Need to know more about private equity and hedge funds? Then you have come to the right place with this quick overview presentation. This is based on my book: "Figuring Out Wall Street". A part of a continuing series of on the financial services industry. We provide training, custom developed to your needs. Contact us to discuss your needs and get a quote.

1. Financial Services Industry Training
Introduction to
Private Equity and Hedge Funds
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2. Training from Saunders Learning Group
Saunders Learning Group provides a variety
of training programs, workshops and
seminars targeted to the financial services
industry.
Programs are available in a wide range of
topics, and we are specialists in developing
custom programs that are targeted to your
needs.
Contact the founder, Floyd Saunders at
316-680-6482 or at
floyd@floydsaunders.com for more
information.
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3. Topics
1. The business of Private Equity
2. Components of Private Equity
3. Private Equity Investors
4. How Hedge Funds Work
5. Types of Hedge Funds
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4. What is Private Equity?
 Equity capital that is not quoted on a public exchange. Private equity
consists of investors and funds (pension funds, mutual funds, insurance
companies) that:
1. make investments directly into private companies or conduct buyouts of public
companies that result in a delisting of public equity.
2. Capital for private equity is raised from retail and institutional investors, and can be
used to:
1. fund new technologies
2. expand working capital within an owned company,
3. make acquisitions
4. strengthen a balance sheet.
 The majority of private equity consists of institutional investors (pension
funds and life insurance companies) who can commit large sums of money
for long periods of time.
 Private equity investments often demand long holding periods to allow for
a turnaround of a distressed company or a liquidity event such as an IPO
or sale to a public company.
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subtitle

5. Private Equity
Function  Private equity firms pools money to invest in non-public companies or public
companies to make they privately held.
 Creates a pool of investors via a partnership agreement
 Invites limited partners to participate in a Private Equity Fund
 Selects companies to make investments in often by a leveraged buy-out (LBO),
or purchasing a controlling interest
 In an LBO, A PE firm buys up shares of a publicly-traded company. They then
Example take it private. Makes investment and management decisions without being
accountable to shareholders. They will then make changes in the business plan
activities or other parts of the company to increase the profits and re-sell in an IPO.
 May invest in high-potential start-up or maturing companies to assist them in
going public (via Initial Public Offering or IPO)
 Provide management assistance to help a company be more profitable
 Evaluate investment opportunities by performing financial analysis on a
company
 Managing payouts to limited partners
Example  List of top 20 PE firms on next page
Companies
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6. 20 Largest Private Equity Firms
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7. Components of Private Equity
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8. Private Equity Investment
Quick Facts
Private Equity Firms Headquartered in the U.S.: 2,400 firms
Buyout/Growth Expansion Funds Currently Fundraising in the U.S.: 315 funds
Private Equity-Backed Companies Headquartered in the U.S.: 14,800 companies
Employees hired by U.S. Private Equity-Backed Companies: 8.1 million employees
Source: Private Equity Growth Capital Council, http://www.pegcc.org/education/pe-by-the-numbers/
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9. Investment Patterns Coming Out of a Recession
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10. Private Equity Investors
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11. Private Equity buyouts
Global buyout fundraising peaked near $300 billion in 2007, then dropped to just $50 billion in 2009
before starting to recover in 2011.
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12. What is a Hedge Fund
 An aggressively managed portfolio of investments that uses advanced investment strategies
such as leveraged, long, short and derivative positions with the goal of generating high
returns.
 Hedge funds are private investment partnerships open to a limited number of investors and
require a very large initial minimum investment.
 Investments in hedge funds are illiquid as they often require investors keep their money in
the fund for at least one year.
 For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to
sophisticated investors.
 In the U.S., laws require that the majority of investors in the fund be accredited. That is,
they must earn a minimum amount of money annually and have a net worth of more than $1
million, along with a significant amount of investment knowledge.
 You can think of hedge funds as mutual funds for the super rich. They are similar to mutual
funds in that investments are pooled and professionally managed, but differ in that the fund
has far more flexibility in its investment strategies.
 It is important to note that hedging is actually the practice of attempting to reduce risk, but
the goal of most hedge funds is to maximize return on investment.
 Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that
hedge funds just "hedge risk". In fact, because hedge fund managers make speculative
investments, these funds can carry more risk than the overall market.
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13. Hedge Funds
 Making an investment to reduce the risk of adverse price movements in an asset.
Normally, a hedge consists of taking an offsetting position in a related security
 Different from typical mutual funds, as follows:
 High minimum investment, averaging around $1 million
 Long-term commitment of funds is required
 High fees: typically 1% of assets plus 20% of profits
 Highly levered
 Little current regulation
 Distinction from Traditional Asset Management:
 Investment Vehicles
 Multiple Asset Classes
 Leverage
 Fee Structure
 Alignment of Incentives
 Investor Requirements
21-12
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14. Hedge Funds
 Hedge funds are often trying to take advantage of unusual spreads
between security prices
21-13
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15. Hedge Funds
 The SEC passed regulation in 2006 requiring hedge fund advisors to
register with the SEC. The SEC became concerned about fraud, and hedge
funds became available to the average investor via “retailization”.
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16. History, Definition and Overview
 FEES:
 MANAGEMENT: 1% TO 2% OF ASSETS
 INCENTIVE: 10% TO 40% ON RETURNS IN EXCESS OF A
HURDLE RATE (T-BILLS)
 HIGH WATERMARK: RETURNS BELOW HIGH WATERMARK
MUST BE MADE BACK BEFORE INCENTIVE FEE APPLIES
 THESE INCENTIVES MAY RESULT IN TAKING ON EXCESSIVE RISK
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17. TYPES OF HEDGE FUNDS
 Capital Structure Arbitrage
 Relative value approach, attempts to capture pricing
inefficiencies among various tranches of debt or equity of the
same or related companies.
This is trading on the relative value between a company’s common stock and bonds. Bond holders
are usually the first to receive the recovery amount of a bankrupt company. If the market place
releases bad news on the credit of a company the equities could receive a disproportionate hit
relative to the bonds because of the differences in risk. A trader can buy the common stock and short
the bonds to profit from the miss valuation. This is known as capital structure arbitrage.
 Convertible Arbitrage
 Purchase different securities of the same issuer such as the
common stock and convertible bonds, one position being long,
the other short.
 CTA’s / Managed Futures
 Commodity Trading Advisors. Trade commodity futures, options
and foreign exchange; often highly leveraged;
 trend following .
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18. TYPES OF HEDGE FUNDS
 Distressed Securities
 Buy the equity or debt of companies that are in or facing
bankruptcy, hoping that company will come out of bankruptcy.
 Emerging Markets
 Invest in the securities of companies from "emerging" or
developing countries.
 Event Driven
 Take positions in companies with "special situations":
depressed stock; event offers significant potential market interest
such as company merging with or acquired by another company;
reorganizations; bad news which temporarily depress stock,
which is shorted
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19. TYPES OF HEDGE FUNDS
 Fixed Income Arbitrage
 Plays the spread between similar fixed income securities. Often highly
leveraged
 Fund of funds
 Invests in a basket of different hedge funds. Benefit is to have experts
choose the funds and also get into funds closed to new investors. There
is a second layer of fees.
 Long/Short Equity
 Buy securities expected to perform well and sell short securities
expected to perform poorly. Often either net long or net short depending
on market view
 Global Macro
 Investment is based on shifts in global economies. Derivatives are
often used to speculate on currency and interest rate moves
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20. TYPES OF HEDGE FUNDS
 Market Neutral
 Any strategy that attempts to eliminate market risk and be
profitable in any market condition; equity or fixed income.
 Example: beta=0 for “double alpha”
 Market Timing
 Attempts to time the market by allocating assets among
different investments such as between mutual funds and money
markets.
 Multi-Strategy
 A single hedge fund that runs several different strategies in-
house. Different from a fund of funds in that the money is kept in-
house as opposed to being farmed out. Thus more nimble
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21. TYPES OF HEDGE FUNDS
 Regulation D
 Private investments made in public companies in need of
financing.
 Merger Arbitrage
 Also known as “Risk Arbitrage". Invest in event-driven
situations, such as leveraged buy-outs, mergers, and hostile
takeovers. Example: purchase stock in the firm expected to be
taken over and sell short stock of the acquiring company.
 Short Bias
 Any manager who consistently has a "net short" exposure to
the market. Includes short only funds.
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22. TYPES OF HEDGE FUNDS
 Special Situations
 Consists of some type of event driven strategy.
Opportunistically trade in any type of security that
deemed to be a "special situation."
 Statistical Arbitrage
 Invest in equities believed to behave in a way that is
mathematically describable.
 VC / Private Equity
 Invest in venture capital or private equity
 Sector Funds
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23. Strategies for Investment
 THE FUTURE OF HEDGE FUNDS:
 RETAIL OFFERINGS WILL BE APPEARING FOR
SMALLER INVESTORS
 IS A MATURING MARKET
 MORE TRANSPARENCY WILL BE OFFERED
 MUTUAL FUNDS ARE ADOPTING SOME HEDGE
FUND STRATEGIES
 REGISTRATION AND REGULATION IS COMING
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24. Thank You !
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25. Saunders Learning Group, LLC, Andover, KS

