Execu Net P.E. 101 Mike Lorelli

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  • 1. p.e. 101 An ExecuNet Coffee Break Presented by Mike Lorelli 1 ExecuNet 2010 All Rights Reserved
  • 2. EBITDA Earnings Before: ▬ Interest ▬ Taxes ▬ Depreciation ▬ Amortization 2 ExecuNet 2010 All Rights Reserved
  • 3. Stages Idea Up & Running Mature • Trailing EBITDA VC PE 3 ExecuNet 2010 All Rights Reserved
  • 4. Agenda  How the p.e.‟s made/make money  Terminology  Where they are; where their companies are  Some names  The p.e. model*  p.e. compensation  Performance measures  The Funnel  Getting to a p.e.  Know who you‟re getting in bed with  Management Compensation  The p.e.‟s Plan  LinkedIn  Resources  (*The p.e. model)  (Debt and Covenants) 4 ExecuNet 2010 All Rights Reserved
  • 5. Worse than real estate brokers in Darien, CT  1978: 80 „Leveraged Buyout Groups‟ in US  2008: Estimated 3,000 around the world - 2,000 U.S. 5 ExecuNet 2010 All Rights Reserved
  • 6. Private Equity as a % of U.S. M& A Activity 35 30 25 20 15 10 5 0 '90 '95 '00 '05 '09 ExecuNet 2010 All Rights Reserved 6
  • 7. How They Made Money: ‟70‟s and ‟80‟s and today 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Late 70s Mid 80s Late 80s Early 90s Late 90s Today Origination Revenue Growth Financial Engineering Acquisition ExecuNet 2010 All Rights Reserved 7 Source: David Offensend, Evercore Capital Partners
  • 8. WSJ: “Buyouts Leave Simmons Little Rest” 8 ExecuNet 2010 All Rights Reserved
  • 9. Terminology  The providers of capital: Limited Partners, or LP‟s - who are they?  The fund manager: General Partner, or GP, or p.e. 9 ExecuNet 2010 All Rights Reserved
  • 10. 10 ExecuNet 2010 All Rights Reserved
  • 11. Percentage of Capital by LP type LBO Funds 11 ExecuNet 2010 All Rights Reserved
  • 12. Private Equity Firms Portfolio Companies % of % of States total States total 1 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 12 ExecuNet 2010 All Rights Reserved
  • 13. Many ways to categorize the 3,000  By size ▬ Large $1 billion+ revenues ▬ Mid-market > $150 million ▬ Small < $150 million  By sector specialty ▬ Health care ▬ Consumer ▬ IT ▬ Financial services ▬ etc.  And those that chase everything that moves  Net-net, sector first; and mid-market; not lower or upper 13 ExecuNet 2010 All Rights Reserved
  • 14. Excellent 14 ExecuNet 2010 All Rights Reserved
  • 15. Top 50 Fund Managers Rank Firm City Capital ($Millions) 1 Carlyle Group LP Washington $32,000 2 Permira Advisers LLP London $27,388 3 Bain Capital Inc. Boston $26,000 4 Blackstone Group New York $25,000 5 Kohlberg Kravis Roberts & Co. New York $24,300 6 Credit Suisse Private Equity New York $22,100 7 GS Capital Partners Inc. New York $21,500 8 Apax Partners Worldwide LLP London $20,750 9 Texas Pacific Group Inc. Fort Worth, TX $20,000 10 CVC Capital Partners London $18,784 11 Thomas H. Lee Partners Boston $18,000 12 HarborVest Partners Boston $16,800 13 Cerberus Capital Management LLC New York $16,500 14 Welsh Carson Anderson & Stowe New York $16,000 15 Apollo Advisors LP New York $15,000 16 Adams Street Partners LLC Chicago $12,700 17 Lehman Brothers Merchant Banking New York $12,600 ExecuNet 2010 All Rights Reserved 15
  • 16. Very Respectable Mid-Market  American Capital  Fenway Partners  Capital Partners  Frontenac  Founders Equity  Hamilton Robinson  Mid-Ocean  Pegasus  Nautic Partners  HIG  North Castle  Charter House Group  Riverside Company  Gemini Investors  Wind Point  Lincolnshire  Goodrich Capital  MCG Capital 16 ExecuNet 2010 All Rights Reserved
  • 17. The LBO model  Purchase  Sale ▬ 7.0 X $9m = $63 ▬ 8.0 X 13 = $112 ▬ Cash 27 ▬ Debt 32 ▬ Debt 36 ▬ Proceeds 80 17 ExecuNet 2010 All Rights Reserved
