity-Owned Company Failures
      3. Private Equity Purchase Commitment Failures
      4. Private Equity Portfolio Companies Purchased During 2006–2007
      5. Private Equity Value Proposition for Corporations
      6. Corporate Rationale for Completing Private Equity Transactions
      7. Private Equity as an Alternative Model of Corporate Governance
      8. Private Equity Influence on Companies
      9. Questions
    9. 19. Organization, Compensation, Regulation, and Limited Partners
      1. Organizational Structure
      2. Compensation
      3. Regulations
      4. Limited Partners
      5. Questions
    10. 20. Private Equity Issues and Opportunities
      1. PIPEs
      2. Equity Buyouts
      3. Distressed Assets
      4. M&A Advisory
      5. Capital Markets Activity
      6. Hedge Fund and Real Estate Investments
      7. 2008 Losses and Future Expectations
      8. Boom and Bust Cycles
      9. Annex Funds
      10. Limited Partner Pull-Backs
      11. Risk Factors
      12. Asian Private Equity Activities
      13. Strategic Alliances
      14. Private Equity IPOs
      15. Focus on Portfolio Management
      16. Comparison of Private Equity Firms
      17. Profile of The Carlyle Group
      18. Future Issues and Opportunities
      19. The New Landscape
      20. Questions
  12. Section III: Case Studies
    1. Investment Banking in 2008 (A): Rise and Fall of the Bear
      1. Bear Stearns
      2. Long Term Capital Management
      3. The Credit Crisis
      4. Bear Stearns Asset Management
      5. The Calm Before the Storm
      6. Run on the Bank
      7. Bear’s Last Weekend
    2. Investment Banking in 2008 (B): A Brave New World
      1. The Aftermath of Bear Stearns
      2. Gramm-Leach-Bliley and the Fall of Glass-Steagall
      3. Lehman Brothers
      4. Merrill Lynch
      5. Goldman Sachs and Morgan Stanley
    3. Freeport-McMoRan: Financing an Acquisition
      1. Metals Heating Up
      2. Enter Freeport-McMoRan
      3. Role of the Investment Banks
      4. Inside the Wall
      5. Outside the Wall
      6. Mandatory Convertible Preferred Shares
      7. FCX Post-Allocation
    4. The Best Deal Gillette Could Get?: Procter & Gamble’s Acquisition of Gillette
      1. A Dream Deal
      2. Deal Structure: An “All-Stock,” 60/40, No-Collar Acquisition
      3. Valuation of the Deal
      4. Key Stakeholders: Beantown, Wall Street, DC, and Main Street
      5. Conclusion
    5. A Tale of Two Hedge Funds: Magnetar and Peloton
      1. What a Year
      2. What a Nightmare
      3. Magnetar’s Structured Finance Arbitrage Trade
      4. The 2007–2008 Financial Crisis
      5. The CDO Market
      6. Rating Agencies
      7. Correlation
      8. CDO Market Evolution
      9. Bank Debt and the Cov-Lite Craze
    6. Kmart, Sears, and ESL: How a Hedge Fund Became One of the World’s Largest Retailers
      1. The Unusual Weekend
      2. Flash Forward: November 2004
      3. The Rise and Fall of Kmart
      4. Bankruptcy and Inefficient Financial Markets
      5. Financial Buyers vs. Strategic Buyers
      6. Private Equity
      7. Hedge Funds
      8. ESL: The Hedge Fund That Could Not Be Categorized
      9. 2002–2003 Decision: Should ESL Seek to Gain Control of Kmart during Bankruptcy?
      10. Lampert’s Kmart Play
      11. November 2004 Decision: Should Kmart (under ESL’s Control) Acquire Sears?
    7. McDonald’s, Wendy’s, and Hedge Funds: Hamburger Hedging? Hedge Fund Activism and Impact on Corporate Governance
      1. Growing Hedge Fund Activism
      2. A Tale of Two Activists: Carl Icahn and William Ackman
      3. Pershing Square’s Initial Involvement: Wendy’s and McDonald’s
      4. McDonald’s Management and Franchisees Respond
      5. Rating Agency Concern
      6. Unlocking McDonald’s Real Estate Value
      7. Aftermath of McDonald’s Rejection
      8. The Truce
      9. Retrospective
    8. Porsche, Volkswagen, and CSX: Cars, Trains, and Derivatives
      1. Using Derivatives to Obtain Control Positions
      2. CSX Equity Derivatives
      3. CSX Collides with TCI and 3G
      4. Porsche and Volkswagen: Brothers Reunited
      5. Cash-Settled Options
    9. The Toys “R” Us LBO
      1. Case Focus
      2. Emergence of Club Deals in a Maturing Industry
      3. Dividends and Fees Paid to Private Equity Firms
      4. U.S. Retail Toy Industry in 2005
      5. European Retail Toy Industry
      6. Infant, Toddler, and Preschool Market
      7. Overview of Toys “R” Us
      8. Challenging Times for Toys “R” Us
      9. Toys “R” Us Strategic Review and Sale
      10. The Toys “R” Us Club
      11. The Assignment
    10. Cerberus and the U.S. Auto Industry
      1. Introduction
      2. “What’s Good for GM?”
      3. Cerberus Capital Management to the Rescue … Maybe
      4. GM’s Supplier Relationships
      5. Cerberus Builds an Even Bigger Auto Stage
      6. The Dream Becomes a Nightmare
  13. Exhibit Sources
  14. Reading List
  15. References
  16. Index