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The Private Equity Play by Mike Lorelli
 

The Private Equity Play by Mike Lorelli

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The Private Equity Play is a comprehensive overview on how the private equity model works: what’s in it for the Limited Partners, the private equity firm, and portfolio company management. You ...

The Private Equity Play is a comprehensive overview on how the private equity model works: what’s in it for the Limited Partners, the private equity firm, and portfolio company management. You don’t need to be on the buy side or sell side of the private equity equation to find this presentation of value and interest. It will broaden everyone’s understanding of this major component of the capital markets.

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  • The p.e. life may seem glamorous and easy, but take a look at the statistics from his side. That’s a lot of frogs to kiss for one date.

The Private Equity Play by Mike Lorelli The Private Equity Play by Mike Lorelli Presentation Transcript

  • The Private Equity PlayMike Lorelli
  • 2EBITDAEarnings Before:• Interest• Taxes• Depreciation• Amortization
  • 3StagesIdea Up & Running MatureVC PE• Trailing EBITDA
  • 4Agenda History Returns Where is the money coming from? Terminology Where they are; where their companies are The p.e. model Some names p.e. compensation Results and Performance Measures “The Funnel” Management Compensation The Return Drivers The p.e.’s Plan In The News Importance of a good LinkedIn profile, and resume
  • 5Worse than real estate brokers in Darien, CT 1977: Kohlberg, Kravis, and Roberts leaveBear Stearns, forming KKR 1978: 80 ‘Leveraged Buyout Groups’ in US 2012: Estimated 2,800 around the world 1,800 U.S.
  • 6Value Creation100% Value Creation90%80%70%60%50%40%30%20%10%0%18%31%51%22%36%46%39%32% 25%Leverage era (1980s) Multiple Expansionera (1990s)Earnings growthera (2000s)Operational improvementera (2010s)Operational improvement Multiple arbitrage LeverageValueCreation
  • 7WSJ: “Buyouts Leave Simmons Little Rest”
  • 8Terminology The providers of capital: Limited Partners, or LP’s- who are they? The fund manager: General Partner, or GP, or p.e.
  • 9Returns Well Out-Performed S&P
  • 10Returns Comparisons
  • 11Percentage of Capital by LP typeLBO Funds0.3 1.82.23.68.410.614.216.228.76.45.43.9Public pension fundsFunds of fundsCorp pension funds & corpsBanks/financial services cos.Endowments/foundationsInsurance Cos.Sovereign wealth fundsWealthy investors/feeder fundsGP contributionFamily officesUnion pension fundsOther
  • 12
  • 13The “Vintage Year”
  • 14‘Add-On’s now fully half of Deals
  • 15LP’s pushing for Exits (i.e. distributions)
  • 161/4thof Exits are now to another p.e. firm
  • 17GeographyPrivate Equity Firms Portfolio CompaniesStates% oftotal States% oftotal1 New York 23.3% 1 California 18.8%2 California 15.1% 2 Texas 8.8%3 Illinois 9.4% 3 New York 6.6%4 Texas 7.4% 4 Massachusetts 5.9%5 Massachusetts 7.0% 5 Florida 4.5%6 Connecticut 6.5% 6 Pennsylvania 4.2%7 Pennsylvania 3.7% 7 Illinois 4.2%8 Virginia 2.4% 8 New Jersey 3.7%9 Florida 2.2% 9 Georgia 3.2%10 Michigan 2.0% 10 Ohio 3.0%11 Ohio 2.0% 11 Colorado 2.7%12 Colorado 1.9% 12 North Carolina 2.5%13 North Carolina 1.9% 13 Virginia 2.4%14 New Jersey 1.8% 14 Minnesota 2.2%15 Georgia 1.7% 15 Michigan 2.0%16 Washington DC 1.6% 16 Washington 2.0%17 Minnesota 1.6% 17 Connecticut 1.9%18 Maryland 1.4% 18 Maryland 1.9%19 Indiana 0.8% 19 Wisconsin 1.8%20 Wisconsin 0.8% 20 Tennessee 1.8%Sample Size: 1,000+ private equity firms, 10,000+ portfolio companies
  • 18Many ways to categorize the 1,800 By size• Large $1 billion+ revenues• Mid-market > $150 million• Small < $150 million By sector specialty• Health care• Consumer• IT• Financial services• etc. Net-net, sector first; and mid-market; not lower orupper
  • 19Excellent
  • 20Don’t unnecessarily limit where you can play