  • 18. The LBO model  Purchase  Sale ▬ 7.0 X $9m = $63 ▬ 8.0 X 13 = $112 ▬ Cash 27 ▬ Debt 32 ▬ Debt 36 ▬ Proceeds 80 = 3.1 X cash-on-cash 18 ExecuNet 2010 All Rights Reserved
  • 19. Maslow‟s Hierarchy of Needs Air 19 ExecuNet 2010 All Rights Reserved
  • 20. p.e. Hierarchy of Needs Air Water EBITDA Sex Self-actualization Clothing Shelter Social Needs 20 ExecuNet 2010 All Rights Reserved
  • 21. 21 ExecuNet 2010 All Rights Reserved
  • 22. The p.e. / L.P Model Pelosi 2008 Fund Sale A D F C E B F J C A D G I Purchase B H E 2008 2009 2010 2011 2012 2013 2014 2015 2016 ExecuNet 2010 All Rights Reserved 22
  • 23. The p.e. / L.P Model Pelosi 2008 Fund Sale A D F C E B F J C A D G I Purchase B H E 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Invest Harvest ExecuNet 2010 All Rights Reserved 23
  • 24. The “Vintage Year” 24 ExecuNet 2010 All Rights Reserved
  • 25. p.e. Compensation  2% of managed capital ▬ pays salaries, rent, and nominal bonuses  20% carried interest from profits on distributions* * pre-Obama 25 ExecuNet 2010 All Rights Reserved
  • 26. Performance Measures  IRR 20% 28% 33+%  Cash-on-cash return 2X 3X 5+X  Hold period years 8+ years 6 years 3 years 26 ExecuNet 2010 All Rights Reserved
  • 27. Buyout Fund Sample Capital Capital Dist. As of Net IRR Partnership/Year Committed (M) Cont. (M) (M) As of (%) 02/28/09 02/28/0 9 Endeavour Capital Fund III LP/2000 $25.0 $24.5 $41.9 29.6 Endeavour Capital Fund IV LP/2004 $50.0 $45.6 $16.1 25.2 Wellspring Capital Partners III LP/2002 $75.0 $80.9 $85.4 24.9 TPG Partners III LP/2000 $300.0 $284.5 $549.9 24.5 BDCM Opportunity Fund LP/2002 $50.0 $108.5 $128.1 23.3 Providence Equity Partners IV LP/2000 $150.0 $210.1 $243.9 22.5 2000 Riverside Capital Appreciation Fund/2000 $50.0 $45.9 $68.0 22.4 Green Equity Investors III LP/1999 $50.0 $49.4 $104.1 21.7 Hicks Muse Tate & Furst Europe Fund LP/1999 $99.3 $116.8 $195.9 21.6 Fox Paine Capital Fund II LP/2000 $50.0 $42.0 $47.8 20.0 Castle Harlan Partners IV LP/2002 $100.0 $98.3 $90.7 18.4 KKR European Fund LP/1999 $400.0 $532.0 $737.3 18.1 OCM Principal Opportunity Fund II LP/2001 $50.0 $61.3 $79.4 17.3 Aurora Equity Partners III LP/2004 $50.0 $39.0 $20.8 16.9 Providence Equity Partners III LP/1999 $100.0 $106.4 $157.2 15.6 2003 Riverside Capital Appreciation Fund/2003 $75.0 $72.2 $29.2 15.6 Matlin Patterson Global Opportunities Partners/2001 $75.0 $76.6 $117.1 15.2 OCM Opportunities Fund V LP/2004 $50.0 $50.0 $66.3 13.9 Vestar Capital Partners IV LP/1999 $100.0 $97.6 $101.1 13.9 ExecuNet 2010 All Rights Reserved 27
  • 28. The Funnel 300 teasers 100 books 7 LOI‟s 2 due diligence 1 close ExecuNet 2010 All Rights Reserved 28
  • 29. “ The Capital Call” Pelosi 2008 Fund Sale A D F C E B C F J A D I G Purchase B H E 2008 2009 2010 2011 2012 2013 2014 2015 2016 ExecuNet 2010 All Rights Reserved 29
  • 30. Landing in a Portfolio Company  CEO  Direct to p.e. Deal Team (Board Members)*  Direct to p.e. Board  CFO or COO Members and portfolio company CEO  C-level in „the leverage  Direct to p.e. Board point‟ Members and portfolio company CEO  Other C-Level  Portfolio company CEO * Check their web site 30 ExecuNet 2010 All Rights Reserved
  • 31. Who the p.e. wants to meet Target-Driven Deal Exec Thesis-Driven Deal Exec Deal Resource Source: Andy Thompson, Notch Partners Job Seekers ExecuNet 2010 All Rights Reserved 31
