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Investment Banks, Hedge Funds, and Private Equity - 2nd Edition - ISBN: 9780124158207, 9780124046320

Investment Banks, Hedge Funds, and Private Equity

2nd Edition

Author: David P. Stowell
Hardcover ISBN: 9780124158207
eBook ISBN: 9780124046320
Imprint: Academic Press
Published Date: 20th August 2012
Page Count: 672
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The dynamic environment of investment banks, hedge funds, and private equity firms comes to life in David Stowell’s introduction to the ways they challenge and sustain each other. Capturing their reshaped business plans in the wake of the 2007-2009 global meltdown, his book reveals their key functions, compensation systems, unique roles in wealth creation and risk management, and epic battles for investor funds and corporate influence. Its combination of perspectives—drawn from his industry and academic backgrounds—delivers insights that illuminate the post-2009 reinvention and acclimation processes. Through a broad view of the ways these financial institutions affect corporations, governments, and individuals, Professor Stowell shows us how and why they will continue to project their power and influence.

Key Features

  • Emphasizes the needs for capital, sources of capital, and the process of getting capital to those who need it
  • Integrates into the chapters ten cases about recent transactions, along with case notes and questions
  • Accompanies cases with spreadsheets for readers to create their own analytical frameworks and consider choices and opportunities

Table of Contents

Section One: Investment Banking

  1. Chapter 1 – Overview of Investment Banking
    1. Organizational Structure of an Investment Bank
    2. Investment Banking Division
      1. Client Coverage Bankers
      2. Capital Markets Group
        1. Equity Capital Markets
        2. Debt Capital Markets

      3. Mamp;A Product Group

    3. Trading Division
      1. Fixed Income, Currencies and Commodities (FICC)
      2. Equities

    4. Non-Client Related Trading and Investing
      1. Principal Investing
      2. Proprietary Trading

    5. Asset Management Division
      1. Co-Investments in Asset Management Division Funds

    Referenced Case Studies – Investment Banking in 2008 (A): Rise and Fall of the Bear; Investment Banking in 2008 (B): A Brave New World

  2. Chapter 2 – Regulation of the Securities Industry
    1. Introduction
    2. Section One: U.S. Regulations
      1. Early Investment Banking
      2. The Growth of Investment Banking
      3. Limited Regulation
      4. The Securities Act of 1933
        1. The Registration Statement
        2. The Investment Prospectus
        3. New Liabilities
        4. Gun-Jumping Rules

      5. The Glass-Steagall Act (formally, the Banking Act of 1933)
        1. Separation of Private Banks into Deposit and Investment Banks
        2. Separation of Commercial and Investment Banks

      6. Securities Act of 1934
      7. Public Utility Holding Company Act
      8. Chandler Act
      9. Maloney Act
      10. Investment Company Act of 1940

    3. Section Two: Recent Development in Securities Regulations
      1. Gramm-Leach-Bliley Act
      2. Sarbanes-Oxley Act
      3. Bear Stearns Collapse

    4. Section Three: Securities Regulations in Other Countries
      1. Japan
        1. 1947 – 1992
        2. 1992 – 1998
        3. 1998 – Present

      2. United Kingdom
        1. Pre-1986
        2. 1986 – 1997
        3. 1997 – Present

      3. China
        1. Pre-1992
        2. 1992 – 1998
        3. 1998 – 2005
        4. 2005 – Present

  3. Chapter 3 – Financings
    1. Capital Markets Financings
    2. Financing Considerations
    3. Financing Alternatives
      1. Debt Financing
        1. Bonds
        2. Loans
        3. Private Placements
        4. Asset Backed Securities
        5. Commercial Paper

      2. Equity Financing
        1. Initial Public Offerings (IPOs)
        2. Follow-On Offerings
        3. Convertible Securities
          1. Rationale for Issuing Convertible Bonds
          2. Convertible Bond Example
          3. Convertible Market