  • 21Top Fund ManagersRank Firm City Capital ($Millions)1 TPG Capital Fort Worth (Texas) $50,5532 Goldman Sachs Principal Investment Area New York $47,2243 The Carlyle Group Washington DC $40,5404 Kohlberg Kravis Roberts & Co. New York $40,2155 The Blackstone Group New York $33,4186 Apollo Global Management New York $33,8137 Bain Capital Boston $29,4028 CVC Capital Partners London $25,0689 Hellman & Friedman San Francisco $17,20010 Apax Partners London $16,63711 Warburg Pincus New York $15,00012 Cerberus Capital Management New York $14,90013 Advent International Boston $14,51914 Permia London $13,57215 Oaktree Capital Management Los Angeles $13,04516 Tera Firma Capital Partners London $12,24917 Providence Equity Partners Providence (RI) $12,10018 Clayton Dubilier & Rice New York $11,40419 Charterhouse Capital Partners London $11,26820 Teacher’s Private Captial Toronto $10,758
  • 22Top 12 p.e. Investors in 2012
  • 23The LBO model Purchase• 7.0 X $9m = $63• Cash 27• Debt 36 Sale• 8.0 X $14.1m = $113• Debt 32• Proceeds 81
  • 24The LBO model Purchase• 7.0 X $9m = $63• Cash 27• Debt 36 Sale• 8.0 X $14.1m = $113• Debt 32• Proceeds 81= 3.0 X cash-on-cash
  • The p.e. / L.P Model Pelosi 2008 Fund2008 2009 2010 2011 2012 2013 2014 2015 2016ABC DEFGHIJFEDABCSalePurchase
  • 26The p.e. / L.P Model Pelosi 2008 Fund2008 2009 2010 2011 2012 2013 2014 2015 2016 2017ABCDEFG H IJFEDABCSalePurchaseInvest Harvest
  • 28A lot of fish vs. Fortune 1,000 and Russell 2,000
  • 29p.e. Compensation 2% of managed capital• pays salaries, rent, and nominal bonuses 20% carried interest from profits on distributions** pre-Obama
  • 30Performance MeasuresGood Great Awesome IRR 20% 28% 33+% Cash-on-cash return 2X 3X 5+X Hold period 8+ years 6 years 3- years
  • 31Buyout Fund SamplePartnership/YearCapitalCommitted(M)CapitalCont.(M)Dist. Asof (M)Net IRRAs of (%)Oregon State Treasury 12/31/12 12/31/122000 Riverside Capital Appreciation Fund/2000 $50.0 $46.3 $73.1 22.12003 Riverside Capital Appreciation Fund/2003 $75.0 $77.4 $47.1 15.3Apollo Investment Fund VI LP/2006 $200.0 $223.1 $57.5 3.1Aurora Equity Partners III LP/2004 $50.0 $53.0 $20.8 17.7BCI Growth V LP/1999 $75.0 $72.9 $27.2 -8.7Castle Harlan Partners IV LP/2002 $100.0 $102.3 $109.8 17.3CVC Capital Partners Asia Pacific II LP/2005 $100.0 $122.4 $38.3 -6.2Diamond Castle Partners IV LP/2005 $100.0 $71.3 $16.1 -4.5Endeavor Capital Fund III LP/2000 $25.0 $24.5 $43.7 28.9Fenway Partners Capital Fund III LP/2006 $50.0 $53.9 $19.6 -4.9Hicks Muse Tate & Furst Europe Fund LP/1999 $99.3 $116.8 $196.9 21.7KKR European Fund LP/1999 $400.0 $532.3 $778.8 19.3KKR Millennium Fund LP/2002 $1,000.0 $1,308.8 $1,064.2 17.9Lion Capital Fund I LP/2004 $99.8 $108.8 $117.2 26.5Oak Hill Capital Partners II LP/2004 $100.0 $105.8 $15.7 6.8Parthenon Investors III LP/2005 $100.0 $67.8 $8.7 1.7Rhone Partners III LP/2006 $100.0 $65.4 $11.5 5.8TPG Partners III LP/2000 $300.0 $284.5 $571.9 24.5HarbourVest Partners 2004 Direct Fund/2004 $75.0 $74.1 $21.1 11.1
  • 32A typical 10 company fund result 2 out-of-the-park 1 triple 2 doubles 3 singles 2 the bank took the car keys
  • 33Riverside Company 20% of the invested money will lost If less, we’re not taking enough risk Not sweat the duds, but rather the ones we missed
  • 34The Funnel300 teasers100 books7 LOI’s2 due diligence1 close20 Meetings with Mgmt
  • 35Options for Executives Working with Private EquityFundCommit-mentAdvisorexpenses+upsideDeal Executive / Executive in Residenceretainer+upsidePortfolio Company Managementsalary+bonus+equityExecutive’s IncomeExpert Network / Interim Executivehourly compOperating Partnersalary+bonus+carryDavid Teten, www.Teten.com/executive
  • 36Who the p.e. wants to meetJob SeekersDeal ResourceThesis-DrivenDeal ExecTarget-Driven DealExecSource: Andy Thompson, Notch Partners
  • 37Management Compensation CEO $200K - $350K 50-75% 5.0% equity* CFO/COO 125K - $275K 40-50% 1.5% equity VP 125K- $225K 25-33% 1.0% equity * and opportunity to co-invest
  • 38The Three Primary Return Drivers Leverage Value Improvement: EBITDA Growth Exit Multiple ExpansionCourtesy: Wind Point Partners
