navigating the private equity process - white · advisory services for companies primarily in the...

2/25/2019

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Navigating the Private Equity Process

Prepared Exclusively for MGMA Alabama by Founders Advisors

2STRICTLY CONFIDENTIAL

Michael White Biography

20 years experience in M&A and capital raising across all Healthcare sectors

Senior Banker at Barclays and Bear Stearns

Chief Financial Officer at Carbylan Therapeutics

B.S. International Finance, University of Alabama

M.B.A. Finance and Accounting, University of Chicago

Michael White, Managing Director of Founders Advisors’ Healthcare practice, is a strategic finance professional with operating experience as a Chief Financial Officer. He has over 20 years’ experience advising healthcare clients on a range of strategic alternatives including IPOs, public and private equity and debt capital raises, joint ventures, licensing and buy-side and sell-side mergers and acquisitions.

Michael spent seven years at Bear, Stearns & Co. in New York where he served in a series of positions of increasing responsibility in the healthcare investment banking group. He then joined Barclays where he was a Vice President and Director in the healthcare investment banking group on the West Coast for six years. Most recently Michael has acted as a consultant, advising clients on a variety of strategic alternatives across multiple healthcare subsectors as well as serving as Chief Financial Officer of Carbylan Therapeutics, a specialty pharmaceutical company. Michael started his career at SouthTrust Bank and its affiliate, PRN Mortgage Capital, providing financing and advisory services for companies primarily in the post-acute care space.

Michael received his B.S. in International Finance from the University of Alabama and his M.B.A. with concentrations in Finance and Accounting from the University of Chicago Booth School of Business. A native of Talladega, Alabama, Michael and his wife Gayle have returned to Birmingham, where they live with their two children, Emelia and Madeline.

Michael White – Managing Director, Head of Healthcare Practice Michael White – Managing Director, Head of Healthcare Practice

Detailed BioDetailed Bio

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Section I:What is Private Equity?


Private Equity Overview

• Alternative asset class used primarily for investing in publicly or privately held businesses

• Generally organized as partnerships

• Outside Investors – Limited Partners

• Private Equity Firm Management – General Partners

• Capital raised from various institutional investors and high net-worth individuals

• Acquire / Invest in public or private companies through debt and cash – Leveraged Buyout

• Generally hold investments for a 3 – 7 year period before selling / exiting

• Can be categorized according to multiple sets of criteria

• Investment size, fund size, geography, etc.

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Types of Private Equity Funds

Financial Investors

Private Equity Funds Mutual Funds

Hedge Funds Venture Capital Funds

Growth Equity Family Office Mezzanine Financing

Buyout FundDistressed / Special

Situations


Private Equity Investment Structure

Private Equity Fund

Investment

Investment A

Investment B

Investment C

Investment D

Portfolio Companies

Outside Investors(Limited Partners)

General Partner(LLC)

Individual Fund Managers(as part of LLC)

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Private Equity Investment Criteria

Size

< $5MAnnual Revenue

$1BAnnual Revenue

Investment Type

Minority Investment Buyout

Company Life Cycle

Startup Mature

Industry

Energy /Oil & Gas

Healthcare / Life Sciences

Manufacturing / Industrials

Software / Technology


Transaction Options

Control

Liq

uid

ity

Outright Sale

100% of Equity Sold

Recapitalization

Sell Majority or Minority Stake

Status Quo

No Investment or Exit

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Valuation Framework

Income Statement

Revenue

Less: Cost of Goods Sold

Gross Profit

Less: Operating Expenses

EBIT

Add: Depreciation & Amortization

Add: Adjustments

EBITDA

EBITDA Multiple

Enterprise Value

Determined as a function of buyer expectations of risk-adjusted future cash flows


Valuation Multiples

Risk

Mu

ltip

leH

igh

Low

HighLow

Quantitative Determining Factors

• Margin Profile

• Growth

• Overall Size & Scale

• Customer Concentration

• Cash Conversion

• Leverage, Liquidity & Solvency

• Cost of Financing

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Qualitative Value Drivers

Key Value DriversKey Value Drivers

Market PerformanceTeam ControlsRisk

Management

Large Market

Stable & Predictable Cash Flow

Strong Management

Team

Documented Strategic

Plan

SustainableCompetitiveAdvantages

Growing Market

Sizable & Growing

Market Share

Clear Vision, Mission &

Values

Key Performance

Indicators

Customer Diversification

Niche Market

High Margins Relative to

Industry

Quality Employees

Strong Financial Controls

Proprietary Technology

High Barriers to Entry

High ROICHigh

Employee Retention

Documented Operational Procedures

Exit Strategy


Private Equity Value Proposition

Example AcquisitionsExample Acquisitions

Assets / Purchase

Price

$100M

Debt

$60M

Equity

$40M

Assets / Purchase

Price

$100M

Debt

$10M

Equity

$90M

Assets / Purchase

Price

$150M

Debt

$10M

Equity

$140M

Assets / Purchase

Price

$100M

Debt

$60M

Equity

$40M

Efficient Capital Structure with No GrowthEfficient Capital Structure with No Growth Efficient Capital Structure with GrowthEfficient Capital Structure with Growth

