what is private equity
DESCRIPTION
Explain private equity to employees of your portfolio companyTRANSCRIPT
Private EquityApril 2014
Structure
Limited Partners
• Public Pension Funds • California Public Employees’ Retirement System (CalPERS)
• Corporate Pension Funds• Boeing Company Pension Fund
• Endowments/Foundations• USC
• Banks & Financial Services• Wells Fargo
• Insurance Companies • MetLife
• Corporations• General Motors
• Wealthy Individuals / Family offices• Intermediaries / Fund of funds
PE Funds
• Blackstone Group
• Carlyle Group
• KKR
• Silver Lake
• CVC Capital Partners
• Warburg Pincus
• 3i
• Bain Capital
• Sequoia Capital
• ABRY Partners
• GTCR
• Harvest Partners
• CIP Capital
Companies
• Private equity
• Venture capital
• Hedge fund
• Debt / Mezz fund
Raise a fund
• Research
• Investment bankers
• Conferences
• Networking
Find an investment
• The offer
• Haggling over terms
• Getting financing / loans
• Equity / ownership / control
Deal
• Targets are set
• Leaving their mark: processes, new initiatives, new products etc.
• Hand picked management
• Partnerships, M&A
Value creation
• Recapitalization
• IPO
• Sale to financial or strategic buyer Return
Later Stage / Large
Companies
Development Stage / SMBs
Early State / Startup
Family / AngelVenture Capital
Middle Market
Private Equity
Mature Stage / LBO
Publically Traded
• Early stage businesses without proven technology or distribution channels
• Limited if any profitability• Diverse portfolio to include
multiple “zeros”
• Proven business models with positive cash flow
• Typically single shareholder or family-controlled businesses without resources to execute on range of growth initiatives
• Attractive valuations
• Established businesses with limited ability for significant growth or operational improvement
• Stable cash flow
Different types of Stage Funding
Investment by IndustryB2B Information
ManagementMarketing Services
Knowledge Services
Business Process Outsourcing
CIP Capital
Receive an initial teaser or Information memorandum (“CIM”)
Submit a tentative/ nonbinding Indication of Interest (“IOI”)
Perform detailed due diligence on target
company
Exclusivity / Third Party Diligence
Final Binding
offer
• Value proposition / Customers
• Industry
Market Opportunity
• Competitors
• Barriers to entry
• Product differentiation
Competitive Landscape /
Market Share
• Geographic expansion
• New product / market entry
• Acquisitions
Growth Opportunities
• Track record
• Macro drivers
• Pricing Profitability
• Organization
• Post-Closing execution planOperations
Deal Sourcing & Closing Business Diligence
Value Creation
Provide “large company” expertise, investment and resources that were previously unavailable given their small / middle-market size
Accelerate the achievement of strategic initiatives
Geographic market
expansion
Market priority analysis / product
suitability launch
Introduction of new product lines
Buy vs. Build Prioritize rolloutIdentify
customer demand
M&A
Identify Targets and Approach
Targets
Due diligence & Close
Transactions
Tactical initiatives
Efficiency improvements in sales, marketing and operations
Identity new sales and marketing channels
Organization build out
Third party resources
Construct financial reporting metrics to
track progress
Report findings on daily, weekly
and monthly basis
• You buy a company for 10.0x EBITDA multiple
• You raised 30/70 debt to equity; Debt costs 10%
• Company generates $50 million in revenue with a 40% EBITDA margin
• Revenue is expected to increase by $12.5 million every year
• Capital expenditures are 10% of sales; Depreciation is $5 million every year
• Tax rate is 40%
• You’d like to exit in five years
Uses: Sources: % of Total
TEV $200 Equity $140 70%
Debt $60 30%
Total $200 Total $200
Ending EBITDA $45
Multiple 10.0x
TEV $450
Less Debt $8
Equity Value $442
MOC (x) 3.2x
IRR 33%
$ in millions Year 1 Year 2 Year 3 Year 4 Year 5 CAGR
Income Statement
Revenue $50 $63 $75 $88 $100 19%
COGS $13 $16 $19 $22 $25 19%
Gross Profit $38 $47 $56 $66 $75 19%
Fixed (Rent) $5 $5 $5 $5 $5 0%
Variable (Payroll) $13 $16 $19 $22 $25 19%
SG&A $18 $21 $24 $27 $30 14%
EBITDA $20 $26 $33 $39 $45 22%
Margin% 40% 42% 43% 44% 45%
D&A $5 $5 $5 $5 $5
Interest (@10%) $6 $6 $6 $6 $6
EBT $9 $15 $22 $28 $34
Taxes (@40%) $4 $6 $9 $11 $14
NI $5 $9 $13 $17 $20
Free Cash Flow
EBITDA $20 $26 $33 $39 $45
Less:
Capex $5 $6 $8 $9 $10
Cash Taxes $4 $6 $9 $11 $14
Cash Interest $6 $6 $6 $6 $6
Free Cash Flow $5 $8 $10 $13 $15
Debt $60 $60 $60 $60 $60
Cumulitive Cash $5 $13 $24 $37 $52
Return: Illustrative LBO example
• Investment in the target company
• Capital investments, operational changes etc.
• May well take many years
J-Curve Effect
Returns since 1986
Questions?