    4. Fees to Bankers
    5. Distribution Alternatives
    6. Shelf Registration Statements
    7. ""Green Shoe"" Over-Allotment Option

    Referenced Case Studies – Freeport McMorRan: Financing an Acquisition

  4. Chapter 4 – Mergers amp; Acquisitions
    1. Strategic Rationale
    2. Synergies
    3. Credit Ratings and Acquisition Currency
    4. Regulatory Considerations
    5. Social and Constituent Considerations
    6. Role of Investment Bankers
    7. Other Mamp;A Participants
    8. Fairness Opinion
    9. Acquisitions
      1. Merger
      2. Tender Offer
      3. Proxy Contest

    10. Due Diligence and Documentation
    11. Breakup Fee
    12. Alternative Sale Process
      1. Preemptive
      2. Targeted Solicitation
      3. Controlled Auction
      4. Public Auction

    13. Cross-Border Transactions
    14. Tax-Free Reorganizations
    15. Corporate Restructurings
      1. IPO
      2. Carve-Out
      3. Spin-Off
      4. Spit-Off
      5. Tracking Stock

    16. Valuation
      1. Comparable Company Analysis
      2. Comparable Transaction Analysis
      3. Discounted Cash Flow Analysis
      4. Leverage Buyout Analysis
      5. Breakup Analysis
      6. Valuation Summary

    17. Takeover Defenses
      1. Shareholder Rights Plan
      2. Other Defenses

    18. Risk Arbitrage

    Referenced Case Study – The Best Deal Gillette Could Get? Procter amp; Gamble’s Acquisition of Gillette

  5. Chapter 5 – Trading
    1. Client-Related Trading
      1. Pricing Securities Offerings
      2. Research
      3. Sales

    2. Equity Trading
      1. Prime Brokerage
        1. Securities Lending
        2. Margin Financing

    3. Fixed Income, Currencies and Commodities (FICC) Trading
      1. Interest Rate Products
      2. Credit Products
        1. Structured Credit
        2. Credit Default Swaps

      3. Bank Loans
      4. Commodities
      5. Currencies

    4. Proprietary Trading
    5. Risk Monitoring and Control
    6. Value-at-Risk (VaR)

    Referenced Case Studies – A Tale of Two Hedge Funds: Magnetar, Peloton, CDOs, and the 2008 Financial Crisis; Kmart, Sears, and ESL: How a Hedge Fund Became One of the World’s Largest Retailers

  6. Chapter 6 – Asset Management, Wealth Management and Research
    1. Asset Management
    2. Wealth Management
      1. Hedge Fund Investments
      2. Private Equity Investments

    3. Research
      1. Paying for Research
      2. Conflicts of Interest
      3. Regulation FD

  7. Chapter 7 – Credit Rating Agencies, Exchanges and Clearing and Settlement
    1. Credit Rating Agencies
      1. Asset-Backed Securities and Criticism Against Credit Rating Agencies
      2. Monoline Insurers’ Relationship with Credit Agencies
      3. Credit Rating Advisory Services Provided by Investment Banks

    2. Exchanges
      1. Specialists
      2. Futures Exchanges

    3. Over-the-Counter Market
    4. Clearing and Settlement
      1. Securities Settlement
      2. Derivatives Settlement
      3. Investment Banking Services

  8. Chapter 8 – International Banking
    1. Euromarkets
    2. Japan’s Financial Market
      1. Mamp;A in Japan
      2. Equity Financing in Japan
      3. Trading Securities in Japan

    3. China’s Financial Market
      1. Mamp;A in China
      2. Equity Financing in China
      3. Trading Securities in China
      4. International Investment Banking Activity in China

    4. Emerging Financial Markets
      1. Bonds
      2. Syndicated Loans
      3. Equity
      4. Mamp;A

    5. Global IPO Market
      1. Brazil’s IPO Market
      2. Russia’s IPO Market
      3. India’s IPO Market
      4. China’s IPO Market

    6. American Depository Receipt (ADR)
    7. Standardized International Financial Reporting
    8. International Investors

