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  • Significant Workplace Known as the “Athens of the South”, the tradition boasts over eighteen colleges, universities and post-graduate institutions, including such nationally recognized research and development leaders as Vanderbilt University and the University of Tennessee Space Institute. Over 45% of adults in the Nashville area have some level of college education, and more than 45,000 Nashville residents have graduate or professional degrees. The pool of potential ideas and the talent to execute such ideas is immense.
  • coba.belmont.edu

    1. 1. Private Equity and Debt Alternatives Linda Costello Managing Director April 27, 2006
    2. 2. Common Reasons to Seek Financing <ul><li>Expansion – Growth in fixed assets or marketing expansion </li></ul><ul><li>Acquisitions </li></ul><ul><li>Founder/shareholder liquidity </li></ul><ul><li>Refinancing – Improvement of existing debt terms </li></ul>
    3. 3. How to Finance? <ul><li>Available cash on the balance sheet </li></ul><ul><li>Operating cash flow </li></ul><ul><li>External financing </li></ul><ul><li>The principal consideration will be timing of the opportunity and </li></ul><ul><li>the alternative need for existing cash. </li></ul>
    4. 4. Capital Structure Overview <ul><li>Very generally, a company’s capital base is made up of debt and equity. </li></ul>
    5. 5. Maturity of the Business - Investor Types <ul><li>Seed/Start-Up Stage </li></ul><ul><li>Individuals </li></ul><ul><li>Venture Capital </li></ul><ul><li>Corporations </li></ul><ul><li>Early Stage </li></ul><ul><li>Individuals </li></ul><ul><li>Venture Capital </li></ul><ul><li>Corporations </li></ul><ul><li>Growth Stage / Expansion Stage </li></ul><ul><li>Buyout funds </li></ul><ul><li>Mezzanine Investors </li></ul><ul><li>Stretch Lenders </li></ul><ul><li>Banks </li></ul><ul><li>Hedge Funds </li></ul><ul><ul><li>Financing </li></ul></ul><ul><ul><li>Buyers </li></ul></ul><ul><li>Corporations </li></ul><ul><li>Later / Mature Stage </li></ul><ul><li>Buyout funds </li></ul><ul><li>Mezzanine Investors </li></ul><ul><li>Stretch Lenders </li></ul><ul><li>Banks </li></ul><ul><li>Hedge Funds </li></ul><ul><ul><li>Financing </li></ul></ul><ul><ul><li>Buyers </li></ul></ul><ul><li>Corporations </li></ul>
    6. 6. Private Equity Investor Universe <ul><li>Private equity capital is provided by the following types of investors: </li></ul><ul><ul><li>Private equity groups/buyout firms/financial sponsors </li></ul></ul><ul><ul><li>Venture capital firms </li></ul></ul><ul><ul><li>Management teams </li></ul></ul><ul><ul><li>Mezzanine funds </li></ul></ul><ul><ul><li>Wealthy individuals (“Angels”) </li></ul></ul><ul><ul><li>Investment arms of corporations </li></ul></ul><ul><li>Most private equity firms target investments based on some or all of the following investment criteria: </li></ul><ul><ul><li>Specific industries </li></ul></ul><ul><ul><li>Maturity of the business </li></ul></ul><ul><ul><li>Size of the investment </li></ul></ul><ul><ul><li>Geography </li></ul></ul><ul><ul><li>Control or non-control investments </li></ul></ul>
    7. 7. Maturity of the Business <ul><li>The maturity of the business is an important investment criterion most private equity firms use to make an initial investment decision. </li></ul><ul><li>Generally, the maturity of a business or its stage of development can be categorized as one of the following: </li></ul><ul><ul><li>Seed/Start-up Stage </li></ul></ul><ul><ul><li>Early Stage </li></ul></ul><ul><ul><li>Growth Stage/Expansion Stage </li></ul></ul><ul><ul><li>Later/Mature Stage </li></ul></ul>
