SlideShare a Scribd company logo
1 of 107
1HC. TBS. 2014-2015
2
 Investment strategy that involves the purchase of equity
or equity linked securities in a company
 Investment is made through a negotiated process
 By sophisticated investors with financial and operating
expertise
 The goal is to acquire undervalued or “promising” assets
and realize profits in 3-5 years after the acquisition
 Information asymmetry and inefficiencies are important
factors
2
HC. TBS. 2014-2015
3
Alternative Investments
Private Equity Hedge Funds Real Estate Commodities
•Venture Capital •Long / Short •Office •Currencies
•Buyout •Global Macro •Retail •Interest Rates
•Mezzanine Capital •Event Driven •Residential •Natural Ressources
•Special Situation •Market Neutral •REITs
•Arbitrage
•Emerging markets
3
HC. TBS. 2014-2015
4
Leveraged Buyouts
Venture Capital (early vs. late stage)
Special Situations (i.e. distressed)
Mezzanine
Secondary Purchases
Fund of Funds
4
HC. TBS. 2014-2015
5
 Established firms with track records, stable cash
flows and stable growth rates
 Annual revenues of $25 - $500 million
 Typically in basic retail, transportation and
manufacturing industries
 Typically have assets to borrow against and
access to bank loans
 Seek private equity to effect a change in
ownership, finance an expansion or restructure
5
HC. TBS. 2014-2015
6
 Firms with substantial risk of failure - business models
and marketing approach are yet to be proved
 Small and illiquid investments with size of $500k - $2
million
 The smallest type is the entrepreneur who needs the
financing to conduct initial research and development
 The most mature type are those firms that are starting to
turn profits but need capital for expansion
 Angel capital is an important source of funding
6
HC. TBS. 2014-2015
7
 Firms with more certain business models
• Proven technology and market
• Profitable and need expansion capital
 General size of $2 - $15 million
 IPO or Sale expected/feasible in near term
 Original investors may achieve some liquidity
 Because the risk is generally lower and the
liquidity higher, later-stage investments require
lower returns than early-stage investments
7
HC. TBS. 2014-2015
8
 Buyouts focus on mature companies with stable
or sustainable growth profile
 Buyouts rely heavily on debt financing to finance
most of the purchase price
 Venture Capital focus on high growth industries
with riskier investment profile than buyouts
 Venture Capital relies heavily on equity financing
and has higher return targets than buyouts
8
HC. TBS. 2014-2015
9
 Investment is supplied by specialized
Turnaround Funds (TF) for target firms that have
defaulted on their outstanding loans
 TFs receive controlling interests, with former
owners making up the minority interest
 TFs renegotiates terms with existing lenders,
offering to restructure or pay off loans at a
discount
 TFs also deliver expertise to find new markets or
partners for the firm’s products, cut costs,
change or improve the current management
9
HC. TBS. 2014-2015
10
 Investing directly in PE funds can be difficult for
individual investors and small institutions
 Relatively high investment minimums may
disqualify some of the small investors
 Information on PE managers is difficult to locate
 Gaining access to top PE funds can be difficult
due to high investor demand
 Fund of Funds co-mingles the investments of
small investors into a single pool and then
assembles a portfolio of PE funds
10
HC. TBS. 2014-2015
11
 Private limited partnerships
 Individual managers are the General Partner (GP)
 Providers of capital (pensions, insurance companies,
wealthy people) are Limited Partners (LPs)
 Partnerships have 10-year life with +1+1 extension
 4-6 year investment period
 1-2% annual management fee
 Profits split 80-20, after reaching “hurdle” return level for
LPs
 LPs need to fund within 2-3 weeks of “capital call”
 Penalties for failure to fund by LPs
 IRRs depend on when money is transferred by LPs
11
HC. TBS. 2014-2015
12
 Selecting investments
• Obtaining access to high quality deal flow
• Sorting and evaluating large amount of information
 Structuring investments
• Designing transactions
 Monitoring investments
• Providing strategic, operational and financial
assistance to portfolio companies
 Exiting investments
• IPO, Sale or Recapitalization
12
HC. TBS. 2014-2015
13HC. TBS. 2014-2015
14
 Public and corporate pension funds,
endowments, foundations, wealthy families,
insurance companies, foreign investors and
others
 Investors expect to receive higher risk-adjusted
returns on private equity than other investments
 Potential benefits of diversification
 Advantage of economies of scope between
private equity investing and investors’ other
activities
14
HC. TBS. 2014-2015
15
 ~ 80% of PE investments flow through
specialized intermediaries, which are limited
partnerships
 Intermediaries provide expertise in selecting,
structuring, and managing private equity
investments
 Intermediaries not organized as LPs play a less
significant role today in the private equity market
 SBICs owned by banks and VC subsidiaries of
non-financial corporations mostly invest their
corporate parent’s capital
15
HC. TBS. 2014-2015
16
 Vary in size and their reasons for raising capital
• Young firms that are developing innovative
technologies
• Middle market companies that are stable, profitable
and need private equity to expand or restructure
 Going private transactions for public companies
 PIPE (Private Investment in Public Equity)
provides financing without registration costs/
disclosures associated with public offerings
16
HC. TBS. 2014-2015
17
 Limited Partners – Investors with money
• Insurance companies, pension funds, banks, and high
net worth individuals
• Investors commit a certain amount to the fund
• They have no other active role in the fund and no
liability beyond their commitments
 One General Partner – Managers of money
• Manages the investments via a management company
• Receives management fee (typically 2%) on
commitments
• Receives “carried interest” in the profits
17
HC. TBS. 2014-2015
18
 Contractually fixed lifetime (10-12 years)
 Capital is invested during the first 4-6 years
 Thereafter, investments are managed and liquidated
 Distributions are made to the limited partners in the forms
of cash or securities
 General Partner typically raises a new fund when the
investment phase for the existing fund has been
completed (=> 80%)
 Each fund partnership is legally separate and is
managed independently of other fund partnerships (i.e
KKR I vs. KKR II)
18
HC. TBS. 2014-2015
19
Target Fund Size $1 billion
Minimum Commitment $10 million
Gross Target Return 25%
Management Fee 2%
Carried Interest 80% - 20%
Commitment Period 5 years
Fund Term 10 years +1+1
19
HC. TBS. 2014-2015
20
 LPs delegate significant responsibilities to GPs
 Resolution of potential conflict of interests lies
in the structure of the partnership agreement
 Partnerships have finite lives
 To remain in business, GPs regularly raise new
funds - easier for reputable firms with good
record
 GP compensation is closely linked to the fund
returns
20
HC. TBS. 2014-2015
21
 The objective is to limit excessive risk taking by GPs
 Covenants usually set limits on the % of the partnership’s
capital that may be invested in a single firm
 Covenants may preclude investments in publicly traded
and foreign securities, derivatives and other private
equity funds, etc
 Covenants usually require that cash from sale of portfolio
assets be immediately distributed to LPs
 LPs usually limit such deal fees or require that deal fees
be offset against management fees
 Return hurdle rates for LPs
21
HC. TBS. 2014-2015
22
 Track record, relevancy of past experience
 Generation of adequate deal flow
 Sound investment decision-making processes
 Ability to achieve successful exits / liquidity
 Advantages vs. similarly focused funds
 Sufficiency of resources
 Meaningful commitment of time
 Cohesiveness and sustainability of team
 Succession planning
22
HC. TBS. 2014-2015
23
 Co-investments are direct investments in portfolio
companies by LPs alongside private equity partnerships
 Usually, LPs acquire the securities on the same terms as
the partnership but pay no management fee or carried
interest
 Co-investment opportunities arise when GPs need
additional equity financing to close a deal
 Some institutional investors see co-investing as an
opportunity to acquire expertise in private equity
investing
 For GPs, LPs that stand ready to co-invest represent a
flexible source of funds for closing deals
23
HC. TBS. 2014-2015
24HC. TBS. 2014-2015
25
 Deal flow, access to high quality investment
opportunities, is absolutely crucial
 GPs rely on relationships with third parties and
industry contacts for deal flow generation
 The greater the deal flow, the higher the
likelihood of identifying an attractive opportunity
 “Proprietary” deals are more attractive than deals
brought by agents or intermediaries
• Less competition means lower purchase price
• Lower purchase price means higher IRRs
25
HC. TBS. 2014-2015
26
 Investment banks, consultants, lawyers and industry
contacts introduce potential opportunities
 Preliminary opportunity analysis will be performed
relatively quickly
 Initial decision is quickly made whether a PE firm would
be interested in the opportunity
• PE firms have different investment strategies and views of the
world
 If interested, PE firms would sign Confidentiality