  • The DealProject NTL Sept 1st, 2007Offer: $55 million for 75% of the company + $34 million debt, implies $107 millionBank Adj. +$4.0 excesses 2006 EBITDA2007 Adjusted EBITDA 12,744 16,744 Sources Debt MultipleEBITDA Multiple 8.4x 6.41x Debt Financing 58,000 3.46xOffer Price 107,333 107,333 new p.e. Equity 35,000 2007 2008 2009 2010Company Debt 34,000 34,000 Total Sources: 93,000 EBITDA 12,744 17,840 23,700 29,300Current Equity 73,333 73,333 Interest @ 12% (6,553) (5,645) (4,450)Uses Taxes % 40% (4,515) (7,222) (9,940)Payment to 5 owners 55,000 Capex (2,500) (2,500) (2,500)Current Owner Proceeds 55,000 Refinancing of Debt 34,000 Debt Pay (6,788) (8,333) (11,591)Estimated Fees and Expenses 4,000 Cash Flow 0.0 0.0 0.0new p.e. $ 35,000 75% Total Uses: 93,000Equity Rollover 11,667 25% Cash 0 0.0 0.0 0.0Total Post-Deal Equity 46,667 100.0% ? equity Debt 58,000 51,212 42,877 31,286196,039 Year 3 Ownership Net Debt 58,000 51,212 42,877 31,286Management: of 15.0 pts 2.5%now 2011 new p.e. 63.8%Mike Lorelli 0.0550 672 10,782 Current Owners 21.3% Exit EV 142,720 189,600 234,400CFO 0.0300 367 5,881 Immediate skin in game 2.5% Exit Equity 91,508 146,723 203,114EVP 0.0200 244 3,921 3 year option program 12.5% Equity to p.e. 58,336 93,536 129,485V.P. and GC 0.0220 269 4,313 100.0% Equity to 5 owners 19,445 31,179 50,920R&D 0.0060 73 1,176 Total cash to 5 owners 74,445 86,179 105,920Sub. GM 0.0060 73 1,176 p.e. cashCMO (new hire) 0.0060 73 1,176 IRR (5 years)VP Supply Chain (new hire) 0.0050 61 980 Exit multiple 8Total Management 0.1500 1,833 29,406
  • 40The Plan Fleshed out approach for how value will be created• Strategic and operational blueprint Rapid change principles• 80/100 rule: an 80% solution that’s ready to go now,beats a 100% effective, theoretical solution, ready to go in 4 months Make capital work hard• Re-deploy underperforming assets
  • Project NTL 100 Day Plan1. Full Court Press on Basic Revenue Projectsa GROWING THE BASE BUSINESS- will be relatively easy for an organization in this space that focuses, prioritizes andexecutes. The ISI partners have for the last two years been focused and spending the majority of ISIs time and resourceson acquisitions, strategic alliances, new ventures, etc and have not focused on ISI core brands and business. To date noneof these ventures have been successful but have utilized significant management time and expense. A sharp focus on thecore business / brands with the some advertising/ promotion and introduction of new products in these brands will resultin strong growth. In addition, providing more products and new and improved products to existing customers and improvingcurrent service levels and fill rates to existing customers will definitely provide positive growth. New domestic customeropportunities will also be a focal point.b INTERNATIONAL-there is still currently a strong demand for ISI products, especially Twin Lab in the International arena.Again, during the last two years because of the intended Pharmaton acquisition, ISI basically ignored existing Internationaldistributors, never hired a new head of International sales and never entertained new distributors that contacted us for ourproduct. ISI is now beginning to refocus on that area with a European head of Intl sales. More resources and specific planfor Intl growth on a number of fronts could result in strong and quick Intl growth.c HERBS AND TEAS- these brands have essentially been allowed to run themselves for the last three years. Despite thatthey have only declined slightly in revenues. Lack of focus and strategy are the primary reasons for thesedeclines. Reversing these revenue declines and growing these brands, which are both in comparatively active and hotgrowth areas, is not that difficult. We need to hire a brand manager to work with our customers and suppliers to revitalizeand contemporize these lines. Both Alvita and Natures Herbs are well recognized and trusted brands that still have a loyalfollowing. We need to add some new more popular flavors which customers have been asking for and update ourpackaging. We can also easily look to expand the channels of distribution for these brands.