    8. 8. Significant Terms of Private Equity Investments <ul><li>Significant terms in private equity investments include the following: </li></ul><ul><ul><li>Type of security </li></ul></ul><ul><ul><ul><li>Almost always convertible preferred stock </li></ul></ul></ul><ul><ul><ul><li>Investors will sometimes also invest in the common stock </li></ul></ul></ul><ul><ul><li>Liquidation Preference </li></ul></ul><ul><ul><ul><li>1 st money out in the event of any sale, dissolution, merger, consolidation, or change of control </li></ul></ul></ul><ul><ul><ul><li>Typically 1x – 3x of capital invested plus accrued dividends with 1x being the most common </li></ul></ul></ul><ul><ul><li>Participation </li></ul></ul><ul><ul><ul><li>In addition to the liquidation preference, the investor “participates” with the other shareholders on an as converted basis </li></ul></ul></ul><ul><ul><ul><li>Will sometimes be capped once a certain return has been achieved </li></ul></ul></ul>
    9. 9. Return Expectations and Investment Horizon <ul><li>All private equity and venture capital investors have certain return on investment expectations which they use to evaluate their opportunities: </li></ul><ul><ul><li>Private equity firms are typically expecting annual returns of approximately 25%-35% on their investments. </li></ul></ul><ul><ul><li>Venture capital investors are typically expecting annual returns of approximately 35%-45% on their investments although, they typically express returns as a multiple of capital invested. </li></ul></ul><ul><ul><ul><li>Assuming a 5 year time horizon this translates to a 3.0x – 6.0x multiple of capital invested. </li></ul></ul></ul><ul><li>Return expectations are also influenced by the investment time horizon of the investor. </li></ul><ul><ul><li>Most later stage private equity firms have a 4-7 year investment horizon. </li></ul></ul><ul><ul><li>Venture capital investors usually have a longer investment horizon. </li></ul></ul>
    10. 10. Liquidation Preference with Participation Example <ul><li>The analysis below assumes the following: </li></ul><ul><ul><li>Pre-money value = $50 million </li></ul></ul><ul><ul><li>Growth capital = $25 million </li></ul></ul><ul><ul><li>Post-money value = $75 million </li></ul></ul><ul><ul><li>Pro forma ownership = 66.7% common / 33.3% preferred </li></ul></ul><ul><ul><li>Liquidation preference = 1x </li></ul></ul>
    11. 11. How Do Debt and Equity Differ? DEBT EQUITY <ul><li>Generally the riskiest investment made in the company, equity is generally the most expensive form of financing. </li></ul><ul><li>Usually has an interest cost that is paid on a regular schedule from its incurrence until the final maturity payment. </li></ul><ul><li>Debt is generally the lowest cost of financing. </li></ul><ul><li>Cash value only after all a company’s obligations, including debt, have been met. </li></ul><ul><li>Generally has no fixed repayment schedule. </li></ul><ul><li>The most junior layer of a company’s capital structure and, as such, has no claim on assets. </li></ul><ul><li>Contractual obligation and must be paid back on a schedule which is agreed to at the outset. </li></ul><ul><li>Often collateralized by a company’s assets and, as such, has a claim on those assets in liquidation. </li></ul><ul><li>Generally the most senior obligation of a company after its accounts payable and other operating expenses. </li></ul>
    12. 12. Senior Lender’s Approach <ul><li>For middle market borrowers, senior debt is typically secured. </li></ul><ul><li>Availability (amount to be loaned) is often limited by hard assets for companies with EBITDA under $10-15 million. </li></ul><ul><ul><li>A percentage of AR, inventory and fixed assets is the starting point for determining revolving credit and term facilities </li></ul></ul><ul><ul><li>Uncollateralized term loans may be added at a higher cost </li></ul></ul><ul><ul><li>Some amount of the committed financing is generally held back as “excess availability” at the time of closing </li></ul></ul>