  9. Chapter 9 – Convertible Securities and Wall Street Innovation
    1. Convertible Securities
      1. Hedge Funds and Delta Hedging
      2. Zero Coupon Bonds
      3. Mandatory Convertibles

    2. Wall Street Innovation
    3. Nikkei Put Warrants
    4. Accelerated Share Repurchase Program

  10. Chapter 10 – Investment Banking Career Opportunities and Trends
    1. Investment Banking Division
      1. Analysts
      2. Associates
      3. Vice Presidents
      4. Managing Directors

    2. Trading and Principal Investments Division
      1. Client-Related Trading
      2. Proprietary Trading
      3. Institutional Sales
        1. Equity Sales
        2. Fixed-Income Sales
        3. Prime Brokerage Sales

    3. Private Wealth Management
    4. Asset Management
    5. Research
    6. Principal Investments
    7. Other Investment Banking Functions
      1. Operations
      2. Finance

    8. Investment Banking Trends
      1. Securitization
      2. Credit Crisis of 2007 – 2008
      3. Bear Stearns
      4. Short-Term Financing by Investment Banks
      5. Structured Investment Vehicles
      6. Leverage at Investment Banks
      7. Capital Ratios
      8. New Power Brokers in the Capital Markets
      9. Credit Default Swaps
      10. Bridge Loans
      11. Investment Banking Future

    Section Two: Hedge Funds and Private Equity

  11. Chapter 11 – Overview of Hedge Funds

    1. Leverage
    2. Growth
    3. Composition of Investors
    4. Industry Concentration
    5. Performance
    6. 2008 Slowdown
      1. Market Liquidity and Efficiency

    7. Financial Innovation
    8. Illiquid Investments
    9. Lock-Ups, Gates and Side Pockets
    10. Comparison with Private Equity Funds and Mutual Funds
    11. High Water Marks and Hurdle Rates
    12. Public Offerings
    13. Fund of Funds

Referenced Case Study – A Tale of Two Hedge Funds: Magnetar, Peloton, CDOs, and the 2008 Financial Crisis

  1. Chapter 12 – Hedge Fund Investment Strategies
    1. Equity-Based Strategies
      1. Equity Long/Short
      2. Non-Hedged Equity

    2. Directional Strategies
      1. Macro
      2. Emerging Markets

    3. Arbitrage Strategies
      1. Fixed Income-Based Arbitrage
      2. Convertible Arbitrage
      3. Relative Value Arbitrage

    4. Event Driven Strategies
      1. Activist
      2. Merger Arbitrage
      3. Distressed Securities

    5. Summary

    Referenced Case Study – Kmart, Sears, and ESL: How a Hedge Fund Became One of the World’s Largest Retailers

  2. Chapter 13 – Shareholder Activism and Impact on Corporations
    1. Shareholder-Centric vs. Director-Centric Governance
    2. Activist Hedge Fund Performance
    3. Activist Hedge Fund Accumulation Strategies
    4. Changing Rules that Favor Activists
    5. Daniel Loeb and 13D Letters
    6. Lehman Brothers’ Erin Callan vs. David Einhorn of Greenlight Capital
    7. Carl Icahn vs. Yahoo
    8. CSX vs. TCI
    9. Bill Ackman vs. McDonald’s, Wendy’s, Ceridian, Target and MBIA
    10. Summary

    Referenced Case Studies – McDonald’s, Wendy’s, and Hedge Funds: Hamburger Hedging?; Porsche, Volkswagen and CSX: Cars, Trains and Derivatives

  3. Chapter 14 – Risk, Regulation and Organizational Structure
    1. Risk
      1. Incremental Risk
        1. Leverage
        2. Regulation
        3. Short Selling
        4. Transparency
        5. Risk Tolerance

