Acknowledgements
Preface
Module I The Private Equity Model and Historical Information
Chapter 1 Introduction to Private Equity
Introduction
What is Private Equity?
General Terms and Brief Overview
The LPA and GP Incentives
PE Firm Structure and Selected Regulations
Types of Private Equity Investment
The PE Fundraising Process
Recent Fundraising Trends
GP Investment Restrictions
Conclusion
Chapter 2 Overview of Historical Trends
Introduction
A Brief History of Private Equity
Private Equity at the Turn of the Century
VC Investment and Returns by Fund Stage
VC and Buyout Returns by Fund Size
Secondary Funds
Conclusion
Chapter 3 Trends in Private Equity
Introduction
A Changing Tide
Overall Industry and Fundraising Trends
Selected Regulatory Changes and Proposals
Rise of Strategic Buyers
Conclusion
Chapter 4 Harvesting Private Equity Investments through IPO
Initial Public Offerings
IPO Basics
Initial Steps in the “Going Public” Process
Role of the SEC and State Policing Bodies
Post-IPO Underwriter Responsibilities
Registration Documents
Historical IPO Trends
Initial Public Offering Summary
Chapter 5 Legal Considerations in IPOs
Introduction
Initial Public Offering (IPO)
Introduction
Potential Advantages of an IPO
Potential Disadvantages of an IPO
Advance Planning Opportunities
The IPO Process
Possible Liabilities Faced by a Company and Its Directors and Officers
Sarbanes-Oxley Act and the Dodd-Frank Act
Public Company Filing Obligations
IPO Alternative: Reverse Mergers
Conclusion
Chapter 6 Harvesting Investments through Mergers and Acquisitions
Introduction
M&A Basics
Types of Takeovers
Reverse Takeovers
The Takeover Process and Financial Advisor Selection
Analyzing Potential Buyers
The Sale Process
The Bidding Process
Reaching an Agreement
Historical M&A Trends
Chapter 7 Legal Considerations in Sale Transactions
Introduction
Sale Transactions
Prior to the Sale Transaction
Key Deal Issues
Sale and Acquisition Structure
Employee Incentive Issues
The Sale Transaction Process
Conclusion
Chapter 8 Intellectual Property and Private Equity
Introduction
Intellectual Property Rights and Remedies
Patents
Trademarks
Copyrights
Trade Secrets
Pre-Acquisition Due Diligence
Established Barriers to Entry – Evaluating Investment Value
Freedom to Practice – Assessing Risk of Proposed Acquisition
Creating IP Value During Management
Leveraging and Monetizing Patent Rights
Bolstering Technological Advantages
Boosting Brand Development Efforts
Preserving Knowledge-Based Resources of the Workforce
Positioning the Exit – Reverse Due Diligence
Module II Governance Structures in Private Equity
Chapter 9 The Private Equity Governance Model
Introduction
A New Model for Corporate Governance
An Analogy to Physics
Corporate Governance and the Management of Crisis
Public Corporations and the Private Equity Model
The Magic of the Private Equity Governance Model
Conclusion
Chapter 10 Value of Internal Control
Introduction
Introduction to COSO and Internal Control
COSO Background
Internal Control Defined
Components of Internal Control
Control Environment
Risk Assessment
Enterprise Risk Management
Control Activities
Information and Communication
Monitoring
Limitations of Internal Control
Control Objectives and Control Components
Effectiveness of Internal Control
Internal Control and the PE Firm
Value of Internal Control for PE Fund Operations
Value and the Control Environment
Value and Risk
Value and Control Activities
Value and Information and Communication
Value and Monitoring
Value of Internal Control for Target Companies
Operational Value
Financial Reporting Value
Compliance Value
Conclusion
Chapter 11 Internal Control Evaluation
Introduction
PCAOB Auditing Standard No. 5
Phase 1: Planning the Audit
Risk Assessment
Scaling the Audit
Fraud Risk
Using the Work of Others
Materiality
Phase 2: Using a Top-Down Approach
Identifying Entry-Level Controls
Identifying Significant Accounts and Disclosures and Their Related Assertions
Understanding Likely Sources of Misstatement
Selecting Controls to Test
Phase 3: Testing Controls
Testing Design Effectiveness
Testing Operating Effectiveness
Relationship of Risk to the Evidence to Be Obtained
Special Considerations for Subsequent Yearly Audits
Phase 4: Evaluating Identified Deficiencies
Phase 5: Wrapping Up
Forming an Opinion
Obtaining Written Representations
Communicating Certain Matters
Phase 6: Reporting on Internal Controls
Conclusion
Chapter 12 Financial Statement Fraud and the Investment Decision
Introduction
Money Laundering
Categories of Fraud
What Is Fraud?