Agreement to begin evaluating the opportunity
26
HC. TBS. 2014-2015
27
 Deal screening is art and science
 PE firms receive many investment proposals in a year
 Proposals are first screened to eliminate those that are clearly
fail to meet investment criteria
 Specialization on a specific industry or geography reduces the
number of investment opportunities considered
 Initial review takes a 1 – 2 days and results in the rejection of
~ 90% of proposals received by a PE firm
 “Surviving” proposals then become subject to a secondary
review after the signing of a Confidentiality Agreement
 Proposals that survive the preliminary and secondary reviews
become the subject of a comprehensive due diligence process
27
HC. TBS. 2014-2015
28
 Commonly referred to as “1st round bid”
 Give sellers a perspective on the level of buyer
interest and the valuation parameters buyers are
likely to assume
 Indication of interest subject to:
• Completion of business, legal, accounting and
environmental due diligence
• Negotiation and execution of documents
• Receipt of necessary approvals
• Negotiation of employment agreements with key
management
28
HC. TBS. 2014-2015
29HC. TBS. 2014-2015
30
 Acquisition of a company where a PE firm uses cash
equity and debt to fund the purchase price
 PE firm injects equity into a new shell company
(“NewCo”), which borrows debt and simultaneously
acquires the target
 PE firm contributes capital, operating and financial
expertise, strategic insight, contacts and management
talent
 Management ownership increases, creating higher
incentives to improve operations and deliver results
 Debt is repaid by the operating cash flows or by the sale
of non-core assets of the acquired business
 LBO is similar to buying and renting out a house - the
rent cash flows to pay down the mortgage debt
30
HC. TBS. 2014-2015
31
Ownership
Purchase price Equity investment
Bonds Bank loan
NewCo acquires Target
Acquiror (LBO firm)
Banks
Current Owners
Bond Holders
NewCo
Target
32
Varies over time with market conditions
Sources of financing
• 40 – 50% senior bank debt (5-7 years)
• 20 – 30% subordinated debt (8-12 years)
• 20 – 40% common equity
Bank debt is secured from receivables,
inventory and PP&E
32
HC. TBS. 2014-2015
33
 History of consistent profitability
 Predictable cash flows to service debt
 Availability of excess cash
 Easily separable assets or businesses
 Strong management team
 Strong brands and market position
 Industry with barriers to entry
 Little danger from disruptive changes
(technology, regulatory, etc.)
 Visible/feasible exit strategy (IPO or M&A)
33
HC. TBS. 2014-2015
34
 Strategic
• Vision, growth initiatives, add-on acquisitions, exit
 Operational
• Sales, costs, assets
 Organizational
• Processes, structure, systems, skills
 Financial
• Balance sheet, tax structure, capitalization
 Expansion in valuation multiples
 Advantages of being private
34
HC. TBS. 2014-2015
35
Minimize purchase price
Maximize leverage
Minimize liabilities purchased
Manage transaction costs
Improve business operations
Maximize tax efficiency
Optimize exit
35
HC. TBS. 2014-2015
36
Avoid competition
• Auction process vs. proprietary deal
Maintain price discipline
• Avoid “deal fever”
Maximize deductions from headline price
• Earn outs
• Liabilities – pension, legal, other
36
HC. TBS. 2014-2015
37
Maintain competitive process among
banks willing to fund the transaction
Choose right financing structure
• Balance of risk, flexibility and interest cost
Seller notes and staple financing
• Deeply subordinate and at attractive terms
Partner with co-investors
37
HC. TBS. 2014-2015
38
Detailed due diligence
• Legal
• Financial
• Accounting
• Environmental
Tough negotiations
Reps and Warranties
38
HC. TBS. 2014-2015
39
Minimize transaction costs
• Internal costs
• Aborted deal costs
Maximize tax efficiency
• Increase interest tax shield
• Increase depreciation
• Increase tax deductible amortization
39
HC. TBS. 2014-2015
40
Top line growth
• New markets, partners
• Products
Margin improvement
• COGS
• SG&A
40
HC. TBS. 2014-2015
41
 Difficult to predict future business cycles and market
conditions
 Prepare an exit strategy and groom the business for that
exit
 Trade sale or M&A – “clean” cash exit
 IPO – long process, company needs to be above a
certain size, lock-up restrictions
 Leveraged recapitalization – allows sponsor to remove
invested capital prior to ultimate exit, increases IRR and
hedges against poor exit
 Secondary buyout – selling to another sponsor
41
HC. TBS. 2014-2015
42
SOURCES USES
New Revolver (L + 275 bps) $ 25.0 Purchase Price of Equity $ 250.0
New Term Loan A (L + 275 bps) 150.0 Refinance Existing Debt 630.0
New Term Loan B (L + 325 bps) 200.0 Assume Capital Leases 25.0
Assume Capital Leases 25.0 Transaction Costs 20.0
Total Senior Debt 400.0
New Senior Subordinated Notes (12%) 250.0
Total Debt 650.0
New PIK Preferred / Seller Paper (14%) 75.0
Acquiror’s Equity / Strategic Cash 200.0
Total Sources $925.0 Total Uses $925.0
42
HC. TBS. 2014-2015
43
 Equity
• New equity injection from LBO sponsor
• Potential equity contribution from existing management
• Potential continuing equity investment by existing shareholders
(“rollover”)
• Equity from a strategic partner
 Debt
• Bank debt (“senior” debt)
• High yield debt (“subordinated” debt)
 Mezzanine securities
• Can be structured to be more “debt-like” or more “equity-like”
depending on the situation
43
HC. TBS. 2014-2015
44
 Senior secured (most senior debt)
 Flexible, interest rate is floating
 Matures before other debt classes, amortizing
 Typically callable/prepayable at par
 Quarterly interest payments
 Maintenance covenants
 Structured at the operating company level
 Underwritten via syndication
 Diligence, commitment, launch, syndicate, fund
44
HC. TBS. 2014-2015
45
 Revolving Credit Facilities vs. Term loans
• Revolvers allow multiple drawings for working capital and general
corporate needs
• Term loans funded at closing
 Pro Rata facilities
• Revolver and Term Loan A – held by commercial banks
• Buy and hold mentality, shrinking segment
 Institutional tranches
• Consist of Term Loans “B”, “C” or “D”- held by insurance
companies, CLOs and CDOs, growing segment
• Purely transactional, liquidity in the secondary market
• Minimal front-end amortization
45
HC. TBS. 2014-2015
46
 Usually subordinated and/or unsecured
 Interest rate is fixed, maturity of 8-10 years
 “Bullet” maturity after full bank debt amortization
 Usually not callable at par in early years,
typically 1-5 years
 Structured at the operating company level
 Publicly quoted security
 Incurrence covenants
 Diligence, document, roadshow, price and fund
46
HC. TBS. 2014-2015
47
 Subordinated to bank debt and high yield bonds
 Flexible, typically floating interest rate
 Non-amortizing, “bullet” maturity typically after 10
years
 Cash & PIK coupon payment further enhanced
with equity warrants
 PIK component can “eat” into equity
 Structurally subordinated at the holding company
level
 Incurrence covenants
47
HC. TBS. 2014-2015
48HC. TBS. 2014-2015
49
 Objective
• Validate business concept
• Verify market
• Appraise management
• Validate forecasts
 Valuation
• Diligence establishes basis for valuation, price and negotiation
• Diligence is expensive and time consuming
 Diligence strategy
• Preliminary evaluation to identify “deal-breakers” before spending
time and money on detailed due diligence
49
HC. TBS. 2014-2015
50
Business concept, opportunity
Market
Competition
Customers
Products
Management
Financials
Returns
50
HC. TBS. 2014-2015
51
What is the concept/opportunity?
Is the opportunity sustainable?
Potential size of the opportunity?
How can the target company capitalize on
the opportunity?
Is the proposed plan/strategy realistic?
How does the target business fit to its
markets and region?
Why are we so smart or lucky?
51
HC. TBS. 2014-2015
52
 Market characteristics, segments, size, growth,
cyclicality, key metrics, demographics?
 Projected market share and sales volume?
 Low barriers to entry into the market?
 Is target’s business model sustainable?
 How will the business be perceived by
customers?
 Regulatory issues?
52
HC. TBS. 2014-2015
53
 Who are the direct competitors?
 Relative size, scope, cost basis, brands and
market share?
 What are the key factors/levers of competition in
the industry?
 How is target’s business strategy different than
competitors’?
 What are target’s competitive advantages?
 What are the target’s competitive
disadvantages?
 Threat from potential new entrants?
53
HC. TBS. 2014-2015
54
 Who are the customers?
 Current and future customer base?
 What specific market and customer needs does
the target business serve?
 How do customers make their purchase
decisions? Key criteria?
 Customer satisfaction and retention?
 Does the projected number of customers or
sales make sense? Realistic?
 How will the target acquire new customers?
54
HC. TBS. 2014-2015
55
 Product life cycle, penetration trends?
 Product pricing?
 Product profitability?
 Productivity versus competition?
 Maintain or “jettison” certain products?
 Plant consolidation?
 Inventory optimization?
 CAPEX requirements?
 Development plans?
55
HC. TBS. 2014-2015
56
Competent?
Experienced?
Cohesive?
Strategic?
Flexible?
Incentivized?
Proactive?
Realistic?
56
HC. TBS. 2014-2015
57
 What is the optimal capital structure?
 Are revenue and cost projections
comprehensive, realistic, reasonable?
 What are the underlying business assumptions