      2. Systemic Risk
        1. Bank Exposure to Hedge Funds
        2. Mitigating Systemic Risk

      3. Investor Risks

    2. Regulation
      1. Alternative Regulatory Approaches

    3. Organizational Structure
      1. Domicile
      2. Legal Entity
      3. Open-Ended Partnership

    Referenced Case Study – Porsche, Volkswagen and CSX: Cars, Trains and Derivatives

  4. Chapter 15 – Hedge Fund Issues and Performance
    1. 2008 Summary
    2. Fund of Funds
    3. Absolute Return
    4. Benefits Revisited
    5. Transparency
    6. Fees
    7. Taxes
    8. High Water Mark
    9. Searching for Returns
    10. Future Developments
    11. Merging of Functions
    12. Hedge Fund Performance

  5. Chapter 16 – Overview of Private Equity
    1. Characteristics of a Private Equity Transaction
    2. Target Companies for Private Equity Transactions
    3. Private Equity Transaction Participants
    4. Structure of a Private Equity Fund
    5. Capitalization of a Private Equity Transaction
    6. Assets Under Management
    7. Private Equity Goes Public
    8. History
    9. Equity Bridge Loans
    10. Covenant-Lite Loans and PIK Toggles
    11. Club Transactions and Stub Equity
    12. Teaming Up with Management
    13. Private Equity Investment in Public Equities (PIPEs)
    14. Leveraged Recapitalizations
    15. Secondary Market for Private Equity
    16. Fund of Funds
    17. Impact of Financial Services Meltdown on Private Equity

  6. Chapter 17 – LBO Financial Model
    1. Determining Cash Flow Available for Debt Service
    2. Determining Financial Sponsor IRR
    3. Determining Purchase Price and Sale Price
    4. LBO Analysis Example
      1. Forecast Revenue, Margins, Damp;A, CapEx, Working Capital, Interest Rate and Tax Rate
      2. Calculate Acquisition Multiples
      3. Determine Target’s Capitalization after Acquisition
      4. Determine Cash Flow Available for Debt Service
      5. Calculate Credit Ratios
      6. Calculate Equity Value, IRR, and Multiple of Investment on Projected Exit Date

    5. LBO Analysis Post Credit Crisis

    Referenced Case Study – The Toys ""R"" Us LBO

  7. Chapter 18 – Private Equity Impact on Corporations
    1. Private Equity-Owned Companies: Management and Productivity
    2. Private Equity-Owned Company Failures
      1. Hawaiian Telecom Communications (HTC)
      2. Washington Mutual, Inc (WaMu)
      3. Scorecard During 2008

    3. Private Equity Purchase Commitment Failures
      1. BCE, Inc
      2. Huntsman Corporation

    4. Private Equity Portfolio Companies Purchased During 2006-2007
      1. TXU Energy (TXU)
      2. Equity Office Properties (EOP)
      3. Hospital Corporation of America (HCA)
      4. Harrah’s Entertainment (Harrah’s)
      5. Freescale Semiconductor (Freescale)
      6. Univision

    5. Private Equity Value Proposition for Corporations
    6. Corporate Rationale for Completing Private Equity Transactions
      1. Alternative to an IPO
      2. Corporate Orphans
      3. Ignored Public Companies
      4. Operating or Financial Weakness
      5. Mandated Divestitures

    7. Private Equity as an Alternative Model of Corporate Governance
    8. Private Equity Influence on Companies
      1. Pressure on Corporate Performance
      2. Changing Capital Structure
      3. Reduction in Public Market Capitalization
      4. Mergers and Acquisitions

    Referenced Case Study –Cerberus and the U.S. Auto Industry

  8. Chapter 19 – Organization, Compensation, Regulation and Limited Partners
    1. Organizational Structure
      1. Closed End Funds
      2. Exits