    13. 13. Subordinated (Mezzanine) Lender’s Approach <ul><li>Amount of the loan is typically determined by applying a multiple to historical EBITDA rather than by the company’s asset base. </li></ul><ul><ul><li>The most significant measure of EBITDA is the company’s trailing twelve months performance. </li></ul></ul><ul><ul><li>“Run rate” and projected results may also be considered. </li></ul></ul><ul><li>Always behind senior lender in security and repayment. </li></ul><ul><ul><li>Mezzanine is either unsecured or has a second lien on assets and doesn’t amortize before senior term loan is repaid. </li></ul></ul><ul><ul><li>Interest rate is usually fixed, while senior debt is typically priced with a floating rate. </li></ul></ul><ul><ul><li>Financial covenants are generally fewer and looser than those of senior debt. </li></ul></ul>
    14. 14. Senior and Mezzanine Debt Comparison
    15. 15. The Financing Process Week 1 - Company selects placement agent Weeks 8-9 - Interested investors / lenders submit term sheets Weeks 2-4 - Private Placement materials assembled Weeks 9-10 - Selected investor(s) / lender(s) complete on-site due diligence Weeks 5-7 - Contact potential investors / lenders Week 10-12 - Legal documentation and Closing
    16. 16. Expenses <ul><li>Depending on the nature of the transaction, several types of fees and expenses can be incurred during the senior and mezzanine capital raising process: </li></ul><ul><ul><li>Legal </li></ul></ul><ul><ul><li>Accounting </li></ul></ul><ul><ul><li>Consulting </li></ul></ul><ul><ul><li>Advisor </li></ul></ul><ul><ul><li>Debt financing fees </li></ul></ul><ul><ul><li>Travel </li></ul></ul><ul><li>In most transactions, the company raising the capital will pay the fees and expenses incurred by the capital providers. </li></ul><ul><li>The total fees and expenses incurred in senior and mezzanine capital raising transactions are generally between 3%-5% and are paid out of the proceeds. </li></ul>
    17. 17. How Can an Advisor / Agent Help? <ul><li>Knowledge of most likely financing sources developed over years of experience. </li></ul><ul><li>Advice regarding structure, pricing and covenants. </li></ul><ul><li>Ability to generate increased competition among investors and negotiate most attractive terms. </li></ul><ul><li>Shouldering the burden throughout the entire financing process to allow management to devote more time to day-to-day business. </li></ul>
    18. 18. Case Study <ul><li>A steadily growing, seven-year old company was interested in buying a competitor that had announced it was for sale. </li></ul><ul><li>The company’s passive shareholders also had interest in getting some liquidity for their initial investment made seven years earlier. </li></ul><ul><li>Financing Requirement </li></ul><ul><ul><li>Purchase of competitor’s equity </li></ul></ul><ul><ul><li>Refinance existing debt </li></ul></ul><ul><ul><li>Shareholder liquidity </li></ul></ul><ul><ul><li>Transaction expenses </li></ul></ul><ul><ul><ul><ul><ul><li>Total Requirement </li></ul></ul></ul></ul></ul>$ 38 million $ 5 million $ 5 million $ 2 million $50 million
    19. 19. Historical Financial Performance
    20. 20. Target’s Historical Financial Performance <ul><li>The $38 million purchase price yields an EBITDA multiple of 6.9x. </li></ul>
    21. 21. Acquirer’s Balance Sheet
    22. 22. Debt Capacity – Acquirer Only
    23. 23. Combined Financial Performance <ul><li>Lenders will take the target company’s EBITDA into account when analyzing debt capacity. </li></ul><ul><li>Synergies and cost reductions post closing will also be examined and incorporated into the analysis. </li></ul>