of the projections?
 Impact of various business case scenarios?
 How does cash flow in this business?
 How much capital investment needed? When?
 Correct accounting treatment?
 What are the key sensitivities?
57
HC. TBS. 2014-2015
58
Financial and accounting diligence is
primarily focused on drilling into the basic
components of valuation
Recurring EBITDA (adjust for extraordinary
items)
CAPEX
Working Capital
Cash Flow
Multiple
58
HC. TBS. 2014-2015
59
 General issues – exclusions, accounting changes, pro
forma adjustments
 Revenue – components, method of recognition,
customers, customer arrangements, pricing/volume
 Margins – components of cost of sales, gross margin
trends
 Reserves – under/over statement of profits
 Compensation – benefits, headcount needs, transition
issues, bonus
 SG&A – components, trends, discretionary costs, fixed
vs. variable, cost savings
 Other – restructurings, acquisitions, contingencies
59
HC. TBS. 2014-2015
60
Determine normalized annual CAPEX
• Maintenance or mandatory CAPEX
Determine expansion CAPEX
• Discretionary CAPEX
CAPEX between signing and closing of
transaction reduce net cash position
Important to have correct CAPEX
assumptions in calculating exit value
60
HC. TBS. 2014-2015
61
Analyze working capital cycle
Components of B/S accounts
Needs and trends
Savings opportunities
Potential closing balance sheet issues
Important to have correct working capital
assumptions in calculating exit value
61
HC. TBS. 2014-2015
62
Conducted in tandem with business,
financial and accounting due diligence
Structure the transaction in the most tax
efficient manner
Understand the legal aspects of target’s
business and assets being acquired
Identify and evaluate liabilities
Materials are typically made available for
review in a data room
62
HC. TBS. 2014-2015
63
 No real competitive advantage of PE firm
 Long list of things that have to go right to make
the deal work
 “Build it and they will come” is not a good
business strategy
 Aggressive estimates of future growth
 Employing the wrong management team
 True downside case is not adequately evaluated
63
HC. TBS. 2014-2015
64HC. TBS. 2014-2015
65
 Preliminary documents designed to provide a framework for
negotiations between investors and the target company
 Provides collective understanding of the proposed transaction, basic
terms and conditions
 Generally focuses on the target’s valuation and the conditions under
which investors agree to provide financing
 Term sheet eventually transforms into a formal agreement known as
the Purchase Agreement, which is a legal document that details
• who is buying what
• from whom
• at what price
• when
65
HC. TBS. 2014-2015
66
 Acquirer
 Target
 Valuation
 Structure of acquisition
 Management compensation
 Debt financing
 Board of directors
 Rights
 Transaction fees
 Management fees
66
HC. TBS. 2014-2015
67
Transaction terms and structure
Description of asset sold
Calculation of purchase price
Closing date
Reps and Warranties – buyer and seller
Conditions to closing – seller
Conditions to closing – buyer
Conditions for termination
67
HC. TBS. 2014-2015
68
 Clarity regarding key financial and deal terms
 Business/assets being acquired and the liabilities being
assumed
 Arrangements for asset sharing going forward
 Protecting the acquirer from contingent or undisclosed
liabilities
 Locking up the target, no “shopping” of the deal
 Representations and Warranties – verification of factual
matters covered during the due diligence
 Pre-closing operations
 Closing conditions – fiduciary outs, break up fee
 Purchase price adjustments – post closing adjustment
68
HC. TBS. 2014-2015
69
 Statement of fact at a particular point in time
 Purpose
• Provides basis for refusal to close the transaction if untrue (pre-
close)
• Provides basis for post-closing indemnification for damages if
untrue (post-close)
 Mainly refers to areas covered in due diligence
• Financial statements, liabilities, contracts, real estate, litigation,
taxes
 Both buyer and seller gives Reps & Warranties
 Buyer’s objective – understand what I am buying
 Seller’s objective – increase certainty of closing
69
HC. TBS. 2014-2015
70
 Agreements to act or refrain from acting in the future
 Positive vs. Negative covenants
 Necessary because signing and closing are not
simultaneous
 Pre-closing covenants
• Largely to the benefit of buyer
• Objective is to preserve the asset to be purchased and ensure
closing occurs
 Post-closing covenants
• To the benefit of seller
• Objective is to protect certain interests once seller no longer owns
the business
70
HC. TBS. 2014-2015
71
 Pre-closing
• Operations in the ordinary course of business
• No solicitation of proposals from competing buyers
• No dividends and distributions
• No issuance of equity or incurrence of debt
• No acquisitions and divestitures
• No execution of significant contracts
• No change in accounting practices
 Post-closing
• No changes to compensation
• No hiring or firing of key management employees
71
HC. TBS. 2014-2015
72
 Transaction will not close until all conditions are satisfied
 Representations and warranties are true
 Absence of material adverse change in the business
• Excludes general economic or industry conditions, stock price movements, failure
to meet forecasts, matters known to buyer
 Receipt of required government approvals and major third party consents
 Debt financing available on terms and conditions set forth in commitment
letters
 Termination is cessation of both parties’ obligations
• “Drop dead” date – financing and regulatory
• Breaches - break up fee ~5%
• Fiduciary out
 Buyer’s objective – to be able to walk away if anything major is wrong
 Seller’s objective – to have some certainty that transaction will close if things
are in reasonable order
72
HC. TBS. 2014-2015
73
Initial screening of deals
“Heads up” memorandum
Non-binding indications / term sheets
Detailed due diligence and evaluation
Formal and detailed presentation to the
investment committee
Final approval and funding
73
HC. TBS. 2014-2015
74
 Why is the company being sold?
 What is the investment thesis?
 How does the opportunity fit with the PE firm’s
investment strategy and skill base?
 What are the size, structure and timing of the
investment?
 What is the PE firm’s “edge” in the process?
 What is the due diligence road map?
 How will the PE firm exit the investment?
 What are the expected returns and key
assumptions driving the projections?
74
HC. TBS. 2014-2015
75
 Analysis of the deal opportunity, the business, the
transaction, the process, industry trends, due diligence
results
 Detailed discussion of risks and opportunities
 Detailed analysis of operating and financial projections
 Detailed scenario analysis and projected returns
 Key questions to answer:
• Why do we want to do this deal?
• What is our edge?
• What value do we bring to this deal?
• Who is the competition?
• How and when will we exit?
• Impact of this deal on the rest of the portfolio?
75
HC. TBS. 2014-2015
76HC. TBS. 2014-2015
77
 Year 1 – Figure out what you just bought
• Fix problems, focus on 2-3 key areas to improve
• Assess and change out management
 Years 2-3 – Strategic Plan and Execution
• Develop strategic business plan
• Make investments, pursue acquisitions
• Execute plan
• Pay down debt
 Year 4-5 – Prepare for Exit
• Windows dressing, clean up
• Sell on good performance
77
HC. TBS. 2014-2015
78
 Takes place at least quarterly
 Candid and open discussion on the status of
each investment
 Progress of investment thesis
 Value already created
 Problems experienced
 Changes needed to the “game plan”
 Basis for valuation
 Exit planning and timing
78
HC. TBS. 2014-2015
79
 Information gathering is crucial
 Board seats provide meaningful access
 Monthly financial and operational statistics are
provided to PE investors
 Regular interaction (weekly/monthly conference
calls) with management
 Weekly PE firmwide meetings
 Quarterly MD&A write-ups from portfolio
companies
 Annual audit reports
79
HC. TBS. 2014-2015
80
 Strategic and operational advice
 Financial engineering expertise
 Recruitment of top management and board members
 Leveraging industry contacts for identifying future partners, markets
 Revenue growth
 Gross margin improvement
 Operating expense reduction
 Cash flow improvement
 Crisis management
 Corporate governance
 Exit preparation
 Degree of involvement varies with type of investment
80
HC. TBS. 2014-2015
81
 Board Representation
• GPs are extremely influential and effective outside directors
• GPs have the resources and staff to monitor portfolio companies
 Allocation of Voting Rights
• GP investment is large enough to achieve majority ownership
• In some situations, GPs may obtain voting control even if they are not
majority shareholders
• In general, a GP’s voting rights do not depend on the type of stock
issued. For example, holders of convertible preferred stock may be
allowed to vote their shares on an as converted basis
 Control of Access to Additional Financing
• Venture Capital is provided in several rounds
• Influence of original investor is high on new GPs’ willingness to
participate in subsequent rounds
81
HC. TBS. 2014-2015
82
 Interact regularly with the management and
gather timely information
 Focus on top 2-3 priorities and deliver strategic
and operational assistance
 Evaluate progress made vs. plan
 Identify problems early
 Adjust “game plan” as needed
 Value portfolio companies conservatively