    2. Compensation
      1. Preferred Returns
      2. Timing Issues
      3. Clawbacks
      4. Taxes

    3. Regulations
      1. Using Intermediaries
      2. Perception and Reality

    4. Limited Partners
      1. Defaults
      2. Disclosure
      3. Fees
      4. Secondary Market
      5. FASB 157

  9. Chapter 20 – Issues and Opportunities
    1. PIPEs
    2. Equity Buyouts
    3. Loans
    4. Mamp;A Advisory
    5. Capital Markets Activity
    6. Hedge Fund and Real Estate Investments
    7. 2008 Losses
    8. Boom and Bust Cycles
    9. Annex Funds
    10. Limited Partner Pull-Backs
    11. Risk Factors
    12. Asian Private Equity Activities
    13. Profile of The Carlyle Group
    14. Strategic Alliances
    15. Private Equity IPOs
    16. Focus on Portfolio Management
    17. Comparison of Private Equity Firms
    18. Future Issues Affecting Private Equity

Section Three: Case Studies

  1. Investment Banking in 2008 (A): Rise and Fall of the Bear
    1. Bear Stearns
    2. Long Term Capital Management
    3. The Credit Crisis
    4. Bear Stearns Asset Management
    5. The Calm Before the Storm
    6. Run on the Bank
    7. Bear’s Last Weekend

  2. Investment Banking in 2008 (B): A Brave New World
    1. The Aftermath of Bear Stearns
    2. Gramm-Leach-Bliley and the Fall of Glass-Steagall
    3. Lehman Brothers
    4. Merrill Lynch
    5. Goldman Sachs and Morgan Stanley

  3. Freeport-McMoRan: Financing an Acquisition
    1. Metals Heating Up
    2. Enter Freeport-McMoRan
    3. Role of the Investment Banks
      1. Inside the Wall
      2. Outside the Wall
      3. Placing the Equity and Convertible Offerings

    4. Mandatory Convertible Preferred Shares
    5. FCX Post-Allocation

  4. The Best Deal Gillette Could Get? Procter amp; Gamble’s Acquisition of Gillette
    1. A Dream Deal
    2. Deal Structure: An ""All-Stock"", 60/40, No-Collar Acquisition
    3. Valuation of the Deal
    4. Key Stakeholders: Beantown, Wall Street, DC, and Main Street
      1. The Razor Boss of Beantown: James Kilts, Gillette CEO
      2. The Rainmakers: Investment Bankers and Power Brokers
      3. The Regulators: International, National, and Local
      4. The White Squire from Omaha: Warren Buffett, Gillette Investor

    5. Conclusion

  5. A Tale of Two Hedge Funds: Magnetar, Peloton, CDOs, and the 2008 Financial Crisis
    1. What a Year
    2. What a Nightmare
    3. Magnetar’s Killer Bet
    4. The 2007 – 2008 Financial Crisis
    5. The CDO Market
    6. Rating Agencies
    7. Correlation
    8. CDO Market Evolution
    9. Bank Debt and the Cov-Lite Craze

  6. Kmart, Sears, and ESL: How a Hedge Fund Became One of the World’s Largest Retailers
    1. The Unusual Weekend
    2. Flash Forward: November 2004
      1. Case Focus

    3. The Rise and Fall of Kmart
    4. Bankruptcy and Inefficient Financial Markets
    5. Financial Buyers vs. Strategic Buyers
    6. Private Equity
    7. Hedge Funds
    8. ESL: The Hedge Fund That Could Not Be Categorized
    9. 2002 – 2003 Decision: Should ESL Seek to Gain Control of Kmart during Bankruptcy?
    10. Lampert’s Kmart Play
    11. November 2004 Decision: Should Kmart (under ESL’s Control) Acquire Sears?

