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BIBF: General Lecture
                           on Private Equity
                             Presented By Jose Paul Mar...
• Who am I??
                    • Quick Disclaimer
                    • Way Forward


Tuesday, March 3, 2009
• Who am I??
                    • Quick Disclaimer
                    • Way Forward


Tuesday, March 3, 2009
• iBanker / PE Professional / VC /
                         xManagement Consultant / Guest
                         Lectur...
• Who am I??
                    • Quick Disclaimer
                    • Way Forward


Tuesday, March 3, 2009
• Who am I??
                    • Quick Disclaimer
                    • Way Forward


Tuesday, March 3, 2009
(Quick) Disclaimer

                    • All views, comments, ideas presented here
                         are personal ...
• Who am I??
                    • Quick Disclaimer
                    • Way Forward


Tuesday, March 3, 2009
• Who am I??
                    • Quick Disclaimer
                    • Way Forward


Tuesday, March 3, 2009
• Talk: 50 minutes on Private Equity (touching
                         upon Venture Capital) and the current
            ...
Talk...



Tuesday, March 3, 2009
• Private Equity (and Venture Capital)
                    • Current Crisis (Are We Immune?)
                    • Predict...
• Private Equity (and Venture Capital)
                    • Current Crisis (Are We Immune?)
                    • Predict...
What is Private Equity?

                         Private Equity is the ownership of
                         shares or in...
Then...Venture Capital?

                         ... is Private Equity in early-stage
                         companies ...
Venture              Buyout
                                     capital              capital




                        ...
How to invest in PE
                    • Fund Route (pooling investments that
                         reduce risk)
     ...
An Example...
Tuesday, March 3, 2009
An Example...
                           Fund-of-funds
                                                                   ...
Who invests in PE?

                    • Hight Net Worth Individuals (Accredited)
                    • Banks & Financial...
Who’s the
                General
             Partner (GP)?
            A GP is the intermediary
         between investo...
General Partner (GP)
                    •                              •
                         GP is paid in the form ...
Why invest in PE?

                    • Improve risk and reward ratio
                    • Balance portfolio with altern...
Diversification!
                    • Stage of investment, seed, early, late,
                         etc...
            ...
The J-curve (Company)
                                                                               The Wall
            ...
The J-curve (Investors)




Tuesday, March 3, 2009
PE Fund Structure
Tuesday, March 3, 2009
Private Equity Process
               Deal          Deal Due        Deal
            Origination      Diligence     Negoti...
Review Rigor
                                                                                    Stage    %age reach
     ...
Post Acquisition
                         Monitoring Rigor
                    • Strategic & Financial Advice
            ...
How PE creates VALUE
                    •                               •
                         Control investments   ...
The Basic Difference



Tuesday, March 3, 2009
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC      PE      HF
      Size    ...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC       PE       HF
      Financ...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC            PE         HF
     ...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC       PE         HF
      Kin ...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC          PE            HF
    ...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC        PE       HF
      Risk ...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC        PE        HF
      Rewa...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC          PE          HF
      ...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC             PE             HF
...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category VC               PE           HF
      Orie...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category VC           PE     HF
      Investment Lon...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category VC           PE       HF
      Investment 5...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC        PE         HF
      Due...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC            PE            HF
  ...
Hedge Funds vs. Private
                 Equity,Venture Capital
      Category           VC         PE         HF
      Ex...
Summary...
                    • What is Private Equity?
                    • What is Venture Capital?
                  ...
Summary...
                    • Why invest in Private Equity?
                    • Benefits of Diversification
           ...
Summary...

                    • How does Private Equity create VALUE?
                    • What are the basic differenc...
• Private Equity (and Venture Capital)
                    • Current Crisis (Are We Immune?)
                    • Predict...
• Private Equity (and Venture Capital)
                    • Current Crisis (Are We Immune?)
                    • Predict...
Are we in a CRISIS?


                         Who switched off the light?



Tuesday, March 3, 2009
Tuesday, March 3, 2009
So... How does the
                           crisis affect PE?