Transaction Exit in Year 5 Transaction Exit in Year 5

18% IRR 28% IRR

Ideal Acquisition TargetIdeal Acquisition Target Typical Transaction StrategyTypical Transaction Strategy

Stable, recurring cash flow

Low capital needs (capital expenditures and working capital)

Favorable industry trends

Multiple avenues of growth

Strong management team and opportunity to add value

Acquire a company at a fair value using financial leverage (debt), execute growth plan, mitigate risk factors, and sell within 3 to 7 years

Target returns are 20 – 30% depending on the size and risk profile of the investment

Even without growth in the value of the company, the private equity group earns a respectable return

If their organic growth initiatives succeed, the IRR reaches the desired 20% – 30% range

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Section II:Navigating the Private Equity Process


• Number of market participants

• Message to buyers

• Competition and maximizing valuation

• Negotiation leverage and favorable terms

• Strategic positioning and upside

• Confidentiality and access to Company and its data

• Duration of process

• Management’s time and attention

Key Process Considerations

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Comparison of Sell-Side Strategies

Limited Negotiation Targeted Auction Broad Auction

Description of Process• Process and negotiations limited to

high-intent parties• Target select prospective buyers,

utilizing a two-step auction• Wide range of potential buyers

contacted

# of Potential Buyers 5 or fewer 6 – 60 60+

Advantages

• Speedy execution, minimal interruption

• Maximum confidentiality, easiest termination

• Abbreviated deal execution

• Maintains confidentiality, avoids perception the Company is being sold

• Fosters competition among buyers

• May identify unexpected parties

Disadvantages

• Weakened negotiating position, little guarantee buyer will proceed

• May not realize maximum value

• Requires management’s time and attention

• Potential to miss optimal buyer

• Extends timeline, meaningful time and attention of management

• Greatest risk of access to the process and confidential materials


Process Overview

Preparation Marketing Diligence Closing

Investment Banker produces professionalized marketing materials

Banking team performs buyer research to find the optimal partner

Leverage investment banking industry connections to ensure marketing materials highlight items buyers want to see

Investment Banker facilitates first round of marketing with calls

Banking team works with management team to prepare Virtual Data Room (“VDR”) and management presentation

Ongoing, weekly marketing updates

Solicit and review first round bids (Indication of Interest –“IOI”)

Prepares data room in advance of management meetings

Solicitation of final bids (Letter of Intent – “LOI”)

Drive increasing bids from IOI to LOI

Assess final negotiations and analyzes available options before selecting a partner

Arrange for final due diligence

Buyers receive VDR access early in the process, allowing a shortened diligence phase

On-going business due diligence and VDR buildout

Develop financial package and unit economic model

Draft & finalize marketing materials

Research & tier buyers list

Approve NDA

Distribute marketing materials

Conference calls with buyersand management (if required)

Draft management presentation

Management presentation dry run

Prepare data room

Solicit and review first round bids (Indication of Interest –“IOI”)

Select second round bidders

Management presentations

Site visits (if required)

Data room access

Detailed buyer due diligence

Solicitation of final bids (Letter of Intent – “LOI”)

Selection of winning bidder

Negotiation of definitive agreement

Confirmatory due diligence

Signing and closing

30 – 60 days 30 – 60 days 20 – 30 days 45 – 60 days

Process Milestones

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Key Deal Considerations

Deal Considerations Things to Consider

Speed and Certainty of Close • How quickly can the investors move on diligence and closing? Time kills deals.

Cash at Close & Earn-outs • Structure plays a big role in deal consideration. Not all enterprise valuations are equal.

Retained Equity Ownership• Is there an opportunity for key shareholders to role equity? An opportunity for a “second-bite” can drive

significant value.

Tax Implications• Is the transaction being structured in the most tax efficient manner, and what is the shareholder take-

home value?

Strategic Fit / Alignment • Does the investor’s future plans for the company align with those of the shareholders?

Value Add of the Investor• What industry experience does the investor have, and how are they going to drive value for the

business? This is particularly important when rolling equity.

Post-Acquisition Environment • How does the investor’s culture align with that of the company’s? Do you like each other?

Stay Bonuses for Key Mgmt. / Staff• Is the company’s key management team being incentivized to continue with the business post-

transaction?

Working Capital Treatment • Working Capital can be both complex and materially impactful to shareholders’ net consideration.

Risk Shifting Considerations• How much cash is being held back at close, and what is the risk of the holdback amounts? Likelihood of

retaining proceeds.