 Prepare for exit at least one year in advance
82
HC. TBS. 2014-2015
83HC. TBS. 2014-2015
84
 Limited partnerships must be dissolved within a
certain time as they need to return capital to LPs
 Exit = Monetization and realization of “paper”
profits
 Exit requires advanced planning and preparation
 Sale
 IPO
 Recapitalization
84
HC. TBS. 2014-2015
85
 Need to forecast the evolution of the business
 Closely follow macro trends in the industry
 Who are the likely buyers?
• Strategics vs. financial buyers
• Foreigners vs. local buyers
 Exit preparation takes time
• Execute strategy and hit the budget forecasts
• Develop and prepare the management team
• Establish a “clean” track record (audits)
• Establish a reputable and competent board
85
HC. TBS. 2014-2015
86
 Advantages
• Buyers usually pay a premium
• “Clean” exit with greater certainty
• Cheaper than IPO
• Faster and simpler than IPO
• Convince one buyer vs. the whole market
 Disadvantages
• May not be welcomed by the management – sale or
merger imply reduced independence
• Buyer appetite can be unpredictable
86
HC. TBS. 2014-2015
87
 Investment bank (target advisor) due diligence
 Investment bank (target advisor) writes selling memo
 Narrow the universe of potential buyers and place initial calls into buyers
 Send and negotiate confidentiality agreements
 Send preliminary bid letters
 Analyze preliminary bids
 Create management presentations
 Assemble data room
 Buyer due diligence
 Send final bid letter
 Analyze final bids
 Negotiate key terms
 Contract negotiations and documentation
 Transaction announcement
87
HC. TBS. 2014-2015
88
 Advantages
• Prestige of becoming a publicly traded company
• Currency for future M&A activity
• Increased visibility for the company
• Preservers a company’s independence and provides continued
access to capital
 Disadvantages
• Not an immediate, “clean” liquidity event for investors
• Long and time-consuming
• Distraction for management
• Expensive process
• Information disclosure requirements
• Lock ups
88
HC. TBS. 2014-2015
89
1. Due Diligence and Drafting
 Meetings with senior management, iterative drafting of registration statement (Business
Overview, Risk Factors, Financials, MD&A)
2. Initial Filing with SEC
 Generally accessible to the public and does not include the expected share price range
for the offering
3. Structuring and Valuation
 Selecting co-managers, setting the initial filing range that serves as a valuation guideline
for investors during the marketing process
4. Prospectus Distribution
 SEC gives comments on each draft of registration statement, the preliminary Prospectus
is mailed broadly to potential investors
5. Salesforce Education
 On the company’s story before marketing to potential investing clients, management dry
runs
6. Targeting Investors
 Identification of best potential buyers, determine “anchor” buyers based on their current
holdings of stock, one-on-one meetings
89
HC. TBS. 2014-2015
90
7. Syndication
 The lead underwriter takes the primary responsibility for this, syndicate members
underwrite a fixed amount of stock and may be given additional allotments
8. Roadshow and Bookbuilding
 Schedule of meetings with investors in key cities around the world, lasts 2-3 weeks,
roadshow team makes formal presentations to investors at these meetings, key investors
are met in a one-on-one format, smaller investors are accommodated in a group
 In tandem with the marketing effort, the bookbuilding process begins, investors submit
indications of interest for shares in the IPO, the lead managers collect these orders and
build a book of demand over the course of the marketing period, a critical component is
the collection of qualitative feedback on the orders in the book
9. Pricing and Allocation
 The quality of the book and aftermarket intentions of investors are critical, share
performance in the aftermarket is important, allocations to institutional and retail investors
10. Aftermarket
 Balance supply and demand in the aftermarket, over-allotment option, on-going research
coverage (after 25 days) and trading support
90
HC. TBS. 2014-2015
91
 Usually, the acquired company is highly levered
at the beginning
 Over time, the company pays off debt with cash
flows from its operations
 This creates additional capacity to add more
debt 1-3 years after the acquisition
 When additional debt is issued, excess cash is
dividended out to the equity investors
 Investors achieve “partial” monetization
 Refinancing a mortgage is effectively a
recapitalization
91
HC. TBS. 2014-2015
92
 Once an investment is “monetized”, the profits
will be divided between LPs and GPs according
to the partnership agreement
 80% / 20% is usually the norm
• 80% to the LPs
• 20% to the GPs
 A minimum return hurdle % for LPs may have to
be cleared before GPs can claim their share of
profits (I.e. 8%)
 Clawback provision
 High returns make a strong track record which in
turn makes future fundraising easier
92
HC. TBS. 2014-2015
93HC. TBS. 2014-2015
94
 Identify a business need or niche and
demonstrate its feasibility
 Analyze a product within the context of market
and customer
 Evaluate the viability of a technology
 Describe major goals, objectives, and vision for 1
year, 3 years and 5 years
 Assess ability of management to execute
 Provide detailed financial projections
94
HC. TBS. 2014-2015
95
 Concept/Opportunity
 Strategy
 Operations
 Markets
 Customers
 Products
 Competition
 Risks
 Implementation
95
HC. TBS. 2014-2015
96
 Always stated within the context of an existing or
projected market
 Translate concept into terms that investors can
understand
 Clearly highlight which market needs will be filled or
issues will be addressed
 Have comprehensive knowledge of the competitive
environment and the potential reactions from competitors
 Analyze the current and future customer base in detail
96
HC. TBS. 2014-2015
97
 The process of raising money may have
significant costs
• Time
• Opportunity cost of distraction
• Significant amount of questions and information
requests
• Impact on the organization (I.e. uncertainty)
• Direct expenses – travel, legal and accounting
 May be beneficial to hire reputable advisors with
relevant past fundraising experience and track
record
97
HC. TBS. 2014-2015
98
 Identify relevant PE firms
 May make sense to use advisors
 Most effective if someone credible refers you to
the PE firm
 Do your research in advance
 At the initial meeting, impress them and capture
their interest
 PE firms’ time is the biggest asset
98
HC. TBS. 2014-2015
99
 Who are these people?
 Do they fit the way we do business?
 What is the value and appeal of this business?
 Will there be enough customer demand for its products?
 What can go wrong with this company?
 What needs to be accomplished to justify this valuation?
 What are the key trends in the industry and sector?
 How dependent is the value of this company on the overall performance of
the sector or industry?
 What is the likely response from competition?
 Do they have the right experience and skills to deliver?
 Do they have a realistic, relevant and flexible strategy?
 What are the exit implications?
 IPO and M&A market trends?
 Can we/they win?
99
HC. TBS. 2014-2015
100
 Capital
 Strategic vision
 Growth
 Credibility
 Global best practices
 Investor contacts
 Management talent
10
0
HC. TBS. 2014-2015
101
 Access to long-term financing
 GPs and LPs with significant investing
experience around the globe
 Valuable strategic insights and operational
expertise
 Significant financial discipline
 Substantial credibility and visibility to target
company and the country
 Best practices to pursue profitable growth
10
1
HC. TBS. 2014-2015
102
 A long-term support to those companies with the
potential of success and sustainability
 Builds and grows business faster than they
otherwise would
 Encourages entrepreneurial spirit, technological
advancement and job creation
 Crucial to the existence, feasibility and success
of businesses in the seed/start-up and expansion
stages
 Teaches discipline of the “buyside”
10
2
HC. TBS. 2014-2015
103
Promote entrepreneurial environment and
increase incentives for entrepreneurial
investments
Facilitate private equity fund formation
Develop long-term capital sources
Incorporate private equity needs and
perspectives into policy-making
10
3
HC. TBS. 2014-2015
104
 Minimum regulation and bureaucracy
 Simplified requirements of company formation
 Support for private equity and entrepreneurial
education
 Favorable tax regime – capital gains
 Equity and options ownership
 Awareness of private equity as engine of growth
and value creation
10
4
HC. TBS. 2014-2015
105
 Access to long-term funding is essential for PE
firms
 Development of pension funds and relevant
regulatory regime is a critical step
 U.S. example
 Pension funds should be allowed to invest in
private equity
 Unrestricted movement of capital is a must-have
for private equity industry
10
5
HC. TBS. 2014-2015
106
1. Develop your own idea of what a business is worth
2. Avoid auctions
3. Pick your spots
4. Approach each potential transaction with overwhelming force
5. Follow the cash
6. Get timely help from experts, advisors
7. Keep your emotions in check (“deal fever”)
8. Develop trust with your team and managers
9. Make sure acquired company managers concentrate on the few
vital objectives
10. When management team is not working, change them as soon as
possible
10
6
HC. TBS. 2014-2015
107
10
7
HC. TBS. 2014-2015

