Investment Banks, Hedge Funds, and Private Equity

4th Edition - April 28, 2023
Authors: David P. Stowell, Paul Stowell
Language: English
Hardback ISBN:
9 7 8 - 0 - 3 2 3 - 8 8 4 5 1 - 8
eBook ISBN:
9 7 8 - 0 - 3 2 3 - 9 8 4 4 9 - 2

Investment Banks, Hedge Funds, and Private Equity, Fourth Edition provides a real-world view of this fast-evolving field, reviewing and analyzing recent innovations and developme… Read more

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Investment Banks, Hedge Funds, and Private Equity, Fourth Edition provides a real-world view of this fast-evolving field, reviewing and analyzing recent innovations and developments. This reference captures the actual work of bankers and professional investors, providing readers with templates for real transactions and insight on how investment banks, hedge funds, and private equity firms provide services to each other while creating opportunities for corporations and investors to raise capital, invest, hedge, finance, acquire, divest, and risk manage. For each type of institution, the business model, organizational structure, products, challenges, regulatory issues, and profit-making opportunities are explained.

In addition, specific transactions are analyzed to make clear how advisory services, financings, investments, and trades produce profits or losses, and which types of risks are most commonly taken by each type of institution. Importantly, the linkage of investment banks, hedge funds, and private equity to corporations, governments, and individuals is described, enabling the reader to more clearly understand how these organizations impact them and how their products and services can be best utilized.

Cover image
Title page
Table of Contents
Copyright
Preface
I. Investment Banking
Chapter 1. Overview of Investment Banking
Investment Banks and Their Clients
Large Companies
Institutional Investors
Global Investment Banking Firms
Other Investment Banking Firms
Investment Banking Businesses and Organizations
Investment Banking Division
Trading Division
Asset Management
Wealth Management
Investment Banks During and After the 2007–2008 Financial Crisis
Chapter 2. Regulation of the Securities Industry
Introduction
US Regulations
Recent Developments in Securities Regulation
Chapter 3. Financings
Capital Markets Financings
Financing Considerations
Financing Alternatives
“Green Shoe” Overallotment Option
International Financings
Chapter 4. Mergers and Acquisitions
The Core of Mergers and Acquisitions
Creating Value
Strategic Rationale
Synergies
Control Premium
Credit Ratings and Acquisition Currency
Regulatory Considerations
Social and Constituent Considerations
Role of Investment Bankers
Other Merger and Acquisition Participants
Fairness Opinion
Legal Issues Faced by Boards
Acquisitions
Due Diligence and Documentation
Breakup Fee
Alternative Sale Processes
Cross-Border Transactions
Tax-Free Reorganizations
Corporate Restructurings
Takeover Defenses
Risk Arbitrage
Valuation
M&A Litigation Topics
Chapter 5. Trading
Sales and Trading
Equity Trading
Fixed Income, Currencies, and Commodities Trading
Proprietary Trading
New Nonbank Financial Institutions
Risk Monitoring and Control
Value at Risk
Chapter 6. Asset Management, Wealth Management, and Research
Asset Management
Wealth Management
Research
Chapter 7. Credit Rating Agencies, Exchanges, and Clearing and Settlement
Credit Rating Agencies
Exchanges and Other Trading Venues
Dark Pools
Over-the-Counter Market
Clearing and Settlement
Chapter 8. International Banking
Euromarkets
Japan’s Financial Market
China’s Financial Market
Emerging Financial Markets
Global Initial Public Offering Market
American Depository Receipt
International Financial Reporting Standards
International Investors
Chapter 9. Convertible Securities and Wall Street Innovation
Convertible Securities
Wall Street Innovation
Nikkei Put Warrants
Accelerated Share Repurchase (ASR) Programs
Chapter 10. Investment Banking Careers, Opportunities, and Issues
Investment Banking
Trading and Sales
Private Wealth Management
Asset Management
Research
Principal and Credit Investments
Other Investment Banking Functions
Investment Banking Opportunities and Issues
II. Hedge Funds and Private Equity
Chapter 11. Overview of Hedge Funds
The Case for Hedge Funds
Regulation
Leverage
Growth
Composition of Investors
Industry Concentration
Performance
2008 Crisis
Market Liquidity and Efficiency
Financial Innovation
Illiquid Investments
Lock-Ups, Gates, and Side Pockets
Comparison With Private Equity Funds and Mutual Funds
High Water Marks and Hurdle Rates
Fund of Funds
Chapter 12. Hedge Fund Investment Strategies
Equity-Based Strategies
Macro Strategies
Arbitrage Strategies
Event-Driven Strategies
Chapter 13. Shareholder Activism and Impact on Corporations
Shareholder-Centric Versus Director-Centric Corporate Governance
Activist Hedge Fund Performance
Activist Hedge Fund Accumulation Strategies
CSX Versus TCI
Changing Rules That Favor Activists
Daniel Loeb and 13D Letters
Bill Ackman—McDonald’s, Wendy’s, Ceridian, Target, MBIA, and Valeant
Summary
Chapter 14. Risk, Regulation, and Organizational Structure
Investor Risks
Systemic Risk
Regulation
Organizational Structure
Chapter 15. Hedge Fund Issues and Performance
Hedge Fund Performance
Fund of Funds
Absolute Return
Transparency
Fees
High-Water Mark
Searching for Returns
Merging of Functions
International Hedge Fund Initiatives
Benefits Revisited
Future Developments
Forecasts for Hedge Fund Industry
Chapter 16. Overview of Private Equity
Characteristics of a Private Equity Transaction
Target Companies for Private Equity Transactions
Private Equity Transaction Participants
Structure of a Private Equity Fund
Capitalization of a Private Equity Transaction
Assets Under Management
History
Financing Bridges
Covenant-Lite Loans and Payments-in-Kind Toggles
Club Transactions and Stub Equity
Teaming Up With Management
Private Investment in Public Equities
Leveraged Recapitalizations
Secondary Markets for Private Equity
Fund of Funds
Private Equity Goes Public
Private Equity Historical Results (Exhibits 16.13–16.25)
Chapter 17. LBO Financial Model
Determining Cash Flow Available for Debt Service and Debt Sources
Determining Financial Sponsor Internal Rate of Return
Determining Purchase Price and Sale Price
Leveraged Buyout Analysis Example
Leveraged Buyout Analysis Post–Credit Crisis
Chapter 18. Private Equity Impact on Corporations
Private Equity–Owned Companies: Management Practices and Productivity
Private Equity–Owned Company Failures
Private Equity Purchase Commitment Failures
Deal Profile for Historically Large Private Equity Portfolio Companies
Private Equity Value Proposition for Corporations
Corporate Rationale for Completing Private Equity Transactions
Private Equity as an Alternative Model of Corporate Governance
Private Equity Influence on Companies
Chapter 19. Organization, Compensation, Regulation, and Limited Partners
Organizational Structure
Compensation
Regulations
Limited Partners
Chapter 20. Private Equity Issues and Opportunities
Private Investments in Public Equities (PIPE)
Equity Buyouts
Distressed Assets
M&A Advisory
Capital Markets Activity
Real Estate, Hedge Fund, and Credit Investments
Boom and Bust Cycles
Annex Funds
Asia-Pacific Private Equity
Private Equity Public Share Issues
Comparison of Private Equity Firms
Future Issues and Opportunities
The New Landscape
III. Case Studies
1. Investment Banking in 2008 (A): Rise and Fall of the Bear
Investment Banking in 2008 (B): A Brave New World
Freeport-McMoRan: Financing an Acquisition
The Best Deal Gillette Could Get? Procter & Gamble’s Acquisition of Gillette
A Tale of Two Hedge Funds: Magnetar and Peloton
Kmart, Sears, and ESL: How a Hedge Fund Became One of the World’s Largest Retailers
McDonald’s, Wendy’s, and Hedge Funds: Hamburger Hedging? Hedge Fund Activism and Impact on Corporate Governance
Porsche, Volkswagen, and CSX: Cars, Trains, and Derivatives
The Toys “R” Us LBO
Cerberus and the US Auto Industry
H. J. Heinz M&A
Quintiles IPO
The Panera Bread LBO
Index