  • Project NTL August 9th, 20072004 % 2005 % 2006 % 2007 est % 2008 % 2009 % 2010 %P&LNet Sales 108,874 100.0% 118,293 100.0% 113,168 100.0% 115,579 100.0% 136,000 100.0% 150,000 100.0% 175,000 100.0%Base business 98,193 97,768 100,579 109,000 115,000 125,000Intl 10,800 8,000 7,000 12,000 15,000 21,000Water 0 0 1,000 5,000 7,000 12,000Teas & Herbs 9,300 7,400 7,000 10,000 13,000 17,000Gross Profit 45,436 38.4% 48,829 43.1% 53,124 46.0% 65,280 48.0% 73,500 49.0% 87,500 50.00%R&D 2,192 1.9% 1,923 1.7% 1,919 1.7%Selling 16,624 14.1% 13,783 12.2% 13,298 11.5%Shipping & dist. 5,022 4.2% 4,411 3.9% 4,411 3.8%Mktg G&A 1,607 1.4% 147 0.1% 2,700 2.3%Adv. & Promo. 5,445 4.6% 2,438 2.2% 4,600 4.0%Bus. Planning 493 0.4% 0 0.0% 0 0.0%Consumer Aff. 132 0.1% 140 0.1% 125 0.1%Executive 9,172 7.8% 6,596 5.8% 6,307 5.5%Finance 2,010 1.7% 2,633 2.3% 2,529 2.2%General Office 1,543 1.3% 1,809 1.6% 2,071 1.8%HR 709 0.6% 818 0.7% 830 0.7%IT 3,058 2.6% 2,921 2.6% 2,291 2.0%ISI/N2U 282 0.2% 549 0.5% 547 0.5%Legal 1,494 1.3% 1,949 1.7% 1,783 1.5%Order Entry 284 0.2% 255 0.2% 249 0.2%Other expense 1,458 1.2% 2,509 2.2% 7,819 6.8%Production 365 0.3% 534 0.5% 313 0.3%Purchasing 1,092 0.9% 860 0.8% 761 0.7%Rebus 2,259 1.9% 807 0.7% 459 0.4%Regulatory 0 0.0% 158 0.1% 180 0.2%Corporate M&A 0 0.0% 308 0.3% 215 0.2%intl sales expansion 0 0.0% 0 0.0% 536 0.5%G&Aalloc toCOG (3,145) -2.7% (3,407) -3.0% (3,472) -3.0%Total Op. exp. 52,147 44.1% 42,952 38.0% 51,920 44.9% 54,400 40.0% 58,000 38.7% 64,000 36.60%∆ GrossMargin-OpExp +9,046 +13,666 +21,666Int. income 58 0.0% 18 0.0% 0 0.0%Interest exp. 10,101 8.5% 12,594 11.1% 11,825 10.2%Other Exp (Inc.) 167 0.1% (330) -0.3% 350 0.3%Net Income (16,921) -14.3% (6,535) -5.8% (10,970) -9.5%Dep. & Amort. 2,897 2.4% 3,457 3.1% 3,721 3.2%EBITDA (3,814) -3.2% 9,334 8.2% 4,925 4.3%adjustments 4,505 3.8% 3,729 3.3% 7,819 6.8%BankAdj.EBITDA 690 0.6% 13,065 11.5% 12,744 11.0% 21,000 25,000 33,000-excessive Mgt. 0.0% 4,000 3.5% 4,000 3.5%ProFormaEBITDA 17,065 15.1% 16,744 14.5% 25,000 18.4% 29,000 19.3% 37,000 21.1%
  • Buyout Example EconomicsWPP/Co-Investors Results• 30% IRR• 3.7x cash-on-cash returnCEO• Assuming CEO co-invest of $750k CEO gets 7.5% of common• CEO receives over $10 millionInvestment (Example)• Acquire a business for 5.5x EBITDA• Over 5 year horizon Sales grow at 7% annually Margins improve from 14% to 15.5%• Sell business in year 5 for 5.5x EBITDACourtesy: Wind Point Partners
  • Components of Equity Value CreationAs EBITDA grows, the value of the enterprise increases.At the same time, free cash flow reduces debt.Courtesy: Wind Point PartnersAt Close Y1 Y2 Y3 Y4 Y5EBITDA 25.2 27.5 30.1 32.9 35.9 39.1Exit Value (5.5x EBITDA) 138.6 151.5 165.5 180.7 197.2 215.2Cash Available for Debt Pay down 7.9 9.6 11.5 13.6 15.8Net Debt 100.8 92.9 83.2 71.7 58.1 42.4$ millions
  • 45A word on covenants Max Capital expenditure $1.5 million Min LTM EBITDA 11.0 million Fixed Charge Coverage 1.00x Total Deb Leverage 3.75x Maximum Senior Leverage 4.50x
  • 46
  • 47WSJ
  • 48Private Equity Analyst- November 2012
  • 49Private Equity Analyst- November 2012