    24. 24. Debt Capacity Pro Forma for Acquisition <ul><li>The combined company has debt capacity ranging between $18 and $70 million, therefore the $50 million requirement can be accomplished solely with debt financing. </li></ul><ul><ul><li>“Run rate” EBITDA is probably the most important number in determining debt capacity. </li></ul></ul>
    25. 25. Likely Covenants <ul><li>Limitations on: </li></ul><ul><ul><li>Senior debt </li></ul></ul><ul><ul><li>Total debt </li></ul></ul><ul><ul><li>Capital expenditures </li></ul></ul><ul><ul><li>Sales of assets </li></ul></ul><ul><ul><li>Dividends </li></ul></ul><ul><li>Measurement of: </li></ul><ul><ul><li>Interest coverage </li></ul></ul><ul><ul><li>Fixed charge coverage </li></ul></ul><ul><li>Reporting requirements: </li></ul><ul><ul><li>Monthly financials (30 days) </li></ul></ul><ul><ul><li>Quarterly financials (30 days) </li></ul></ul><ul><ul><li>Annual financials (120 days) </li></ul></ul>
    26. 26. Conclusion <ul><li>The debt market has been active and aggressive for the last several years, making possible increasingly leveraged financings. </li></ul><ul><li>The large second lien market in which many institutions are willing to buy junior bank loans has resulted in favorable terms for borrowers. </li></ul><ul><li>More mezzanine lenders have emerged, raising funds that must be put to work, and this increased competition for junior loans has resulted in attractive mezzanine terms for borrowers. </li></ul><ul><li>These factors have fueled an unprecedented level of middle market borrowing which, while potentially moderating somewhat, is expected by most to continue into 2006. </li></ul>
    27. 27. Technology Venture Segment of Private Equity Gary A. Peat Partner April 27, 2006
    28. 28. Private Equity Overview Venture Capital – “State of the business” Netscape IPO Yahoo IPO Amazon IPO Earthweb IPO $2.4 million revenue $850 million market cap 1 st day price appreciation Peaked at 900%+ Consistent Rate of Investment, “ post-bubble” steady state
    29. 29. Private Equity Overview <ul><li>A strategy and a “real plan” </li></ul><ul><ul><li>A real leader is a must </li></ul></ul><ul><ul><li>Capable team must be built to formulate and execute plan </li></ul></ul><ul><ul><li>Experience matters, but optimized when in concert with entrepreneurship </li></ul></ul><ul><li>A real market, with real customers, paying real prices </li></ul><ul><ul><li>Where this exists, there is still real opportunity </li></ul></ul><ul><ul><ul><li>Examples today: Ecommerce, mobility, software as a service, etc. </li></ul></ul></ul><ul><li>Reasonable Expectations: 10X is great again </li></ul><ul><li>Exit environment: </li></ul><ul><ul><li>IPOs are expensive and difficult and will stay that way </li></ul></ul><ul><ul><li>Strategic buyers only “pay up” for results or strong IP or both </li></ul></ul><ul><ul><li>Private equity buyers are not material in overall tech M&A (yet…) </li></ul></ul>Venture Capital today? Steady pace, competitive, healthy
    30. 30. Council Ventures <ul><li>$52 million Fund I </li></ul><ul><ul><li>3 partners, Gary Peat, Katie Gambill, Denny Bottorff </li></ul></ul><ul><ul><li>Leveraged by CEO Council </li></ul></ul><ul><ul><ul><li>Directorships, Chairmanships, Mentorship, Rolodex, etc. </li></ul></ul></ul><ul><li>Early stage tech focus </li></ul><ul><ul><li>10 deals thus far, 1 or 2 more with this fund </li></ul></ul><ul><ul><li>2 seed (no revenues) </li></ul></ul><ul><ul><li>6 startup (less than $2 million run rate) </li></ul></ul><ul><ul><li>2 early stage (under $10 million run rate, still not profitable) </li></ul></ul><ul><li>Business models: </li></ul><ul><ul><li>5 tech enabled service (a/k/a software as a service) </li></ul></ul><ul><ul><ul><li>EVault, Marketworks, NotifyMD, Advanced Academics, Benefit Informatics, iKobo </li></ul></ul></ul><ul><ul><li>2 enterprise software </li></ul></ul><ul><ul><ul><li>Lancope (network security), AppForge (mobility) </li></ul></ul></ul><ul><ul><li>1 Healthcare financial services </li></ul></ul><ul><ul><ul><li>Senior Whole Health </li></ul></ul></ul><ul><ul><li>1 rocket science (microelectromechanical systems—a/k/a MEMS) </li></ul></ul><ul><ul><ul><li>MEMX, Inc. </li></ul></ul></ul><ul><li>Actively seeking new investments </li></ul>Private Equity Overview
