1 february 4, 2014 private equity for surety professionals: what you need to know presented by:helen...
TRANSCRIPT
1February 4, 2014
Private Equity for Surety Professionals: What you Need to
Know
Presented by: Helen Lally Westfield Insurance
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PRESENTER BIOGRAPHY SLIDE(a paragraph for each presenter)
Helen Lally is the Commercial Surety Leader of Westfield Insurance. She is a surety veteran with over thirty years of active industry experience. She has specialized in Commercial Surety for more than
20 years. She has been a presenter at various NASBP Seminars, Webinars and at the William Angell Surety School. She is a member of the NASBP Commercial Surety Committee and is the
liaison between our association and the SFAA Commercial Surety Committee.
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Definition of Private Equity
• Private Equity is an asset class consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange
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Common Forms of Private Equity
• Private Equity Firm• Angel Investor• Venture Capital
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Definitions
• Private Equity Firm – an investment manager that makes investments in the private equity of operating companies through a variety of affiliated investment strategies including LBO, VC and growth capital.
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Definitions
• Angel Investor – an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Pattern is to see some angel groups or angle networks to share research and pool their capital
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Definitions
• Venture Capital – financial capital provided to early-stage, high-potential, high risk, growth startup companies. The VC fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries
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The Early Years
• 1946 – American Research and Development Corp and J.H. Whitney & Co were founded
• JHW is still thriving and remains privately owned by its investing professionals and they continue to provide private equity capital to small and middle market companies. They introduced the world to Minute Maid Orange Juice
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The Early Years
• ARDC’s claim to fame was the first major venture capital success story when their 1957 investment of $70,000 in equity and $2 million in loans in Digital Equipment Corp turned into a fortune when DEC’s IPO in 1966 was such a success. ARDC was founded to encourage investments by soldiers returning from WWII. Ultimately sold to Textron in 1972.
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Legislative Actions
• Business Development Companies were authorized by the US Congress as part of the Small Business Incentive Act of 1980. A benefit here to investors was the tax pass-through set up to avoid double-taxation on dividends
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History of Private Equity
• Leveraged Buyout – LBO – were active in the 1980’s. LBO’s usually had a ratio of 90% debt to 10% equity. The bonds were usually referred to as junk bonds. In the 1980’s several prominent buyouts led to the eventual bankruptcy of the acquired companies. One of the largest was the acquisition of HCA by KKR, Bain and Merrill Lynch for $33 billion. LBO’s were regarded as ruthless and predatory
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Legislative
• Sarbanes Oxley Act of 2002 was a factor in many publicly traded companies going private. The expense factor of compliance, especially on smaller companies was not favorable.
• Hertz, MGM, and Toys’R’Us were a few that private equity firms invested in and removed them from the public market
Legislative • In 2012 , Congress passed the JOBS Act, which
directed the Securities and Exchange Commission (SEC) to implement rules that, among other things, allow general solicitation and advertising of private placement offerings that are made in reliance on Regulation D, Rule 506. Those rules allow companies and promoters to offer securities through means such as direct mail, cold calls, free lunch seminars and media advertisements.
• The SEC has implemented some changes here about disclosure for investors that may have an impact on investors path of support for developing and mature companies.
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Forms of PE Investment
• Senior Debt– Borrowed money that a company must repay first if it goes out of
business. Even though senior debtholders are the first in line to be repaid, they will not necessarily receive the full amount they are owed in a worst-case scenario
• Senior Subordinated Debt– In the case of default, creditors with subordinated debt wouldn’t get
paid out until after the senior debtholders were paid in full.• Preferred Stock
– Have no voting privileges but have priority over other subordinate forms of equity for dividends and claims on the company’s assets in the case of liquidation
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Largest Private Equity FirmsName Headquarters Capital Raised @ 5/2013
TPG Capital Fort Worth $35.73 bnCarlyle Group Washington, D.C.$32.82 bnThe Blackstone Group New York $29.56 bnKohlberg Kravis Roberts New York$28.41 bnWarburg Pincus New York $26.00 bnG S Principal Investment New York$24.63 bnAdvent International Boston $23.06 bnApollo Management New York $22.07 bnBain Capital Boston $19.36 bnCVC Capital Partners London $17.99 bn
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CDC Example - Corporate Capital Trust
• Formed on June 9, 2010 and commenced operations on June 16, 2011.