Tuesday, March 3, 2009
Leverage has declined,
                     requiring more Equity




Tuesday, March 3, 2009
Deal Value and Average
                       Size Declining




Tuesday, March 3, 2009
Quarterly Distributions
                       Decline!




Tuesday, March 3, 2009
So are we (MENA)
                             Immune??


Tuesday, March 3, 2009
MENA Growth Story
                    • MENA Growth
                     • 5% on average since 2000
                    • ...
Worldwide (growth?)
                              Story...

                    • NEGATIVE growth!
                    • E...
Can history point to
                             the future?
                    • THEN: MENA - half a decade of petro-
 ...
“MENA will be in for a severe
                         retrenchment, but will bounce
                         back by 2009...
Face it! MENA PE
                          faces a challenging
                               period...


Tuesday, March 3...
MENA PE
                          Transformation
                    • MENA PE is relatively new
                    • MEN...
Why MENA PE is
                              unique?
                    • Family-owned companies (5,000 family
          ...
Why MENA PE is
                              unique?
                    • Today approximately 100 funds with
            ...
So where will PE firms
                     focus? (Hint: MENA)
                    • Populous domestic-driven Egypt
      ...
PE is welcome?



                           61%
           …of respondents welcome private equity investors in their sect...
Is MENA PE Immune?



                         Yes / No
                                    …yeahs raise your hands!


Tue...
Challenges for PE firms
                    •                                •
                         This is not your   ...
• Private Equity (and Venture Capital)
                    • Current Crisis (Are We Immune?)
                    • Predict...
• Private Equity (and Venture Capital)
                    • Current Crisis (Are We Immune?)
                    • Predict...
Expect...
                            The Unexpected!
                    •                               •
              ...
Expect...
                            The Unexpected!
                                                    •
              ...
Expect...
                            The Unexpected!
                    •                              •
               ...
Expect...
                         The Unexpected!

                            2009?
                           Hmm....
T...
Global Private Equity
                             Syndrome...
                    • Prematurely grey hair
               ...
Global Private Equity
                             Syndrome...
                    • Inability to remember (or be present ...
Global Private Equity
                             Syndrome...
                    • Doubling of golf handicap every 6 mon...
Interactive...



Tuesday, March 3, 2009
Tuesday, March 3, 2009
Quiz

                    1. What are the PE investment routes?
                    2. Is GREED good?
                    ...
• Find The Time To (TTT)...
                     • Visit and subscribe: jpm.cc
                     • Send your feedback: ...
BIBF Presentation (With Video)
BIBF Presentation (With Video)
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BIBF Presentation (With Video)

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  • The majority of private equity investments are in unquoted companies. Private equity investment is typically a transformational, value-added, active investment strategy. It calls for a specialized skill set which is a key due diligence area for investors' assessment of a manager. The processes of buyout and venture investing call for different application of these skills as they focus on different stages of the life cycle of a company.


    Private equity has arrived as a major component of the alternative investment (comprising a variety of investment techniques, strategies and asset classes that are complimentary to the stock and bond portfolios traditionally used by investors) universe and is now broadly accepted as an established asset class within many institutional portfolios. Many investors still with little or no existing allocation to private equity are now considering establishing or significantly expanding their private equity programs. investing in securities through a negotiated process.






  • Seed stage Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase.


    Start-up stage Financing for product development and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their products commercially and are not yet generating a profit.


    Expansion stage Financing for growth and expansion of a company which is breaking even or trading profitably. Capital may be used to finance increased production capacity, market or product development, and/or to provide additional working capital. This stage includes bridge financing and rescue or turnaround investments.


    Replacement Capital Purchase of shares from another investor or to reduce gearing via the refinancing of debt.


    Buyout A buyout fund typically targets the acquisition of a significant portion or majority control of businesses which normally entails a change of ownership. Buyout funds usually invest in more mature companies with established business plans to finance expansions, consolidations, turnarounds and sales, or spinouts of divisions or subsidiaries. Financing expansion through multiple acquisitions is often referred to as a \"buy and build\" strategy. Investment styles can vary widely, ranging from growth to value and early to late stage. Furthermore, buyout funds may take either an active or a passive management role.











