Introduction to Investment Banks, Hedge Funds, and Private Equity (eBook)

Front Cover 1
An Introduction to Investment Banks, Hedge Funds, and Private Equity 4
Copyright Page 5
Dedication 6
Contents 8
Preface 10
Target Audience 10
Distinguishing Features 11
Cases 11
The World Has Changed 11
Structure of the Book 12
Section One: Investment Banking 12
Section Two: Hedge Funds and Private Equity 13
Section Three: Cases 13
Acknowledgments 14
Section I: Investment Banking 16
Chapter 1: Overview of Investment Banking 18
Post-Crisis Global Investment Banking Firms 19
Other Investment Banking Firms 21
Investment Banking Businesses 21
Investment Banking Division 23
Trading Division 30
Non-Client-Related Trading and Investing 31
Asset Management Division 32
Questions 34
Chapter 2: Regulation of the Securities Industry 36
Introduction 36
U.S. History and Regulations 36
Recent Developments in Securities Regulations 46
Securities Regulations in Other Countries 51
Questions 54
Chapter 3: Financings 56
Capital Markets Financings 56
Financing Considerations 60
Financing Alternatives 61
Fees to Bankers 72
Distribution Alternatives 73
Shelf-Registration Statements 74
Green Shoe Overallotment Option 75
Questions 76
Chapter 4: Mergers and Acquisitions 78
The Core of M& A
Creating Value 79
Strategic Rationale 80
Synergies and Control Premium 80
Credit Ratings and Acquisition Currency 81
Regulatory Considerations 82
Social and Constituent Considerations 82
Role of Investment Bankers 83
Other M& A Participants
Fairness Opinion 84
Acquisitions 85
Due Diligence and Documentation 86
Breakup Fee 87
Alternative Sale Processes 87
Cross-Border Transactions 89
Tax-Free Reorganizations 89
Corporate Restructurings 90
Takeover Defenses 91
Risk Arbitrage 92
Valuation 93
Service Company Case 101
Questions 110
Chapter 5: Trading 112
Client-Related Trading 112
Equity Trading 114
Fixed Income, Currencies, and Commodities (FICC) Trading 118
Market-Making 124
Proprietary Trading 124
Risk Monitoring and Control 127
Value at Risk (VaR) 127
Questions 128
Chapter 6: Asset Management, Wealth Management, and Research 130
Asset Management 130
Wealth Management 133
Research 134
Questions 139
Chapter 7: Credit Rating Agencies, Exchanges, and Clearing and Settlement 140
Credit Rating Agencies 140
Exchanges 145
Over-the-Counter Market 147
Clearing and Settlement 149
Questions 150
Chapter 8: International Banking 152
Euromarkets 152
Japan's Financial Market 153
China's Financial Market 154
Emerging Financial Markets 157
Global IPO Market 161
American Depository Receipt (ADR) 166
Standardized International Financial Reporting 166
International Investors 167
Questions 168
Chapter 9: Convertible Securities and Wall Street Innovation 170
Convertible Securities 170
Wall Street Innovation 177
Nikkei Put Warrants 178
Accelerated Share Repurchase Program 183
Questions 186
Chapter 10: Investment Banking Careers, Opportunities, and Issues 188
Investment Banking 188
Trading and Sales 191
Private Wealth Management 193
Asset Management 194
Research 195
Principal Investments 195
Other Investment Banking Functions 196
Investment Banking Opportunities and Issues 197
Questions 210
Section II: Hedge Funds and Private Equity 212
Chapter 11: Overview of Hedge Funds 214
Leverage 215
Growth 216
Composition of Investors 218
Industry Concentration 219
Performance 220
2008 Slowdown 222
Market Liquidity and Efficiency 225
Financial Innovation 227
Illiquid Investments 228
Lock-ups, Gates, and Side Pockets 228
Comparison with Private Equity Funds and Mutual Funds 229
High-Water Marks and Hurdle Rates 230
Public Offerings 230
Fund of Funds 232
Questions 233
Chapter 12: Hedge Fund Investment Strategies 234
Equity-Based Strategies 234
Macro Strategies 237
Arbitrage Strategies 238
Event-Driven Strategies 243
Summary 250
Questions 253
Chapter 13: Shareholder Activism and Impact on Corporations 256
Shareholder-Centric vs. Director-Centric Corporate Governance 257
Activist Hedge Fund Performance 258
Activist Hedge Fund Accumulation Strategies 260
CSX vs. TCI 262
Changing Rules That Favor Activists 264
Daniel Loeb and 13D Letters 265
Lehman Brothers' Erin Callan vs. David Einhorn of Greenlight Capital 265
Carl Icahn vs. Yahoo 265
Bill Ackman vs. McDonald's, Wendy's, Ceridian, Target, and MBIA 268
Summary 270
Questions 270
Chapter 14: Risk, Regulation, and Organizational Structure 272
Investor Risks 272
Systemic Risk 274
Regulation 277
Organizational Structure 280
Questions 283
Chapter 15: Hedge Fund Issues and Performance 284
Hedge Fund Performance 284
Fund of Funds 288
Absolute Return 289
Benefits Revisited 289
Transparency 290
Fees 290
High-Water Mark 291
Searching for Returns 292
Future Developments 292
Merging of Functions 293
Questions 296
Chapter 16: Overview of Private Equity 298
Characteristics of a Private Equity Transaction 299
Target Companies for Private Equity Transactions 300
Private Equity Transaction Participants 301
Structure of a Private Equity Fund 302
Capitalization of a Private Equity Transaction 302
Assets Under Management 303