Section III:Valuation Trends

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$1,9

37

$2,1

77

$2,2

27

$2,3

65

$2,5

57

$3,0

54

$3,3

97

-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2012 2013 2014 2015 2016 2017 2018*

$174

$144

$228

$213

$192 $2

09

$134

908

820

1,088 1,083

1,002 1,017

609

-

$50

$100

$150

$200

$250

2012 2013 2014 2015 2016 2017 2018*0

200

400

600

800

1,000

1,200

Exit Value ($B) # of Exits

Middle Market Private Equity Market Update

Private Equity Assets Under Management ($B)Private Equity Assets Under Management ($B)

Fundraising & FinancingFundraising & Financing US Middle Market Private Equity FundraisingUS Middle Market Private Equity Fundraising

US Middle-Market Private Equity-Backed ExitsUS Middle-Market Private Equity-Backed Exits

US middle market fundraising continued to be strong through Q3 2018, with $88 billion raised across 99 funds

Average amount raised per fund is up through Q3, averaging ~$890 million per fund, compared to ~$700 million raised per fund during 2017

Private equity firms exited 609 middle market deals totaling $134 billion through Q3 2018

Average middle-market, private equity exit deal value through Q3 2018 was ~$221 million, up from ~$205 million in full-year 2017

Source: PtichBook

$73 $8

6 $111

$94 $1

14

$115

$88

106

138

154

139

164 165

99

-

$20

$40

$60

$80

$100

$120

$140

2012 2013 2014 2015 2016 2017 2018*0

20

40

60

80

100

120

140

160

180

Capital Raised ($B) # of Funds Closed

* As of Sep. 30, 2018


Lower Middle Market Valuation

Valuation CommentaryValuation Commentary Lower-Middle Market Transactions MultiplesLower-Middle Market Transactions Multiples

Number of Transactions by Year and ValueNumber of Transactions by Year and Value Add-On ActivityAdd-On Activity

EV / EBITDA Multiples remain near all-time high levels, reflecting a competitive environment for quality businesses

Valuations Remain Elevated, but Value is Down

Recent M&A activity indicates a preference for smaller deals as add-on acquisitions

Are we nearing the end of the cycle?

Private equity may be showing some conservative signals

Bank financing is beginning to tighten

There is increasing asymmetry between buyer & seller expectations

$250

$248

$352

$321

$310 $3

74

$178

.5

1,936 1,743

2,2732,275 2,435

2,565

2,046

-

$50

$100

$150

$200

$250

$300

$350

$400

$450

2012 2013 2014 2015 2016 2017 2018*0

500

1,000

1,500

2,000

2,500

3,000

3,500

Deal Value ($B) # of Deals Closed

$105 $1

22

$186

$158

$158 $1

89

$160

957 980

1,3121,361 1,373 1,382

1,123

-

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2012 2013 2014 2015 2016 2017 2018*0

200

400

600

800

1,000

1,200

1,400

1,600


6.2x

6.4x 6.4x

6.7x 6.7x

7.3x

7.1x

5.5x

6.0x

6.5x

7.0x

7.5x

2012 2013 2014 2015 2016 2017 2018

EV

/ E

BIT

DA

* As of Sep. 30, 2018 Source: Pitchbook & GF Data

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Healthcare M&A Activity

EV / EBITDA – Healthcare Services ValuationsEV / EBITDA – Healthcare Services ValuationsMiddle Market Healthcare Private Equity M&AMiddle Market Healthcare Private Equity M&A

Source: Pitchbook & GF Data

$34

$17

$52

$45 $5

2

$50

$46

241218

283 297

369399

323

0

50

100

150

200

250

300

350

400

450

-

$10

$20

$30

$40

$50

$60

2012 2013 2014 2015 2016 2017 2018*


EV / EBITDA – All Industries EV / EBITDA – All Industries

6.4x

6.5x

8.8x

7.2x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

2014 2015 2016 2017 2018**

$10M - $25M $25M - $50M $50M - $100M $100M - $250M

6.4x

7.3x

8.2x

9.3x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

$10M - $25M $25M - $50M $50M - $100M $100M - $250M

EV Range

Valuation CommentaryValuation Commentary

Size-related premium for assets of quality continues to be reflected in multiples paid

EBITDA multiples for platform assets can command up to 2.0x more than multiples for smaller comparables

The size premium in healthcare services is more pronounced, reflecting investor interest in quality assets

* As of Sep. 30, 2018; ** As of Jun. 15, 2018


Current Economic Environment

Duration of U.S. Economic Expansions

50

80

37

45

39

24

106

36

58

12

92

120

73

116

0

20

40

60

80

100

120

140

Nu

mb

er

of

Mo

nth

s

Date of Peak

Expansion Duration

Average

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BIRMINGHAM2204 Lakeshore Drive, Suite 425

Birmingham, AL 35209-8855Phone: 205.949.2043

DALLAS180 State Street, Suite 225

Southlake, TX 76092Phone: 214.295.1055

In order to provide securities-related services discussed herein, certain principals of Founders are licensed with M&A Securities Group, Inc. or Founders M&A Advisory, LLC, both members FINRA & SiPC. Founders M&A Advisory is a wholly owned subsidiary of Founders.

HOUSTON24275 Katy Freeway, Suite 400

Katy, TX 77494Phone: 713.412.0313

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