  • \"Blind pool\" investing When committing to a private equity fund, the commitment is typically to provide cash to the fund on notice from the general partner. Whilst launch documentation will outline the investment strategy and restrictions, investors give a very wide degree of discretion to the manager to select the companies that the investors will have a share in. Unlike some real estate partnerships, there is usually no ability at the launch of a private equity fund to preview portfolio assets before committing, because they have not yet been identified. Also, there is generally no ability to be excused from a particular portfolio investment after the fund is established.






  • The spectrum of investors in private equity has expanded rapidly to include different types of investors with significant long-term commitments to the asset class. The majority of commitments to private equity funds based in respective geographical regions have come from institutions within the same region. This is evolving as investors seek a higher level of geographical diversification in their private equity portfolios.











  • The fundamental reason for investing in private equity is to improve the risk and reward characteristics of an investment portfolio. Investing in private equity offers the investor the opportunity to generate higher absolute returns whilst improving portfolio diversification.







    Absolute Returns:
    Excessive volatility and poor investment performance experienced by quoted equity portfolios, many of which have index-tracking strategies or are benchmarked to an index (\"closet trackers\"), have led to a swing in favor of strategies that seek absolute returns.







    The private equity industry has brought corporate governance to smaller companies and provides an attractive manner of gaining exposure to a growth sector that went out of favor with market investors in the mid 1990s for reasons of liquidity. A much greater depth of information on proposed company investments is available to private equity managers. This helps managers more accurately assess the viability of a company's proposed business plan and to project the post-investment strategy to be pursued and expected future performance. This greater level of disclosure contributes significantly to reducing risk in private equity investment. Equivalent information in the public markets would be considered \"inside information\". By definition, investors in public markets will know less about the companies in which they invest.



















  • Stage There is negative correlation between returns from different stages of private equity. Diversification can therefore reduce risk within a private equity portfolio and this should be an important consideration.


    Geography Geographical diversification can be secured in Europe through the use of country-specific, regional and pan-European funds. Non-European exposure is also widely available, in particular through US funds, but also for example through Global, Israeli, Latin American and Asian funds.


    Manager Selecting a variety of managers will reduce manager specific risk.


    Vintage year Timing has an impact on the performance of funds, as opportunities for investment and exit will be impacted by external economic circumstances. For this reason it has become a normal practice to compare the performance of funds against others of the same vintage. There may be marked differences in performance from one vintage year to another. In order to ensure participation in the better years, it is generally perceived to be wiser to invest consistently through vintage years, as opposed to \"timing the market\" by trying to predict which vintage years will produce better performance.


    Industry In venture investing, most of the focus tends to be on technology based industries. These can be subdivided, for example into healthcare / life sciences, information technology and communications. Buyout funds tend to focus on technology to a lesser extent, providing exposure to such sectors as financial institutions, retail and consumer, transport, engineering and chemicals. Some have a specific sector focus.




  • An investor is typically required to fund only a small percentage of its total capital commitment at the outset. This initial funding may be followed by subsequent drawdowns (the timing and size of which are generally made known to the investor two or three weeks in advance) as needed to make new investments. Just-in-time drawdowns are used to minimize the amount of time that a fund holds uninvested cash, which is a drag on fund performance when measured as an internal rate of return (\"IRR\"). Investors need to maintain sufficient liquid assets to meet drawdown obligations whenever called. Penalty charges can be incurred for late payment or, in extreme cases, forfeiture of an investor's interest in the fund. In most funds' early years, investors can expect low or negative returns, partly due to the small amount of capital actually invested at the outset combined with the customary establishment costs, management fees and running expenses


  • As portfolio companies mature and exits occur, the fund will begin to distribute proceeds. This will take a few years from the date of first investment and the timing and amounts will be volatile.


    When drawdowns and distributions are combined to show the net cash flows to investors, this normally results in a \"J-curve\", illustrated in the chart below. As distributions normally commence before the whole commitment has been drawn, it is unusual for an investor ever to have the full amount of its commitment actually managed by the manager. In the illustration below, net drawn commitments peak at around 80%.