• Registered with SEC• @ 9/30/2013 – net assets $1.2 billion
• Investment income $35 million• 1 billion shares authorized; 127 million
issued and outstanding
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Corporate Capital Trust Holdings• Senior Debt
– Hubbard Radio, LLC; Guitar Center, Inc., Gymboree Corp, Avaya, Inc., Sabre, Inc., Office Depot, Inc., Bright Horizons Family Solutions, Inc. HUB International
• Senior Subordinated Debt– E-Trade Financial Corp, Aramark Corp,
Chesapeake Energy Corp, Neiman Marcus Group, Trans Union, J. Crew Group, Inc., Cablevision
Capital Raised 2009-2012
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2012 Investments under Regulation D
• Hedge Funds $386 billion
• Private Equity Funds $159 billion
• Venture Capital Funds $ 19 billion
• Other Investment Funds $165 billion
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Gymboree – Case to Analyze
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On November 23, 2010 (the “Transaction Date”), we completed a merger (the “Merger”) with Giraffe Acquisition Corporation (“Acquisition Sub”) in accordance with an Agreement and Plan of Merger (the “Merger Agreement”) with Giraffe Holding, Inc. (“Parent”) and Acquisition Sub, a wholly owned subsidiary of Parent, on November 23, 2010 (the “Transaction Date”), with the Merger funded through a combination of debt and equity financing (collectively, “the Transactions”). We are continuing as the surviving corporation and 100%-owned indirect subsidiary of Parent. Investment funds sponsored by Bain Capital Partners, LLC (“Bain Capital”) own a controlling interest in Parent. The following selected historical consolidated financial data are presented for the Predecessor and Successor periods, which relate to the periods preceding and succeeding the Transaction Date, respectively.
Surety Program Needs
• Multi million U.S. Customs Bond• Self Insurance Workers Comp Bond• Transportation needs – fuel tax,
highway use• Various Compliance L&P Bonds• Financial Guarantee Bonds
– Rhode Island Payroll bi-weekly– Utility Deposit Bonds – Con Ed et al
– Program Total - $23 millionFebruary 4, 2014 21
THE GYMBOREE CORPORATION
CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
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January 30,
2010 January 31,
2009
ASSETS
Current Assets:
Cash and cash equivalents $ 257,672 $ 140,472 Accounts receivable, net of allowance of $434 and $388 9,911 18,735 Merchandise inventories 121,133 114,972 Prepaid expenses 5,315 4,596 Deferred income taxes 14,463 15,108
Total current assets 408,494 293,883
Property and Equipment:
Land and buildings 15,776 15,776 Leasehold improvements 228,254 213,164 Furniture, fixtures, and equipment 192,520 183,775
436,550 412,715 Less accumulated depreciation and amortization (231,089) (208,488)
205,461 204,227 Deferred Income Taxes 17,417 20,850 Other Assets 4,758 1,621
Total Assets $ 636,130 $ 520,581
THE GYMBOREE CORPORATIONCONSOLIDATED BALANCE SHEETS(In thousands, except share data)
THE GYMBOREE CORPORATIONCONSOLIDATED BALANCE SHEETS (In thousands, except share data)
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LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable $ 46,470 $ 44,400 Accrued liabilities 69,295 69,341 Income tax payable 5,381 102
Total current liabilities 121,146 113,843
Long-Term Liabilities:
Lease incentives and other deferred liabilities 70,859 67,072 Unrecognized tax benefits 5,372 5,391
Total Liabilities 197,377 186,306
Commitments and Contingencies (see Note 2) — — Stockholders’ Equity:
Common stock, including additional paid-in capital ($.001 par value: 100,000,000 shares authorized; 29,369,126 and 29,077,446 shares issued and outstanding at January 30, 2010 and January 31, 2009, respectively) 198,879 175,519
Retained earnings 239,531 160,178 Accumulated other comprehensive income (loss) 343 (1,422)
Total Stockholders’ Equity 438,753 334,275
Total Liabilities and Stockholders’ Equity $ 636,130 $ 520,581
THE GYMBOREE CORPORATIONCONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
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Year Ended
January 30,
2010 January 31,
2009 February 2,
2008
Net sales:
Retail $1,001,527 $ 987,859 $ 909,410 Play & Music 13,384 12,819 11,404
Total net sales 1,014,911 1,000,678 920,814 Cost of goods sold, including buying and occupancy expenses (535,005) (524,477) (478,020)
Gross profit 479,906 476,201 442,794 Selling, general and administrative expenses (316,268) (327,893) (312,549)
Operating income 163,638 148,308 130,245 Interest income 728 1,690 2,609 Interest expense (243) (208) (179) Other income (expense), net 610 (151) 769
Income before income taxes 164,733 149,639 133,444 Income tax expense (62,814) (56,159) (53,113)
Net income $ 101,919 $ 93,480 $ 80,331
THE GYMBOREE CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
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Year Ended
January 30,
2010 January 31,
2009 February 2,
2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 101,919 $ 93,480 $ 80,331
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 37,302 34,854 31,151