History 304
Financing Bridges 307
Covenant-Lite Loans and PIK Toggles 308
Club Transactions and Stub Equity 308
Teaming Up with Management 309
Leveraged Recapitalizations 311
Secondary Markets for Private Equity 312
Fund of Funds 313
Private Equity Goes Public 313
Impact of Financial Services Meltdown on Private Equity 315
Questions 321
Chapter 17: LBO Financial Model 322
Determining Cash Flow Available for Debt Service and Debt Sources 323
Determining Financial Sponsor IRR 324
Determining Purchase Price and Sale Price 326
LBO Analysis Example 327
LBO Analysis Post-Credit Crisis 338
Questions 338
Chapter 18: Private Equity Impact on Corporations 340
Private Equity-Owned Companies: Management Practices and Productivity 340
Private Equity-Owned Company Failures 341
Private Equity Purchase Commitment Failures 342
Private Equity Portfolio Companies Purchased During 2006-2007 343
Private Equity Value Proposition for Corporations 353
Corporate Rationale for Completing Private Equity Transactions 355
Private Equity as an Alternative Model of Corporate Governance 357
Private Equity Influence on Companies 358
Questions 360
Chapter 19: Organization, Compensation, Regulation, and Limited Partners 362
Organizational Structure 362
Compensation 365
Regulations 369
Limited Partners 371
Questions 374
Chapter 20: Private Equity Issues and Opportunities 376
PIPEs 376
Equity Buyouts 377
Distressed Assets 377
M& A Advisory
Capital Markets Activity 379
Hedge Fund and Real Estate Investments 379
2008 Losses and Future Expectations 379
Boom and Bust Cycles 380
Annex Funds 380
Limited Partner Pull-Backs 381
Risk Factors 381
Asian Private Equity Activities 381
Strategic Alliances 382
Private Equity IPOs 383
Focus on Portfolio Management 383
Comparison of Private Equity Firms 386
Profile of The Carlyle Group 388
Future Issues and Opportunities 391
The New Landscape 393
Questions 394
Section III: Case Studies 396
Chapter 1: Investment Banking in 2008 (A): Rise and Fall of the Bear 398
Bear Stearns 398
Long Term Capital Management 400
The Credit Crisis 403
Bear Stearns Asset Management 406
The Calm Before the Storm 408
Run on the Bank 409
Bear's Last Weekend 414
Chapter 2: Investment Banking in 2008 (B): A Brave New World 418
The Aftermath of Bear Stearns 418
Gramm-Leach-Bliley and the Fall of Glass-Steagall 420
Lehman Brothers 423
Merrill Lynch 427
Goldman Sachs and Morgan Stanley 430
Chapter 3: Freeport-McMoRan: Financing an Acquisition 434
Metals Heating Up 434
Enter Freeport-McMoRan 436
Role of the Investment Banks 439
Inside the Wall 440
Chapter 4: The Best Deal GiIlette Could Get?: Procter & Gamble’s Acquisition of Gillette
A Dream Deal 450
Deal Structure: An ``All-Stock,´´ 60/40, No-Collar Acquisition 453
Valuation of the Deal 456
Key Stakeholders: Beantown, Wall Street, DC, and Main Street 457
Chapter 5: A Tale of Two Hedge Funds: Magnetar and Peloton 466
What a Year 466
What a Nightmare 467
Magnetar's Structured Finance Arbitrage Trade 469
The 2007-2008 Financial Crisis 470
The CDO Market 471
Rating Agencies 474
Correlation 474
CDO Market Evolution 475
Bank Debt and the Cov-Lite Craze 475
Chapter 6: Kmart, Sears, and ESL: How a Hedge Fund Became One of the World’s World’s 484
The Unusual Weekend 484
Flash Forward: November 2004 484
The Rise and Fall of Kmart 485
Bankruptcy and Inefficient Financial Markets 487
Financial Buyers vs. Strategic Buyers 487
Private Equity 488
Hedge Funds 490
ESL: The Hedge Fund That Could Not Be Categorized 492
2002-2003 Decision: Should ESL Seek to Gain Control of Kmart during Bankruptcy? 493
Lampert's Kmart Play 495
November 2004 Decision: Should Kmart (under ESL's Control) Acquire Sears? 496
Chapter 7: McDonald's, Wendy's, and Hedge Funds: Hamburger Hedging? Hedge Fund Activism and Impact on Corporate Governance 504
Growing Hedge Fund Activism 504
A Tale of Two Activists: Carl Icahn and William Ackman 505
Pershing Square's Initial Involvement: Wendy's and McDonald's 507
McDonald's Management and Franchisees Respond 511
Rating Agency Concern 515
Unlocking McDonald's Real Estate Value 516
Aftermath of McDonald's Rejection 520
The Truce 522
Retrospective 522
Chapter 8: Porsche, Volkswagen, and CSX: Cars, Trains, and Derivatives 526
Using Derivatives to Obtain Control Positions 526
CSX Equity Derivatives 527
CSX Collides with TCI and 3G 528
Porsche and Volkswagen: Brothers Reunited 530
Cash-Settled Options 532
Chapter 9: The Toys ``R´´ Us LBO 536
Case Focus 537
Emergence of Club Deals in a Maturing Industry 538
Dividends and Fees Paid to Private Equity Firms 539
U.S. Retail Toy Industry in 2005 539
European Retail Toy Industry 542
Infant, Toddler, and Preschool Market 542
Overview of Toys ``R´´ Us 543
Challenging Times for Toys ``R´´ Us 549
Toys ``R´´ Us Strategic Review and Sale 549
The Toys ``R´´ Us Club 552
The Assignment 553
Chapter 10: Cerberus and the U.S. Auto Industry 554
Introduction 554
``What's Good for GM?´´ 554
Cerberus Capital Management to the Rescue ... Maybe 557
Exhibit Sources 568
Reading List 574
References 576
Index 578