  • Deal Origination or as some call it ‘Deal Sourcing’ is how we get our deals, a potential deal can either come through a company owner approaching us or from an intermediary who will try to bring both parties (Company and Deal Maker) to close the deal. In some cases, we may just approach companies who are expanding fast and wish to grow further. In a year, we come across hundreds of potential deals - but only a few are selected.



    Due Diligence is what you could call ‘doing your homework’. Before starting detailed negotiations, we try to make sure everything is fair and square. Although Auditors and Consultants are appointed to conduct the Financial, Tax, Legal and Technical Due Diligence - we also work side by side to understand the target company and its industry better. All the information collected at this time, is then used during negotiation.



    At the Deal Negotiation phase, we set out the terms and conditions (covenants, representations and warranties) and other deal terms that define (or make the deal). Contracts such as Investment Agreement, Share Purchase Agreement, Management Agreement, Advisory Agreement etc are drafted to include all items that put the deal together.



    Deal Closing is probably the easiest part but also contains an element of risk. It’s the conclusion of the deal, the signing of all Agreements and transferring funds* from the buyer to seller, conducting other administrative functions (usually done by a separate entity) like updating any articles of association etc.



    * So where do those funds come from? Well, there are two routes - the Fund route or the Private Placement route. And this is where the element of risk can step in. Most private equity firms have a Fund, that calls upon its HNWI to bring up money as committed earlier to fund these acquisitions. However some firms choose to place (sell) a stake in the ownership of the acquired company to certain individuals who might wish to participate only in a specific sector - what we commonly call the private placement. We do through this Special Purpose Vehicles (SPVs) that are nothing but legal entities to hold our stake in the company.



    Post Acquisition Monitoring requires the Deal Team (those who have worked on putting the deal together) to closely monitor the company, both from an operational and financial point of view against the expansion plan and budgets that were setup earlier by the company. Improvements to business, from Corporate Governance, Financial Reporting, Information Flow to Strategy are made at each level through either the company’s management or its board (where we have a seat).



    As the company matures (usually after 2 - 4 years) with the presence of the Deal Team, we prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger party, multi-national or conglomerate) or in rare cases a Buy Back by the owners. By this time, the company will have grown quite a bit with still plenty of room to grow further. (There’s a saying, in a deal - always leave something extra for the person buying - it makes everyone happy.)



    And once we’ve exited the company, we return our investors money with the profit we gained for them after taking our fees for all the effort put in the above process. Then… we just repeat the process, albeit with a greater appetite for investments.



    (PS: Although this may seem like a linear process - it isn’t exactly so, primarily because we deal with a number of companies and each one is at a different stage in the private equity process.)



















  • Long-term investment In general, holding periods between investment and realization can be expected to average three or more years (although this may be shorter when IPO markets are especially healthy). Because the underlying portfolio assets are less liquid, the structure of private equity funds is normally a closed-end structure, meaning that the investor has very limited or no ability to withdraw its investment during the fund's life. Although the investor may receive cash distributions during the fund's life, the timing of these is normally uncertain. \"Liquidity risk\" is one of the principal risk characteristics of the asset class. Private equity should therefore be viewed as a longer-term investment strategy.





































  • Source: Thomson Venture Economics data as of 31, Dec 2008.









  • 5%, according to IMF















  • Small Deal Flow: Undeployed Capital, 69 investments worth $3.9 bn in 2007, vs. $500 mn in 2008.




  • 19.5 Bn according to Preqin, a private equity data provider.
  • Population: Double Edged Sword (Growth vs. Unemployment)




  • Preservation: What PE firms do now will be remembered far more what is done in good times.


  • Great Opportunities: Governments and others will increasingly see private equity as a solution to problems. The need for private equity is greater than ever. Enhanced recognition that private equity was not a cause of systemic risk - not a cause of the economic decline. Realistic expectations will be set for PE firms.





    Vintage: reduced prices will likely yield very high returns for private equity capital invested now and over the next 2 - 3 years.



    Cash, No Debt: many private equity transactions now available do not need new debt, or any debt.



    Leverage: pressure on banks to lend will result in enhanced credit availability for deals needing leverage - mostly likely by mid or later 2009. Debt will be on terms which ensure more discipline in the investment decision process.