    31. 31. Venture Capital and Healthcare
    32. 32. Nashville… Healthcare “Silicon Valley” <ul><li>Over 200 healthcare companies with multi-state, national or international presence </li></ul><ul><li>More than 130 professional service firms support Nashville’s healthcare community </li></ul><ul><li>21 public companies - $25 billion revenues </li></ul><ul><li>More than 100 companies have been spun-off from HCA, HealthTrust and Hospital Affiliates </li></ul><ul><li>More than $750 million in venture capital invested in Nashville healthcare companies from 1995-1997 (this accounts for 25% of all venture capital invested in healthcare services in the U.S. during that time) </li></ul><ul><li>Source: Nashville Healthcare Council </li></ul>
    33. 33. Nashville… Healthcare Family Tree
    34. 34. <ul><li>Invested in Medcast in July of 1998 </li></ul><ul><li>- Proven management team </li></ul><ul><li>- Opportunity to create value in emerging industry </li></ul><ul><li>- Clayton Associates brought knowledge and contacts to the transaction </li></ul><ul><li>Merged with WebMD in November of 1999 for $250 million </li></ul><ul><li>Shows proactive nature of investing with a proven management team and unique business opportunity </li></ul>WebMD An Early Winner
    35. 35. <ul><li>Invested first seed equity in 1998 </li></ul><ul><li>Developed strategy to own and manage non-rural hospitals </li></ul><ul><li>Clayton Associates and FCA assisted in recruitment of senior management </li></ul><ul><li>Recruited Joseph Littlejohn & Levy’s $285 million equity investment to acquire 15 hospitals </li></ul><ul><li>Top 10 for-profit hospital management company in the U.S. </li></ul>Iasis Healthcare
    36. 36. <ul><li>Invested first seed equity in 1998 </li></ul><ul><li>Developed strategy to own and manage behavioral healthcare physician practices and facilities </li></ul><ul><li>Clayton Associates assisted in recruitment of senior management </li></ul><ul><li>Through acquisition, became a publicly traded company </li></ul><ul><li>Today, one of the top for-profit behavioral management companies in the U.S. </li></ul>Psychiatric Solutions
    37. 37. <ul><li>Clayton Associates participated in the first seed funding with New York-based, Welsh, Carson, Anderson and Stowe </li></ul><ul><li>Premiere provider of healthcare services throughout U.S. </li></ul><ul><li>Divested their behavioral healthcare hospital holdings and focusing on urban acute care </li></ul><ul><li>Today, over a $1 Billion revenue business </li></ul>Ardent Health Services
    38. 38. <ul><li>Provided growth capital in September 2002 </li></ul><ul><li>CEO is a respected executive in the international healthcare industry. HCA Alumni. </li></ul><ul><li>HCCA is a recognized leader in global healthcare management, operations, recruitment and staffing services since 1973 </li></ul><ul><li>Operates through offices and staff in the U.S., Canada, United Kingdom, India and the Philippines </li></ul><ul><li> </li></ul>HCCA International
    39. 39. <ul><li>Relationships, relationships, relationships </li></ul><ul><li>Leverage resources </li></ul><ul><li>Do the right thing </li></ul><ul><li>The next 10 years </li></ul>

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