  • 32. Elements of a Deal Thesis  Clear definition of industry – niche, size, geography, etc.  Outline of value-creation opportunities  Outline of plan for pursuing those sources of value  Explanation of why you/ your team are ideally suited to lead such an effort – include description of team if applicable  Roster of 5-20 target companies  Status of discussions with target companies (if any)  Thoughts on likely exits Source: Andy Thompson, Notch Partners 32 ExecuNet 2010 All Rights Reserved
  • 33. Management Compensation  CEO $150K - $300K 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 33 ExecuNet 2010 All Rights Reserved
  • 34. Know Who You‟re Getting in Bed With  Professionals ▬ results with class  Sharks  The tell-tale signs of people who re-use dental floss  $150K base  Low bonus  Minimal equity  No contract 34 ExecuNet 2010 All Rights Reserved
  • 35. The 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 35 ExecuNet 2010 All Rights Reserved
  • 36. Buyout Example Economics Investment (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 EBITDA WPP/Co-Investors Results CEO • Assuming • 30% IRR • 3.7x cash-on-cash return  CEO co-invest of $750k  CEO gets 7.5% of common • CEO receives over $10 million 36 ExecuNet 2010 All Rights Reserved Courtesy: Wind Point Partners
  • 37. Components of Equity Value Creation As EBITDA grows, the value of the enterprise increases. At the same time, free cash flow reduces debt. At Close Y1 Y2 Y3 Y4 Y5 EBITDA 25.2 27.5 30.1 32.9 35.9 39.1 Exit Value (5.5x EBITDA) 138.6 151.5 165.5 180.7 197.2 215.2 Cash Available for Debt Pay down 7.9 9.6 11.5 13.6 15.8 Net Debt 100.8 92.9 83.2 71.7 58.1 42.4 $ millions 37 ExecuNet 2010 All Rights Reserved Courtesy: Wind Point Partners
  • 38. The Three Primary Return Drivers  Leverage  Value Improvement: EBITDA Growth  Exit Multiple Expansion 38 ExecuNet 2010 All Rights Reserved Courtesy: Wind Point Partners
  • 39. WSJ April, 2010 39 ExecuNet 2010 All Rights Reserved
  • 40. APRIL 23, 2010 Blackstone Rides a Better Portfolio By PETER LATTMAN NEW YORK—More signs of strength emerged in the private-equity business Thursday, as Blackstone Group LP reported solid first- quarter earnings results. The firm said the value of its private-equity portfolio rose 16% in the first quarter and its real-estate holdings increased 12%. Its hedge-fund business, which has about $50 billion under management, also posted good performance. Shares of Blackstone fell 11 cents, or 0.74%, to $14.84 in 4 p.m. New York Stock Exchange trading. The report from New York-based Blackstone, the industry's largest player, came as its private-equity peers struck a flurry of leveraged buyouts in the $1 billion range, underscoring the recovery of the large banks that provide the corporate loans to fund such deals. Blackstone Chairman Stephen Schwarzman sees 'concrete signs of economic improvement in our portfolio.„ The private-equity business has settled into a "new normal" after a volatile period. After a buyout bubble during the middle of last decade defined by record-size acquisitions and reckless lending practices, the financial crisis brought the industry to its knees. After a sharp recovery, today's environment is characterized by fewer headline-grabbing deals and more-conservative financing packages. If there's one concern across the industry, it's the pushback private-equity firms are receiving from their investor base of pension funds and sovereign-wealth funds. These investors, called limited partners, are arguing for lower fees and greater disclosure from buyout shops. Fund raising remains difficult; Blackstone is raising its sixth flagship buyout fund and expects to raise $12.5 billion, according to a person familiar with the fund, down from its $21.7 billion fifth fund. The private-equity business is certainly heating up again. In particular, firms announced several deals in which one group of private-equity owners have acquired a business from another private-equity group. Such transactions are less complicated than selling a business to a public company or via a public offering. Some private-equity investors frown upon the practice, as they can create the perception that these deals are being done for expediency rather than maximizing value. 40 ExecuNet 2010 All Rights Reserved