  • Hmm: Private Equity will emerge as the clearly preferred form of alternative investing.
















  • Transcript of "BIBF Presentation (With Video)"

    1. 1. BIBF: General Lecture on Private Equity Presented By Jose Paul Martin www.jpmartin.com ELSEWHERE: Blog: http://jpm.cc Twitter: http://twitter.com/avcion LinkedIn: http://www.linkedin.com/in/avcion Tuesday, March 3, 2009
    2. 2. • Who am I?? • Quick Disclaimer • Way Forward Tuesday, March 3, 2009
    3. 3. • Who am I?? • Quick Disclaimer • Way Forward Tuesday, March 3, 2009
    4. 4. • iBanker / PE Professional / VC / xManagement Consultant / Guest Lecturer / Author / Blogger • Merrill Lynch, ICRA, Arthur Andersen, Ernst & Young, BDO,Venture Capital Bank • 8 years of mistakes • Loves Apple, Photography, Design Tuesday, March 3, 2009
    5. 5. • Who am I?? • Quick Disclaimer • Way Forward Tuesday, March 3, 2009
    6. 6. • Who am I?? • Quick Disclaimer • Way Forward Tuesday, March 3, 2009
    7. 7. (Quick) Disclaimer • All views, comments, ideas presented here are personal and not that of VC Bank or any former employer. • All rights reserved. (Do not quote me!) Tuesday, March 3, 2009
    8. 8. • Who am I?? • Quick Disclaimer • Way Forward Tuesday, March 3, 2009
    9. 9. • Who am I?? • Quick Disclaimer • Way Forward Tuesday, March 3, 2009
    10. 10. • Talk: 50 minutes on Private Equity (touching upon Venture Capital) and the current environment (crisis or not?) • Interactive: 20 minutes (quiz, open house) • Next Steps: 10 minutes Tuesday, March 3, 2009
    11. 11. Talk... Tuesday, March 3, 2009
    12. 12. • Private Equity (and Venture Capital) • Current Crisis (Are We Immune?) • Predictions for 2009 Tuesday, March 3, 2009
    13. 13. • Private Equity (and Venture Capital) • Current Crisis (Are We Immune?) • Predictions for 2009 Tuesday, March 3, 2009
    14. 14. What is Private Equity? Private Equity is the ownership of shares or interests in companies that do not trade publicly on a stock exchange, or over-the-counter, among investment dealers. Tuesday, March 3, 2009
    15. 15. Then...Venture Capital? ... is Private Equity in early-stage companies that are still developing their products or services, yet have the prospect of generating revenue in a few years. Tuesday, March 3, 2009
    16. 16. Venture Buyout capital capital Seed / Early- Buyout Turn- Expan- Start-up stage around sion Private Equity Categories Tuesday, March 3, 2009
    17. 17. How to invest in PE • Fund Route (pooling investments that reduce risk) • don’t put all your eggs in one basket • GPs & LPs • Direct Route (stand alone investments catered to individual investor tastes, risks) Tuesday, March 3, 2009
    18. 18. An Example... Tuesday, March 3, 2009
    19. 19. An Example... Fund-of-funds Fund-of-funds investments Fund investments Buyout Biotech Mixed Investor IT Fund* Fund* Fund * Fund* Direct investments A B CD M N OP E F GH I J K L Investments in single companies *Example (portfolio companies) Tuesday, March 3, 2009
    20. 20. Who invests in PE? • Hight Net Worth Individuals (Accredited) • Banks & Financial Institutions • Pension & Endowment Funds Tuesday, March 3, 2009
    21. 21. Who’s the General Partner (GP)? A GP is the intermediary between investors* with capital and businesses seeking capital to grow. GPs tend to specialize in companies based on industry, sector, stage, size or geography. * Limited Partners: LP Tuesday, March 3, 2009
    22. 22. General Partner (GP) • • GP is paid in the form The GP usually draws of a profit an annual advance of participation, referred 1.5 to 2.0% of to as carried committed capital as interest, usually management fees ranging from 20 to 25% used to select and of profits realized provide ongoing when the underlying management support companies are sold. to the underlying companies. Commonly called - 20:2 Tuesday, March 3, 2009
    23. 23. Why invest in PE? • Improve risk and reward ratio • Balance portfolio with alternative assets • Generate absolute returns • Access non-public companies Tuesday, March 3, 2009