  7. McDonald’s, Wendy’s, and Hedge Funds: Hamburger Hedging? Hedge Fund Activism and Impact on Corporate Governance
    1. Growing Hedge Fund Activism
    2. A Tale of Two Activists: Carl Icahn and William Ackman
    3. Pershing Square’s Initial Involvement: Wendy’s and McDonald’s
      1. Wendy’s
      2. McDonald’s

    4. McDonald’s Management and Franchisees Respond
    5. Rating Agency Concern
    6. Unlocking McDonald’s Real Estate Value
    7. Aftermath of McDonald’s Rejection
    8. The Truce
    9. Retrospective

  8. Porsche, Volkswagen and CSX: Cars, Trains and Derivatives
    1. Using Derivatives to Obtain Control Positions
      1. Volkswagen Equity Derivatives
      2. CSX Equity Derivatives

    2. CSX Collides with TCI and 3G
      1. Background
      2. TCI and 3G Take a Position

    3. Porsche and Volkswagen: Brothers Reunited
      1. Cash-Settled Options
      2. Stealth by Swaps
      3. Dilemma

  9. The Toys ""R"" Us LBO
    1. Case Focus
    2. Emergence of Club Deal in a Maturing Industry
    3. Dividends and Fees Paid to Private Equity Firms
    4. U.S. Retail Toy Industry in 2005
    5. European Retail Toy Industry
    6. Infant, Toddler, and Preschool Market
    7. Overview of Toys ""R"" Us
      1. Toys ""R"" Us – United States
      2. Toys ""R"" Us – International
      3. Babies ""R"" US

    8. Challenging Times for Toys ""R"" Us
    9. Toys ""R"" Us Strategic Review and Sale
    10. The Toys ""R"" Us Club
      1. KKR
      2. Bain Capital
      3. Vornado Realty Trust

    11. The Assignment

  10. Cerberus and the U.S. Auto Industry
    1. Introduction
    2. ""What’s Good for GM?""
      1. GM a Power
      2. GM Hard Times
      3. Effect on Suppliers
      4. CEO Wagoner’s Tough Task Remaking Company

    3. Cerberus Capital Management to the Rescue…Maybe
      1. Cerberus – New Beast of the Investment Community
      2. The Deal and Its Details
      3. Roadblocks and Hurdles

    4. GM’s Supplier Relationships
    5. Cerberus Builds and Even Bigger Auto Stage
    6. The Dream Becomes a Nightmare



No. of pages:
© Academic Press 2012
20th August 2012
Academic Press
Hardcover ISBN:
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About the Author

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 and private equity. He also teaches undergraduate courses on these topics at Northwestern University, University of Utah, and Utah State 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 backing 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 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 investment bank that provided M&A and capital raising services and general advice in 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


"A comprehensive introduction to Investment Banking and Private Equity.  Loaded with intricate details, it contains a unique frame of reference on best practices on both subjects.  The book defines diverse concepts in clear and concise terms, and readers will benefit from valuable insights and expertise to vet opportunities that meet risk and reward objectives."  --Viney Sawhney, Boston National Capital Partners and Harvard University

"It is the best on the subject that I have found, and I have been teaching for fifteen years.  As long as Professor Stowell keeps it current it will be a valuable source of information on these three topics."  --Charles Murphy, New York University

"In the first edition David Stowell gave students and accessible way to develop a deep understanding of financial firms.  The new version smoothly and successfully integrates the lessons from the financial crisis and how the industry has evolved." --Jonathan Brogaard, University of Washington

"Books on investment banking are few and far between and mostly out of date. Usually they are very academic or written by lawyers rather than by someone who understands the business. This one, written by a former practitioner, gives students of investment banking just the insights they need into the nexus of investment banking, private equity and hedge funds." --Brian Scott-Quinn, Chair in Investment Banking, ICMA Centre, Henley Business School, University of Reading

"Investment banking is in permanent change. This new book on investment banking describes the most recent trends that have taken place in the industry, in particular the interaction between investment banking and the hedge funds and private equity businesses. This is an exhaustive and up-to-date guide to the major banking activities. The different themes covered in the book are illustrated by fascinating real life cases. The book by David Stowell will become the new reference on investment banking."  --Pierre Hillion, INSEAD

"A clearly written account of several popular segments of the global financial services industry. Students who wish to enhance their understanding of the banking system would benefit from reading this book." --Sanjay Gupta, Swiss Finance Academy

Ratings and Reviews