More Related Content

What's hot

M2 venture capital
M2 venture capitalM2 venture capital
M2 venture capital
Subin Raj
 
Venture capital
Venture capitalVenture capital
Venture capital
neeta_2010
 
Venture capital BD
Venture capital BDVenture capital BD
Venture capital BD
Mh Dip
 

What's hot (20)

Venture capital
Venture capitalVenture capital
Venture capital
 
Elements for assessing and structuring venture capital financing
Elements for assessing and structuring venture capital financingElements for assessing and structuring venture capital financing
Elements for assessing and structuring venture capital financing
 
M2 venture capital
M2 venture capitalM2 venture capital
M2 venture capital
 
venture capital
venture capitalventure capital
venture capital
 
Venture capital
Venture capitalVenture capital
Venture capital
 
Private Equity Funding
Private Equity FundingPrivate Equity Funding
Private Equity Funding
 
Private equity
Private equityPrivate equity
Private equity
 
Venture capital
Venture capitalVenture capital
Venture capital
 
Venture capital presentation
Venture capital presentationVenture capital presentation
Venture capital presentation
 
Venture capital ppt
Venture capital pptVenture capital ppt
Venture capital ppt
 
Private Equity Presentation
Private Equity PresentationPrivate Equity Presentation
Private Equity Presentation
 
Venture capital
Venture capitalVenture capital
Venture capital
 
Venture capital
Venture capitalVenture capital
Venture capital
 
Venture capital BD
Venture capital BDVenture capital BD
Venture capital BD
 
Venture capital
Venture capitalVenture capital
Venture capital
 
Private equity
Private equityPrivate equity
Private equity
 
Venture capital
Venture capitalVenture capital
Venture capital
 
VENTURECAPITAL FINANCING
VENTURECAPITAL FINANCING VENTURECAPITAL FINANCING
VENTURECAPITAL FINANCING
 
Private Equity and Venture Capital
Private Equity and Venture CapitalPrivate Equity and Venture Capital
Private Equity and Venture Capital
 
Gs503 venture capital financing intro 120115
Gs503 venture capital financing intro 120115Gs503 venture capital financing intro 120115
Gs503 venture capital financing intro 120115
 

Similar to Private Equity Investments 2015 - Tunis Business School

Introduction to Private Equity and Venture Capital_aifsession6.pptx
Introduction to Private Equity and Venture Capital_aifsession6.pptxIntroduction to Private Equity and Venture Capital_aifsession6.pptx
Introduction to Private Equity and Venture Capital_aifsession6.pptx
ssuser4f8f8e
 