  • 50The Trades
  • 51The Importance of a Killer LinkedIn Profile 50% of candidates arefound via LinkedIn Or they will at least checkyou out
  • 52below averageslightly above averageAbove averageVery GoodExcellentOutstandingKiller*You and 6,999You and 3,999You and 1,999You and 999You and 499You and 99140 million LinkedIn members14,000 serious C-Level Candidates = .0001You and 199
  • 53Keywords • EBITDA growth • Revenue Acceleration • Margin Enhancement • Multiple Expansion • Visioning/Strategic Planning • Topgrading • New Channels/Markets • International Expansion • CEO • CXO • Lean Manufacturing • Turnarounds • Exit Strategies
  • 54LinkedIn Profile
  • 55Visit www.linkedin.com/in/mikelorelliMike Lorelli(203) 655-2444MKLorelli@gmail.comQ & A
  • 56Michael K. Lorelli15 Norman LaneDarien, CT 06820Office: 203 655-2444FAX: 203 655-6916Email: miklorelli@gmail.comWebsite: www.Lorelli.netwww.LinkedIn.com/in/MikeLorellihttp://www.gplus.to/MikeLorelliMichael K. LorelliMike Lorelli’s 30-year career spans a wide range of consumer products and services, and B2Bcategories, with responsibilities for both domestic and international units. His years as a line-operating manager have largely been with Fortune 100 companies: PepsiCo and Bristol MyersSquibb. For the last decade, as CEO, he has led revitalizations and turnarounds for private equityfirms. For example, Dr. John Rutledge, Chairman of Rutledge Capital, will say: “I would invade Chinawith Mike alone in a rubber boat.” Most recently, he was CEO of Carlstadt, NJ based WaterJelTechnologies, the leader in burn care products. Today he is Executive Chairman of the Board ofRita’s Italian Ices, which was acquired by Falconhead Capital.Mike has also led CEO engagements for Riverside Company, Rutledge Capital, and PouschineCook Capital.Mike’s assignments at PepsiCo included Executive Vice President – Marketing, Sales and R&D forPepsi-Cola North America, President of Pepsi-Cola East, a $1.5 Billion operating company, andPresident for Pizza Hut’s International division where he led a “global or bust” charge, resulting inexpanding the Company’s presence from 68 to 92 countries, surpassing McDonalds in countrycount. During his PepsiCo tenure, he is given credit for authoring the soft drink company’s “Big EventMarketing” strategy, which coupled the product with leading- edge events in entertainment, sports,consumer electronics, movies and home video.Mike holds a Bachelor of Engineering degree from New York University, and an MBA in Marketingfrom NYU’s Stern Graduate School of Business. He has traveled to 58 countries, is an avid runner,claims to excel at no sport, is an active private pilot, member The CEO Trust, former member ofYPO, and author of the childrens’ best-seller “Traveling Again, Dad?” with profits donated tochildrens’ charities. Mike is a Director of CP Kelco, and iControl. He holds a Professional DirectorCertification from The American College of Corporate Directors, and is also an NACD 2011Governance Fellow. Mike is also a registered speaker with Vistage International.Leading The World In Burn Care