    24. 24. Diversification! • Stage of investment, seed, early, late, etc... • Geographical location of the investment e.g. MENA, Europe, India, US • Industry the investment is involved in. • Vintage year, recessions and depressions have produced the best. Tuesday, March 3, 2009
    25. 25. The J-curve (Company) The Wall The Chasm Venture Capital Public Markets Angels Strategic Investors Founders IPO Early Stage Secondary Seed Capital Later Stage Offerings Mezzanine Revenue C B A Time Valley of Death Seed or Start-up: Market research and product development. Early Stage: Funding full-scale operations and selling products/services. Not yet profitable. Later Stage: Funding expansion and new products. Near break-even. Tuesday, March 3, 2009
    26. 26. The J-curve (Investors) Tuesday, March 3, 2009
    27. 27. PE Fund Structure Tuesday, March 3, 2009
    28. 28. Private Equity Process Deal Deal Due Deal Origination Diligence Negotiation Deal Exit Acquisition Deal Closing (IPO, TS, BB) Monitoring Tuesday, March 3, 2009
    29. 29. Review Rigor Stage %age reach Proactive Deal Sourcing Incoming Deals (50) (50) Initial Review 100% Initial review (100) Initial Meeting 20% Initial meeting (20) Due Diligence 10% Term Sheet 3% Two Pager (10) Committee 2% Deal Due Diligence / Negotiation Detailed Evaluation Investment 2% Investment Committee (4) Invest (2) Tuesday, March 3, 2009
    30. 30. Post Acquisition Monitoring Rigor • Strategic & Financial Advice • Corporate Governance (Board Level) • Organization Structure & Processes • Efficient Management Support • Recruitment & Team Building • Partner / Customer Intros Tuesday, March 3, 2009
    31. 31. How PE creates VALUE • • Control investments Buy into companies that preferably (board seats can serve as platform with all the veto rights acquisitions to that come with it) consolidate the sector and reach the critical • mass necessary for IPO. Value creation through operational • improvement and top Multiples arbitrage (buy line growth (EBITDA at 5-10x and float growth) company at 15-20x) Tuesday, March 3, 2009
    32. 32. The Basic Difference Tuesday, March 3, 2009
    33. 33. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Size Small Large Large Tuesday, March 3, 2009
    34. 34. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Financial Pure Debt & Debt & Structure Equity Equity Equity Tuesday, March 3, 2009
    35. 35. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Lifecycle Seed, Expansion, Any Stage! Stage Startup, Mezzanine, Early Stage Late Stage Tuesday, March 3, 2009
    36. 36. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Kin Angel, LBOs, Ponzi (just Seed MBOs, kidding!), Growth, Traders Turnaround Tuesday, March 3, 2009
    37. 37. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Company Mostly Mostly Public & Types Technology, Established Private Innovative Private Companies, Companies Companies Currencies, Commoditi es, Debt Tuesday, March 3, 2009
    38. 38. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Risk Very High Medium Risk Risk Risk Arbitrage Tuesday, March 3, 2009
    39. 39. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Reward Very High High Absolute Returns Returns Returns Tuesday, March 3, 2009
    40. 40. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Typical EBITDA EBITDA P/E, Valuation Multiples, Multiples, EBITDA, Methods Rounds of DCF, Times Financing, Recent Investment Recent Transaction Multiples, Transaction Mark2Mark Tuesday, March 3, 2009
    41. 41. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Involvement Hands-on Strategic Hands-off (why (management, (strategy, get them recruitment, corporate dirty!) strategy, governance, institutionalizati financial on, corporate restructuring) governance) Tuesday, March 3, 2009
    42. 42. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Orientation Partners, Investors Traders Strategic (Financial Acquisition Acquirer) Tuesday, March 3, 2009