Getting your property financed
Getting your property financedGetting your property financed
Getting your property financed
KevinArnoldSVN
 
Are you preparing for PE fund Accounting interview_.pdf
Are you preparing for PE fund Accounting interview_.pdfAre you preparing for PE fund Accounting interview_.pdf
Are you preparing for PE fund Accounting interview_.pdf
rajendra168342
 

Similar to Private Equity Investments 2015 - Tunis Business School (20)

Introduction to Private Equity and Venture Capital_aifsession6.pptx
Introduction to Private Equity and Venture Capital_aifsession6.pptxIntroduction to Private Equity and Venture Capital_aifsession6.pptx
Introduction to Private Equity and Venture Capital_aifsession6.pptx
 
Venture Financings 101 (SAFEs, Convertible Notes, Seed and Series A) | Bardia...
Venture Financings 101 (SAFEs, Convertible Notes, Seed and Series A) | Bardia...Venture Financings 101 (SAFEs, Convertible Notes, Seed and Series A) | Bardia...
Venture Financings 101 (SAFEs, Convertible Notes, Seed and Series A) | Bardia...
 
Madison Street Capital financial services industry group
Madison Street Capital financial services industry groupMadison Street Capital financial services industry group
Madison Street Capital financial services industry group
 
Project financing
Project financingProject financing
Project financing
 
Raising Capital: Negotiating with Potential Investors (Series: The Start-Up/S...
Raising Capital: Negotiating with Potential Investors (Series: The Start-Up/S...Raising Capital: Negotiating with Potential Investors (Series: The Start-Up/S...
Raising Capital: Negotiating with Potential Investors (Series: The Start-Up/S...
 
Getting your property financed
Getting your property financedGetting your property financed
Getting your property financed
 
Are you preparing for PE fund Accounting interview_.pdf
Are you preparing for PE fund Accounting interview_.pdfAre you preparing for PE fund Accounting interview_.pdf
Are you preparing for PE fund Accounting interview_.pdf
 
Raising Capital: Negotiating with Potential Investors
Raising Capital: Negotiating with Potential InvestorsRaising Capital: Negotiating with Potential Investors
Raising Capital: Negotiating with Potential Investors
 
Capital structure and its Determinants
     Capital structure and its Determinants     Capital structure and its Determinants
Capital structure and its Determinants
 
FM_Financing Decision_Unit.2 Updated.pptx
FM_Financing Decision_Unit.2 Updated.pptxFM_Financing Decision_Unit.2 Updated.pptx
FM_Financing Decision_Unit.2 Updated.pptx
 
Introduction to WSD Capital Management
Introduction to WSD Capital ManagementIntroduction to WSD Capital Management
Introduction to WSD Capital Management
 
Chapter20 venturecapitalandprivateequity
Chapter20 venturecapitalandprivateequityChapter20 venturecapitalandprivateequity
Chapter20 venturecapitalandprivateequity
 
Getting Your Property Financed
Getting Your Property FinancedGetting Your Property Financed
Getting Your Property Financed
 
TSB_IBPresentation.v3
TSB_IBPresentation.v3TSB_IBPresentation.v3
TSB_IBPresentation.v3
 
Kauffman Foundation Report: Poor Long-Term Returns from Venture Capital
Kauffman Foundation Report: Poor Long-Term Returns from Venture CapitalKauffman Foundation Report: Poor Long-Term Returns from Venture Capital
Kauffman Foundation Report: Poor Long-Term Returns from Venture Capital
 
Wealth Management - Week 3
Wealth Management - Week 3Wealth Management - Week 3
Wealth Management - Week 3
 
Alternative Investments Introduction to Alternative Investments.pptx
Alternative Investments Introduction to Alternative Investments.pptxAlternative Investments Introduction to Alternative Investments.pptx
Alternative Investments Introduction to Alternative Investments.pptx
 
Ventrue capital
Ventrue capitalVentrue capital
Ventrue capital
 
venture capital.pptx
venture capital.pptxventure capital.pptx
venture capital.pptx
 
Drexel private equity guest lecture 10 20-2015
Drexel private equity guest lecture 10 20-2015Drexel private equity guest lecture 10 20-2015
Drexel private equity guest lecture 10 20-2015
 

Recently uploaded

SPLICE Working Group: Reusable Code Examples
SPLICE Working Group:Reusable Code ExamplesSPLICE Working Group:Reusable Code Examples
SPLICE Working Group: Reusable Code Examples
Peter Brusilovsky
 
SURVEY I created for uni project research
SURVEY I created for uni project researchSURVEY I created for uni project research
SURVEY I created for uni project research
CaitlinCummins3
 
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
中 央社
 

Recently uploaded (20)

Major project report on Tata Motors and its marketing strategies
Major project report on Tata Motors and its marketing strategiesMajor project report on Tata Motors and its marketing strategies
Major project report on Tata Motors and its marketing strategies
 
Supporting Newcomer Multilingual Learners
Supporting Newcomer  Multilingual LearnersSupporting Newcomer  Multilingual Learners
Supporting Newcomer Multilingual Learners
 
ESSENTIAL of (CS/IT/IS) class 07 (Networks)
ESSENTIAL of (CS/IT/IS) class 07 (Networks)ESSENTIAL of (CS/IT/IS) class 07 (Networks)
ESSENTIAL of (CS/IT/IS) class 07 (Networks)
 
diagnosting testing bsc 2nd sem.pptx....
diagnosting testing bsc 2nd sem.pptx....diagnosting testing bsc 2nd sem.pptx....
diagnosting testing bsc 2nd sem.pptx....
 
Book Review of Run For Your Life Powerpoint
Book Review of Run For Your Life PowerpointBook Review of Run For Your Life Powerpoint
Book Review of Run For Your Life Powerpoint
 
OSCM Unit 2_Operations Processes & Systems
OSCM Unit 2_Operations Processes & SystemsOSCM Unit 2_Operations Processes & Systems
OSCM Unit 2_Operations Processes & Systems
 
VAMOS CUIDAR DO NOSSO PLANETA! .
VAMOS CUIDAR DO NOSSO PLANETA!                    .VAMOS CUIDAR DO NOSSO PLANETA!                    .
VAMOS CUIDAR DO NOSSO PLANETA! .
 
24 ĐỀ THAM KHẢO KÌ THI TUYỂN SINH VÀO LỚP 10 MÔN TIẾNG ANH SỞ GIÁO DỤC HẢI DƯ...
24 ĐỀ THAM KHẢO KÌ THI TUYỂN SINH VÀO LỚP 10 MÔN TIẾNG ANH SỞ GIÁO DỤC HẢI DƯ...24 ĐỀ THAM KHẢO KÌ THI TUYỂN SINH VÀO LỚP 10 MÔN TIẾNG ANH SỞ GIÁO DỤC HẢI DƯ...
24 ĐỀ THAM KHẢO KÌ THI TUYỂN SINH VÀO LỚP 10 MÔN TIẾNG ANH SỞ GIÁO DỤC HẢI DƯ...
 
