Chapter 1

Introduction to Private Equity

Harry Cendrowski

Adam A. Wadecki

Introduction

Private equity (PE), including buyout and venture capital (VC) transactions, is a critical component of modern finance. Since 1980, over $1.1 trillion has been raised by U.S. buyout funds and roughly $700 billion has been raised by VC funds. (See Exhibit 1.1 and Chapter 2 for additional information on fundraising trends.) Eight hundred thirty billion dollars was raised by U.S. buyout funds in the last 10 years alone, while $489 billion was raised by U.S. VC funds over the same time period.

Exhibit 1.1 Historical Venture Capital and Buyout Annual Fundraising Levels, 1980–2010

Source: Thomson's VentureXpert database.

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While relatively small levels of PE capital were raised through the early 1980s, PE fundraising levels have experienced considerable growth—and cyclicality—since that time. However, in spite of the large amounts of capital placed in PE, relatively few individuals have even modest knowledge of this central pillar of the contemporary financial system.

This chapter introduces PE, defines frequently used PE terms, provides an overview of the PE model, and describes the PE fundraising and investment processes. It is not comprehensive in nature but, instead, presents an introduction to numerous concepts that are discussed in greater detail in later sections of this book. Newly defined terms ...

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