    43. 43. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Investment Long Long Long & Position Short Tuesday, March 3, 2009
    44. 44. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Investment 5 to 10 4 to 7 6 to 18 Horizon years years months Tuesday, March 3, 2009
    45. 45. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Due Minimal & Long & Short & Diligence Limited Detailed Superficial Tuesday, March 3, 2009
    46. 46. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Control Majority, Majority, Minority Large Controlling Stake Minority, Stake, (exceptions Controlling Board Seat do exist) Stake, Board Seat Tuesday, March 3, 2009
    47. 47. Hedge Funds vs. Private Equity,Venture Capital Category VC PE HF Exits IPO, Trade IPO, Trade Simple Sale Sale, Buy Trade Back Tuesday, March 3, 2009
    48. 48. Summary... • What is Private Equity? • What is Venture Capital? • Private Equity Categories • How to invest in Private Equity • Examples • Who invests in Private Equity? Tuesday, March 3, 2009
    49. 49. Summary... • Why invest in Private Equity? • Benefits of Diversification • The J-curve (Company & Investors) • Private Equity Fund Structure • Private Equity Process • Rigor of Review & Post Acquisition Mon. Tuesday, March 3, 2009
    50. 50. Summary... • How does Private Equity create VALUE? • What are the basic differences between Private Equity,Venture Capital and Hedge Funds? Tuesday, March 3, 2009
    51. 51. • Private Equity (and Venture Capital) • Current Crisis (Are We Immune?) • Predictions for 2009 Tuesday, March 3, 2009
    52. 52. • Private Equity (and Venture Capital) • Current Crisis (Are We Immune?) • Predictions for 2009 Tuesday, March 3, 2009
    53. 53. Are we in a CRISIS? Who switched off the light? Tuesday, March 3, 2009
    54. 54. Tuesday, March 3, 2009
    55. 55. Tuesday, March 3, 2009
    56. 56. So... How does the crisis affect PE? Tuesday, March 3, 2009
    57. 57. Fundraising Slowdown Tuesday, March 3, 2009
    58. 58. Leverage has declined, requiring more Equity Tuesday, March 3, 2009
    59. 59. Deal Value and Average Size Declining Tuesday, March 3, 2009
    60. 60. Quarterly Distributions Decline! Tuesday, March 3, 2009
    61. 61. So are we (MENA) Immune?? Tuesday, March 3, 2009
    62. 62. MENA Growth Story • MENA Growth • 5% on average since 2000 • Oil funded surplus cushion • Forecasted Growth (as per World Bank) :- 2008: 5.8% 2009: 3.9% 2010: 5.2% Tuesday, March 3, 2009
    63. 63. Worldwide (growth?) Story... • NEGATIVE growth! • Exceptions: China, India Tuesday, March 3, 2009
    64. 64. Can history point to the future? • THEN: MENA - half a decade of petro- dollar growth • NOW: Worldwide • banks are frantically deleveraging • stock markets are plummeting - blocking IPOs • NOW: OIL prices have fallen off the cliff! Tuesday, March 3, 2009
    65. 65. “MENA will be in for a severe retrenchment, but will bounce back by 2009 end.” - HSBC Tuesday, March 3, 2009
    66. 66. Face it! MENA PE faces a challenging period... Tuesday, March 3, 2009
    67. 67. MENA PE Transformation • MENA PE is relatively new • MENA was a place of fund raising • Post 911, MENA is a place of doing deals • Post 2002, OIL prices started soaring... • MENA became CASH rich! Tuesday, March 3, 2009
    68. 68. Why MENA PE is unique? • Family-owned companies (5,000 family businesses with $500 bn assets) dominate (75%) private sector {many are in fact LPs in PE Funds!} • Relationship-driven deals. • Growth Driven Vs. Turnaround (LBO) Driven. Tuesday, March 3, 2009
    69. 69. Why MENA PE is unique? • Today approximately 100 funds with $19.5 Billion • BUT, Lack of interest in western-style LBOs/leverage • Small Deal Flow despite above. • Shari’ah Compliance Tuesday, March 3, 2009
    70. 70. So where will PE firms focus? (Hint: MENA) • Populous domestic-driven Egypt • Demographic-driven wealthy KSA • Record budget in 2009 of $125 Billion • $500 Billion assets overseas • Sectors: Oil & Gas, Healthcare, Education • Youngest Population of 100mn (12 - 24 yr) Tuesday, March 3, 2009