  • 41. A 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 41 ExecuNet 2010 All Rights Reserved
  • 42. The trades . . . 42 ExecuNet 2010 All Rights Reserved
  • 43. A few words about  Have a killer handle - Premium Brand Building CEO - Idea Monitizer - Rapid new revenue streams for brands  Work hard at your keywords . . . ask the recruiter!  Refresh your „Activities‟  A business picture, not a tourist photo  Reco‟s matter . . . 25+  Don‟t be “unconnected” . . . 250+  Consider having it professionally prepared  Claim your personal URL and put on your resume www.LinkedIn.com/in/mikelorelli not www.LinkedIn.com/in/02264lorelli9946 43 ExecuNet 2010 All Rights Reserved
  • 44. Resources ▬ Private Equity Info  www.PrivateEquityinfo.com  Andy Jones  ajones@privateequityinfo.com  (512) 771-3943 ▬ Galante‟s ▬ E-blasts: Solutions Marketing: - Llew Smith (203) 655-2601 - LSmith@SolutionsMktg.com - 2,700 p.e.‟s/VC‟s $499 - 2,700 search + 2,700 p.e.‟s $699 ▬ LinkedIn: Jan Wallen  Jan@LinkedInWorks.com 44 ExecuNet 2010 All Rights Reserved
  • 45. Good luck! Mike Lorelli CEO and Chief Passionate Officer WaterJel Technologies, Inc. (201) 806-3110 MLorelli@WaterJel.com 45 ExecuNet 2010 All Rights Reserved
  • 46. Michael K. Lorelli Mike Lorelli‟s 30-year career spans a wide range of consumer products and services, and B2B categories, 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 Myers Squibb. For the last decade, as CEO, he has led revitalizations and turnarounds for private equity firms. For example, Dr. John Rutledge, Chairman of Rutledge Capital, will say: “I would invade China with Mike alone in a rubber boat.” He is presently CEO of Carlstadt, NJ based WaterJel Technologies, the leader in burn care products. WaterJel is a Riverside Company. Previously, he led the growth of Latex International, a Pouschine-Cook company. Mike has also led CEO engagements for Rutledge Capital, and Cerberus. Mike‟s assignments at PepsiCo included Executive Vice President – Marketing, Sales and R&D for Pepsi-Cola North America, President of Pepsi-Cola East, a $1.5 Billion operating company, and President for Pizza Hut‟s International division where he led a “global or bust” charge, resulting in expanding the Company‟s presence from 68 to 92 countries, surpassing McDonalds in country count. During his PepsiCo tenure, he is given credit for authoring the soft drink company‟s “Big Event Marketing” strategy, which coupled the product with leading- edge events Michael K. Lorelli in entertainment, sports, consumer electronics, movies and home video. 15 Norman Lane Darien, CT 06820 Office: 203 655-2444 Mike holds a Bachelor of Engineering degree in Industrial Engineering from New York University, FAX: 203 655-6916 and an MBA in Marketing from NYU‟s Stern Graduate School of Business. He has traveled to 54 Email: miklorelli@aol.com countries, is an avid runner, claims to excel at no sport, is an active private pilot, member The Website: www.Lorelli.net CEO Trust, former member of YPO, and author of the childrens‟ best-seller “Traveling Again, Dad?” with profits donated to childrens‟ charities. Mike is a Director of iMedicor (Ticker: VMCI). He resides in Darien, CT with his wife Nancy. 46 ExecuNet 2010 All Rights Reserved