26. Questions
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27. Post Workshop Action Plan
 Complete the Post Workshop Action Plan
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28. Module Summary
 Monday morning you will have XX new financial
management techniques that you can use immediately on
your project
 Don’t wait for a new project, verify financials controls on
your current project
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29. Thank You !
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30. About the Author/Presenter
 Floyd Saunders has worked on Wall Street
with both Bank of America and JPMorgan,
where is was a vice president in global
financial systems. He has worked across the
industry in retail, commercial, and
investment banking.
 He has taught courses in Money and Banking
and extensively for the American Institute of
Banking and various colleges.
 As a consultant, he developed and taught a
wide range of banking and investing courses.
 He authored three programs for the
American Bankers Association: Banking on
Mutual Funds and Annuities, Introduction to
Securities Markets and Investing in Securities.
 He is the author of “Figuring Out Wall Street”
and his next book is “Family Financial
Freedom” a book on personal money
management.
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31. Reference Material
Figuring Out Wall Street Consumer’s Guide To
Financial Markets
By Floyd Saunders
Publisher: Saunders Learning Group
ISBN: 978-0-9824019-0-3
Available from Amazon:
http://www.amazon.com/Figuring-Out-Wall-Street-
Consumers/dp/0982401906
and many other online book stores.
Book summary: Figuring Out Wall Street, is the
concise guide to help everyone understand how what to do
now to restore our financial systems. Written in an easy to
understand manner, even the most complex financial
concepts are easy to digest. This book provides help to
monitor investments with a review of investment products,
financial regulators and economic indicators. Learn how the
stock market exchanges work and the world of investment
banking, hedge funds, venture capital and private equity.
Every chapter includes action plans for investing.
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