    71. 71. PE is welcome? 61% …of respondents welcome private equity investors in their sector as a good source of capital and long-term, supportive shareholders. - KPMG Middle East Capital Flows Survey 2008 Tuesday, March 3, 2009
    72. 72. Is MENA PE Immune? Yes / No …yeahs raise your hands! Tuesday, March 3, 2009
    73. 73. Challenges for PE firms • • This is not your LPs (Investors) father’s private need to be updated on the new world of equity world! private equity returns. Evolution applies to all. • • Preserving as much Explaining to Govts. how PE adds value equity and as many to an economy and help jobs as possible during a recoveries. (Forums). slowdown/recession/ depression. Tuesday, March 3, 2009
    74. 74. • Private Equity (and Venture Capital) • Current Crisis (Are We Immune?) • Predictions for 2009 Tuesday, March 3, 2009
    75. 75. • Private Equity (and Venture Capital) • Current Crisis (Are We Immune?) • Predictions for 2009 Tuesday, March 3, 2009
    76. 76. Expect... The Unexpected! • • As conventional bank's 2009/2010 will be a new show reluctance to vintage year! finance - great • opportunities will arise Back to basics - Cash for private equity firms, Flow Generative, No as private companies Debt, Replicable, Boring, who wish to continue Simple. their growth (for • working capital finance, Debt Covenant. PE expansion etc) will Firms with debt laden/ seek PE firms as an leveraged portfolio will option! lose (Forced Sellers). Tuesday, March 3, 2009
    77. 77. Expect... The Unexpected! • • New deals will be More EBOs (Equity executed faster (no Buy Outs) than LBOs lengthy debates on (Leveraged Buy Outs)! valuation). • Entry Multiples • Few successful exits will (Valuations) will be take place. IPOs will not significantly lower. Some be an exit option in Bargain Prices. 2009. • Carry??? What's that! Tuesday, March 3, 2009
    78. 78. Expect... The Unexpected! • • More PE firms will chose PE Firms with capital to Trade Sales as the exit invest will be winners route. (Plenty of Dry Gun Powder). • Portfolio exposure to • private equity might Fund raising will be remain the same. difficult. Investors may or may not have liquidity • problems. Those who More Supplier/Vendor don't are being cautious. Finance will be sought (presents a win win for both sides) Tuesday, March 3, 2009
    79. 79. Expect... The Unexpected! 2009? Hmm.... Tuesday, March 3, 2009
    80. 80. Global Private Equity Syndrome... • Prematurely grey hair • Inability to remember city or country in which one is awakening • Persistent daze / jet lag / hoarse throat. • Equating sleep on an airplane with real sleep Tuesday, March 3, 2009
    81. 81. Global Private Equity Syndrome... • Inability to remember (or be present at) birthdays, anniversaries, or school meetings • Contact with new friends concerned about holding charitable dinners in your honour or naming school buildings for you • Frequent musings about the fairness of pre- nuptial agreements Tuesday, March 3, 2009
    82. 82. Global Private Equity Syndrome... • Doubling of golf handicap every 6 months • Ability to schedule annual physical only every five years • Frequent spousal / child discussions about the value of sound estate planning Tuesday, March 3, 2009
    83. 83. Interactive... Tuesday, March 3, 2009
    84. 84. Tuesday, March 3, 2009
    85. 85. Quiz 1. What are the PE investment routes? 2. Is GREED good? 3. Why do funds invest in non-gulf region? 4. Is MENA PE immune from the current crisis? Tuesday, March 3, 2009
    86. 86. Next Steps... Tuesday, March 3, 2009
    87. 87. • Find The Time To (TTT)... • Visit and subscribe: jpm.cc • Send your feedback: jpm@jpmartin.com • Invite me for another class (or send me a gracious email not to come!) • Thank YOU! Tuesday, March 3, 2009

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