SPLICE Working Group: Reusable Code Examples
SPLICE Working Group:Reusable Code ExamplesSPLICE Working Group:Reusable Code Examples
SPLICE Working Group: Reusable Code Examples
 
Including Mental Health Support in Project Delivery, 14 May.pdf
Including Mental Health Support in Project Delivery, 14 May.pdfIncluding Mental Health Support in Project Delivery, 14 May.pdf
Including Mental Health Support in Project Delivery, 14 May.pdf
 
How To Create Editable Tree View in Odoo 17
How To Create Editable Tree View in Odoo 17How To Create Editable Tree View in Odoo 17
How To Create Editable Tree View in Odoo 17
 
SURVEY I created for uni project research
SURVEY I created for uni project researchSURVEY I created for uni project research
SURVEY I created for uni project research
 
How to Send Pro Forma Invoice to Your Customers in Odoo 17
How to Send Pro Forma Invoice to Your Customers in Odoo 17How to Send Pro Forma Invoice to Your Customers in Odoo 17
How to Send Pro Forma Invoice to Your Customers in Odoo 17
 
e-Sealing at EADTU by Kamakshi Rajagopal
e-Sealing at EADTU by Kamakshi Rajagopale-Sealing at EADTU by Kamakshi Rajagopal
e-Sealing at EADTU by Kamakshi Rajagopal
 
Spring gala 2024 photo slideshow - Celebrating School-Community Partnerships
Spring gala 2024 photo slideshow - Celebrating School-Community PartnershipsSpring gala 2024 photo slideshow - Celebrating School-Community Partnerships
Spring gala 2024 photo slideshow - Celebrating School-Community Partnerships
 
Sternal Fractures & Dislocations - EMGuidewire Radiology Reading Room
Sternal Fractures & Dislocations - EMGuidewire Radiology Reading RoomSternal Fractures & Dislocations - EMGuidewire Radiology Reading Room
Sternal Fractures & Dislocations - EMGuidewire Radiology Reading Room
 
ANTI PARKISON DRUGS.pptx
ANTI         PARKISON          DRUGS.pptxANTI         PARKISON          DRUGS.pptx
ANTI PARKISON DRUGS.pptx
 
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽會考英聽
 
Andreas Schleicher presents at the launch of What does child empowerment mean...
Andreas Schleicher presents at the launch of What does child empowerment mean...Andreas Schleicher presents at the launch of What does child empowerment mean...
Andreas Schleicher presents at the launch of What does child empowerment mean...
 
When Quality Assurance Meets Innovation in Higher Education - Report launch w...
When Quality Assurance Meets Innovation in Higher Education - Report launch w...When Quality Assurance Meets Innovation in Higher Education - Report launch w...
When Quality Assurance Meets Innovation in Higher Education - Report launch w...
 