The Required Elements of Fraud
Financial Statement Attestation
Tax Return Preparation
Compilation
Review
Audit
Recommendations
Do Not Rely Solely on Financial Statements
Pay Attention to Details
Follow Up on Unexpected or Interesting Items
Maintain Professional Skepticism
Explanations Should Be Rational, Reasonable, and Verifiable
What Do the Financial Statements Say about the Entity’s Ability to Meet Their Objectives?
Fraud and Due Diligence Procedures
Background Investigation of Key Employees
Testing of Journal Transactions
Check File Metadata
Conclusion
Chapter 13 Professional Standards
Introduction
Federal Trade Commission (FTC)
Federal Antitrust Legislation
Federal Consumer Protection Legislation
Securities and Exchange Commission (SEC)
Securities Act (1933)
Securities Exchange Act (1934)
Public Utility Holding Company Act (1935)
Trust Indenture Act (1939)
Investment Company Act (1940)
Investment Advisers Act (1940)
Foreign Corrupt Practices Act (1977)
Sarbanes-Oxley Act (2002)
“Private” Equity Going Public
Introduction to Public Standards
PCAOB Standards
PCAOB Auditing Standard No. 1
PCAOB Auditing Standard No. 2
PCAOB Auditing Standard No. 3
PCAOB Auditing Standard No. 4
PCAOB Auditing Standard No. 5
AICPA Auditing Standards
SAS 99, “Consideration of Fraud in a Financial Statement Audit”
SAS 1 Amendments
SAS 85 Amendments
SAS 82 Replacements
SAS 104, “Amendment to Statement on Auditing Standards No.1, ‘Codification of Auditing Standards And Procedures (“Due Professional Care in the Performance of Work”)’”
SAS 105, “Amendment to Statement on Auditing Standards No. 95, Generally Accepted Auditing Standards”
SAS 106, “Audit Evidence”
SAS 107, “Audit Risk and Materiality in Conducting the Audit”
SAS 108, “Planning and Supervision”
SAS 109, “Understanding the Entity and Its Environment and the Risks of Material Misstatement”
SAS 110, “Performing Audit Procedures in Response to Assessed Risks and Evaluation of the Audit Evidence Obtained”
SAS 111, “Amendment to Statement on Auditing Standards No. 39, ‘Audit Sampling’”
SAS 112, “Communicating Internal Control Related Matters Identified in an Audit”
SAS 113, “Omnibus Statement on Auditing Standards”
SAS 114, “The Auditor’s Communication With Those Charged With Governance”
SAS 116, “Interim Financial Information”
AICPA Accounting and Review Standards
SSARS 10
SSARS 12
Institute of Internal Auditors (IIA) Standards
Information Systems Audit and Control Association
Conclusion
Module III Understanding Operations
Chapter 14 Contemporary Business and Competitive Intelligence
Introduction
Contemporary Business Intelligence
Sources of Information
Competitive Intelligence and the External Environment
Normalizing Performance
Cost of Capital and the Option to Invest
Developing “Unique Intelligence”
An Economic View of Quality
Developing Relationships and Navigating Crises
Application to Private Equity
Investment Decision
Strategic Management of Portfolio Companies
Exit Strategy
Conclusion
Chapter 15 Organizations as Humans
Introduction
Organizations as Humans
Purpose of the Organization
Genesis
Development and Specialization
Parts of the Whole and Maturation
Environmental Adaptation
Environmental Influence and Interaction
Maturity Creates “The Machine”
Death of the Organization and Rebirth
Strengths and Weaknesses of the Organizations as Humans Metaphor
Conclusion
Chapter 16 Beginning the Lean Transformation
Introduction
The Origins of Lean Operations: Lean Manufacturing
Potential Pitfalls of Lean
Organizational Development
Discipline Building
What Private Equity Means for Lean
Conclusion
Chapter 17 Performing Manufacturing Due Diligence Assessments
Introduction
Performing the Assessment
Employee Satisfaction
Customer Satisfaction and Perceived Quality
Corporate Vision and Mission
Equipment and Facility Maintenance
Visual Management
Inventory Management and Product Flow
Operational Data and Cost of Sales
Conclusion
About the Authors
Glossary
Index