David P. Stowell

David P. Stowell is a professor of finance at Northwestern University’s Kellogg School of Management, where he teaches classes that focus on investment banking, hedge funds, private equity and venture capital. He also teaches undergraduate courses on these topics at Northwestern University. Prior to joining Northwestern in 2005, he was managing director at JP Morgan, working in Chicago with responsibility for part of the firm's mid-west investment banking business. In addition, he worked in investment banking at UBS as managing director and co-head of U.S. equity capital markets, and at Goldman Sachs, where he co-managed an equity derivatives business and worked in corporate finance in New York and Tokyo. He was also a managing director at O'Connor Partners, a hedge fund based in Chicago. He graduated from Utah State University with a BA in Economics and from Columbia University's Graduate School of Business with an MBA in Finance. In addition to his current teaching responsibilities, he manages Paradigm Partners, a boutique firm that provides M&A and capital raising services and general advice regarding investment banking, hedge fund, and private equity activities to selected clients.

Affiliations and expertise

Professor of Finance, Kellogg School of Management, Northwestern University, Evanston, IL, USA

Paul Stowell

Paul Stowell is a managing director and head of the U.S. Strategic Equity Transactions Group at Jefferies LLC. He has previously been managing director at Deutsche Bank, originating, structuring and executing convertible financings, corporate equity derivatives and margin loans on concentrated equity stakes. Earlier in his career he worked at UBS as an exotic equity derivatives trader and subsequently as a convertible bond trader. He designed and led auctions to facilitate the largest-ever sales of warrants for cash, raising over $7 billion in total including $1.8 billion in the largest offering. He has designed and sold unique equity-linked securities to help companies raise capital for special circumstances. He has helped many companies repurchase stock in a thoughtful manner, and worked with large shareholders on hedging and structured monetization transactions. As an adjunct instructor, he has taught semester-long courses on Investment Banking and on Hedge Funds & Private Equity at universities including the University of Utah, and has also been a guest lecturer at multiple universities on sales & trading and other topics. Paul graduated from Yale University with a BA in Economics.

Affiliations and expertise

Managing Director and head, U.S. Strategic Equity Transactions Group, Jefferies LLC, USA

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