Provision (benefit) for deferred income taxes 2,727 (3,841) (9,771)
Share-based compensation expense 18,462 19,850 16,381
Loss on disposal/impairment of assets 1,336 448 687
Excess tax benefits from exercise of share-based awards (3,750) (6,023) (3,330)
Tax benefit from exercise of stock options 2,629 6,440 3,841
Change in assets and liabilities:
Accounts receivable 8,831 (6,122) 424
Merchandise inventories (6,046) 3,895 (14,874)
Prepaid expenses and other assets (3,865) 7,408 (1,777)
Accounts payable 1,854 (8,113) (3,343)
Income tax payable 6,659 (7,877) 2,577
Accrued liabilities 4,843 5,652 3,964
Lease incentives and other deferred liabilities 3,694 14,973 1,606
Net cash provided by operating activities 176,595 155,024 107,867
THE GYMBOREE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands except per share data)
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Successor
February 2, 2013
January 28, 2012
ASSETS
Current assets:
Cash and cash equivalents $ 33,328 $ 77,910 Accounts receivable, net of allowance of $216 and
$114 27,542 27,277 Merchandise inventories 197,935 210,212 Prepaid income taxes 2,903 3,736 Prepaid expenses 17,341 5,532 Deferred income taxes 31,383 36,115
Total current assets 310,432 360,782
Property and equipment:
Land and buildings 22,428 22,428 Leasehold improvements 174,616 146,497 Furniture, fixtures and equipment 99,120 82,606
296,164 251,531 Less accumulated depreciation and amortization (90,839) (49,379)
Net property and equipment 205,325 202,152 Goodwill 898,966 899,097 Other intangible assets 580,641 599,195 Deferred financing costs 40,040 47,915 Other assets 7,809 4,646
Total assets $ 2,043,213 $ 2,113,787
THE GYMBOREE CORPORATIONCONSOLIDATED BALANCE SHEETS (In thousands except per shares)
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Current liabilities:
Accounts payable $ 90,133 $ 79,027 Accrued liabilities 90,443 94,178 Current portion of long-term debt - 17,698
Total current liabilities 180,576 190,903
Long-term liabilities:
Long-term debt 1,138,455 1,192,171 Lease incentives and other deferred liabilities 40,104 28,681 Unrecognized tax benefits 7,848 7,898 Deferred income taxes 234,593 245,495
Total liabilities 1,601,576 1,665,148
Commitments and contingencies (see Notes 8, 9 and
19)
Stockholders’ equity:
Common stock, including additional paid-in capital
($.001 par value: 1,000 shares authorized, issued and outstanding) 519,687 519,589
Accumulated deficit (76,231) (68,389) Accumulated other comprehensive loss (5,914) (5,825)
Total stockholders’ equity 437,542 445,375
Noncontrolling interest 4,095 3,264
Total equity 441,637 448,639
Total liabilities and stockholders’ equity $ 2,043,213 $ 2,113,787
THE GYMBOREE CORPORATIONCONSOLIDATED STATEMENT OF INCOME(In thousands except per share data)
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Year Ended February 2,
2013
Year Ended January 28,
2012
Net sales:
Retail
$ 1,234,993 $ 1,164,171 Gymboree Play & Music
23,941 13,885 Retail Franchise
16,730 10,232 Other
- -
Total net sales
1,275,664 1,188,288 Cost of goods sold, including buying and
occupancy expenses (794,272) (728,346)
Gross profit
481,392 459,942 Selling, general and administrative
expenses (411,742) (380,141) Goodwill impairment
- (28,300)
Operating income (loss)
69,650 51,501 Interest income
177 168 Interest expense
(85,640) (89,807) Loss on extinguishment of debt
(214) (19,563) Other (expense) income, net
(12) (109)
(Loss) income before income taxes
(16,039) (57,810) Income tax benefit (expense)
5,636 6,626
Net (loss) income (10,403) (51,184)
Net loss attributable to noncontrolling interest 2,561 5,839
Net (loss) income attributable to
The Gymboree Corporation $ (7,842) $ (45,345)
Ratio Analysis Post Merger Pre
Merger
• Tangible Equity ($1,078 million) $433 million
• Stated Equity $441 million $438 million
• Cash $ 33 million $257 million
• Operating Cash Flow $ 73 million $176 million
• Gross Profit Margin 38% 47%
• Net Income Margin (.08%) 10%
• Interest Expense $85 million $243 thousand
• IBD/Equity (Tangible) 2.57 0
• Times Interest Earned .81 677
• Retained Earnings ($76 million) $239 million
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Going Forward
• Agent and Surety need to fully understand the game plan– Intent and strength of the investor– Duration of the investment– Exit strategy of the investor– Outside factors to be aware of
• Tax law changes• Environmental, Safety, Homeland
Security
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The Future of Private EquityAverage U.S. buyout fund performance has exceeded that of public markets for most vintages for a long period of time. The outperformance versus the S&P 500 averages 20% to 27% over the life of the fund and more than 3% per year. Average U.S. venture capital funds, on the other hand, outperformed public equities in the 1990’s but have underperformed public equities in the 2000s.
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Questions
• If you do not have the opportunity to have your question answered during the Seminar, you may contact me directly
– [email protected] – 330-887-8971
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