Private Equity Investments 2015 - Tunis Business School

  • 2. 2  Investment strategy that involves the purchase of equity or equity linked securities in a company  Investment is made through a negotiated process  By sophisticated investors with financial and operating expertise  The goal is to acquire undervalued or “promising” assets and realize profits in 3-5 years after the acquisition  Information asymmetry and inefficiencies are important factors 2 HC. TBS. 2014-2015
  • 3. 3 Alternative Investments Private Equity Hedge Funds Real Estate Commodities •Venture Capital •Long / Short •Office •Currencies •Buyout •Global Macro •Retail •Interest Rates •Mezzanine Capital •Event Driven •Residential •Natural Ressources •Special Situation •Market Neutral •REITs •Arbitrage •Emerging markets 3 HC. TBS. 2014-2015
  • 4. 4 Leveraged Buyouts Venture Capital (early vs. late stage) Special Situations (i.e. distressed) Mezzanine Secondary Purchases Fund of Funds 4 HC. TBS. 2014-2015
  • 5. 5  Established firms with track records, stable cash flows and stable growth rates  Annual revenues of $25 - $500 million  Typically in basic retail, transportation and manufacturing industries  Typically have assets to borrow against and access to bank loans  Seek private equity to effect a change in ownership, finance an expansion or restructure 5 HC. TBS. 2014-2015
  • 6. 6  Firms with substantial risk of failure - business models and marketing approach are yet to be proved  Small and illiquid investments with size of $500k - $2 million  The smallest type is the entrepreneur who needs the financing to conduct initial research and development  The most mature type are those firms that are starting to turn profits but need capital for expansion  Angel capital is an important source of funding 6 HC. TBS. 2014-2015
  • 7. 7  Firms with more certain business models • Proven technology and market • Profitable and need expansion capital  General size of $2 - $15 million  IPO or Sale expected/feasible in near term  Original investors may achieve some liquidity  Because the risk is generally lower and the liquidity higher, later-stage investments require lower returns than early-stage investments 7 HC. TBS. 2014-2015
  • 8. 8  Buyouts focus on mature companies with stable or sustainable growth profile  Buyouts rely heavily on debt financing to finance most of the purchase price  Venture Capital focus on high growth industries with riskier investment profile than buyouts  Venture Capital relies heavily on equity financing and has higher return targets than buyouts 8 HC. TBS. 2014-2015
  • 9. 9  Investment is supplied by specialized Turnaround Funds (TF) for target firms that have defaulted on their outstanding loans  TFs receive controlling interests, with former owners making up the minority interest  TFs renegotiates terms with existing lenders, offering to restructure or pay off loans at a discount  TFs also deliver expertise to find new markets or partners for the firm’s products, cut costs, change or improve the current management 9 HC. TBS. 2014-2015
  • 10. 10  Investing directly in PE funds can be difficult for individual investors and small institutions  Relatively high investment minimums may disqualify some of the small investors  Information on PE managers is difficult to locate  Gaining access to top PE funds can be difficult due to high investor demand  Fund of Funds co-mingles the investments of small investors into a single pool and then assembles a portfolio of PE funds 10 HC. TBS. 2014-2015
  • 11. 11  Private limited partnerships  Individual managers are the General Partner (GP)  Providers of capital (pensions, insurance companies, wealthy people) are Limited Partners (LPs)  Partnerships have 10-year life with +1+1 extension  4-6 year investment period  1-2% annual management fee  Profits split 80-20, after reaching “hurdle” return level for LPs  LPs need to fund within 2-3 weeks of “capital call”  Penalties for failure to fund by LPs  IRRs depend on when money is transferred by LPs 11 HC. TBS. 2014-2015
  • 12. 12  Selecting investments • Obtaining access to high quality deal flow • Sorting and evaluating large amount of information  Structuring investments • Designing transactions  Monitoring investments • Providing strategic, operational and financial assistance to portfolio companies  Exiting investments • IPO, Sale or Recapitalization 12 HC. TBS. 2014-2015
  • 14. 14  Public and corporate pension funds, endowments, foundations, wealthy families, insurance companies, foreign investors and others  Investors expect to receive higher risk-adjusted returns on private equity than other investments  Potential benefits of diversification  Advantage of economies of scope between private equity investing and investors’ other activities 14 HC. TBS. 2014-2015
  • 15. 15  ~ 80% of PE investments flow through specialized intermediaries, which are limited partnerships  Intermediaries provide expertise in selecting, structuring, and managing private equity investments  Intermediaries not organized as LPs play a less significant role today in the private equity market  SBICs owned by banks and VC subsidiaries of non-financial corporations mostly invest their corporate parent’s capital 15 HC. TBS. 2014-2015
  • 16. 16  Vary in size and their reasons for raising capital • Young firms that are developing innovative technologies • Middle market companies that are stable, profitable and need private equity to expand or restructure  Going private transactions for public companies  PIPE (Private Investment in Public Equity) provides financing without registration costs/ disclosures associated with public offerings 16 HC. TBS. 2014-2015
  • 17. 17  Limited Partners – Investors with money • Insurance companies, pension funds, banks, and high net worth individuals • Investors commit a certain amount to the fund • They have no other active role in the fund and no liability beyond their commitments  One General Partner – Managers of money • Manages the investments via a management company • Receives management fee (typically 2%) on commitments • Receives “carried interest” in the profits 17 HC. TBS. 2014-2015
  • 18. 18  Contractually fixed lifetime (10-12 years)  Capital is invested during the first 4-6 years  Thereafter, investments are managed and liquidated  Distributions are made to the limited partners in the forms of cash or securities  General Partner typically raises a new fund when the investment phase for the existing fund has been completed (=> 80%)  Each fund partnership is legally separate and is managed independently of other fund partnerships (i.e KKR I vs. KKR II) 18 HC. TBS. 2014-2015
  • 19. 19 Target Fund Size $1 billion Minimum Commitment $10 million Gross Target Return 25% Management Fee 2% Carried Interest 80% - 20% Commitment Period 5 years Fund Term 10 years +1+1 19 HC. TBS. 2014-2015
  • 20. 20  LPs delegate significant responsibilities to GPs  Resolution of potential conflict of interests lies in the structure of the partnership agreement  Partnerships have finite lives  To remain in business, GPs regularly raise new funds - easier for reputable firms with good record  GP compensation is closely linked to the fund returns 20 HC. TBS. 2014-2015
  • 21. 21  The objective is to limit excessive risk taking by GPs  Covenants usually set limits on the % of the partnership’s capital that may be invested in a single firm  Covenants may preclude investments in publicly traded and foreign securities, derivatives and other private equity funds, etc  Covenants usually require that cash from sale of portfolio assets be immediately distributed to LPs  LPs usually limit such deal fees or require that deal fees be offset against management fees  Return hurdle rates for LPs 21 HC. TBS. 2014-2015
  • 22. 22  Track record, relevancy of past experience  Generation of adequate deal flow  Sound investment decision-making processes  Ability to achieve successful exits / liquidity  Advantages vs. similarly focused funds  Sufficiency of resources  Meaningful commitment of time  Cohesiveness and sustainability of team  Succession planning 22 HC. TBS. 2014-2015
  • 23. 23  Co-investments are direct investments in portfolio companies by LPs alongside private equity partnerships  Usually, LPs acquire the securities on the same terms as the partnership but pay no management fee or carried interest  Co-investment opportunities arise when GPs need additional equity financing to close a deal  Some institutional investors see co-investing as an opportunity to acquire expertise in private equity investing  For GPs, LPs that stand ready to co-invest represent a flexible source of funds for closing deals 23 HC. TBS. 2014-2015
  • 25. 25  Deal flow, access to high quality investment opportunities, is absolutely crucial  GPs rely on relationships with third parties and industry contacts for deal flow generation  The greater the deal flow, the higher the likelihood of identifying an attractive opportunity  “Proprietary” deals are more attractive than deals brought by agents or intermediaries • Less competition means lower purchase price • Lower purchase price means higher IRRs 25 HC. TBS. 2014-2015
  • 26. 26  Investment banks, consultants, lawyers and industry contacts introduce potential opportunities  Preliminary opportunity analysis will be performed relatively quickly  Initial decision is quickly made whether a PE firm would be interested in the opportunity • PE firms have different investment strategies and views of the world  If interested, PE firms would sign Confidentiality Agreement to begin evaluating the opportunity 26 HC. TBS. 2014-2015
  • 27. 27  Deal screening is art and science  PE firms receive many investment proposals in a year  Proposals are first screened to eliminate those that are clearly fail to meet investment criteria  Specialization on a specific industry or geography reduces the number of investment opportunities considered  Initial review takes a 1 – 2 days and results in the rejection of ~ 90% of proposals received by a PE firm  “Surviving” proposals then become subject to a secondary review after the signing of a Confidentiality Agreement  Proposals that survive the preliminary and secondary reviews become the subject of a comprehensive due diligence process 27 HC. TBS. 2014-2015
  • 28. 28  Commonly referred to as “1st round bid”  Give sellers a perspective on the level of buyer interest and the valuation parameters buyers are likely to assume  Indication of interest subject to: • Completion of business, legal, accounting and environmental due diligence • Negotiation and execution of documents • Receipt of necessary approvals • Negotiation of employment agreements with key management 28 HC. TBS. 2014-2015
  • 30. 30  Acquisition of a company where a PE firm uses cash equity and debt to fund the purchase price  PE firm injects equity into a new shell company (“NewCo”), which borrows debt and simultaneously acquires the target  PE firm contributes capital, operating and financial expertise, strategic insight, contacts and management talent  Management ownership increases, creating higher incentives to improve operations and deliver results  Debt is repaid by the operating cash flows or by the sale of non-core assets of the acquired business  LBO is similar to buying and renting out a house - the rent cash flows to pay down the mortgage debt 30 HC. TBS. 2014-2015
  • 31. 31 Ownership Purchase price Equity investment Bonds Bank loan NewCo acquires Target Acquiror (LBO firm) Banks Current Owners Bond Holders NewCo Target
  • 32. 32 Varies over time with market conditions Sources of financing • 40 – 50% senior bank debt (5-7 years) • 20 – 30% subordinated debt (8-12 years) • 20 – 40% common equity Bank debt is secured from receivables, inventory and PP&E 32 HC. TBS. 2014-2015
  • 33. 33  History of consistent profitability  Predictable cash flows to service debt  Availability of excess cash  Easily separable assets or businesses  Strong management team  Strong brands and market position  Industry with barriers to entry  Little danger from disruptive changes (technology, regulatory, etc.)  Visible/feasible exit strategy (IPO or M&A) 33 HC. TBS. 2014-2015
  • 34. 34  Strategic • Vision, growth initiatives, add-on acquisitions, exit  Operational • Sales, costs, assets  Organizational • Processes, structure, systems, skills  Financial • Balance sheet, tax structure, capitalization  Expansion in valuation multiples  Advantages of being private 34 HC. TBS. 2014-2015
  • 35. 35 Minimize purchase price Maximize leverage Minimize liabilities purchased Manage transaction costs Improve business operations Maximize tax efficiency Optimize exit 35 HC. TBS. 2014-2015
  • 36. 36 Avoid competition • Auction process vs. proprietary deal Maintain price discipline • Avoid “deal fever” Maximize deductions from headline price • Earn outs • Liabilities – pension, legal, other 36 HC. TBS. 2014-2015
  • 37. 37 Maintain competitive process among banks willing to fund the transaction Choose right financing structure • Balance of risk, flexibility and interest cost Seller notes and staple financing • Deeply subordinate and at attractive terms Partner with co-investors 37 HC. TBS. 2014-2015
  • 38. 38 Detailed due diligence • Legal • Financial • Accounting • Environmental Tough negotiations Reps and Warranties 38 HC. TBS. 2014-2015
  • 39. 39 Minimize transaction costs • Internal costs • Aborted deal costs Maximize tax efficiency • Increase interest tax shield • Increase depreciation • Increase tax deductible amortization 39 HC. TBS. 2014-2015
  • 40. 40 Top line growth • New markets, partners • Products Margin improvement • COGS • SG&A 40 HC. TBS. 2014-2015
  • 41. 41  Difficult to predict future business cycles and market conditions  Prepare an exit strategy and groom the business for that exit  Trade sale or M&A – “clean” cash exit  IPO – long process, company needs to be above a certain size, lock-up restrictions  Leveraged recapitalization – allows sponsor to remove invested capital prior to ultimate exit, increases IRR and hedges against poor exit  Secondary buyout – selling to another sponsor 41 HC. TBS. 2014-2015
  • 42. 42 SOURCES USES New Revolver (L + 275 bps) $ 25.0 Purchase Price of Equity $ 250.0 New Term Loan A (L + 275 bps) 150.0 Refinance Existing Debt 630.0 New Term Loan B (L + 325 bps) 200.0 Assume Capital Leases 25.0 Assume Capital Leases 25.0 Transaction Costs 20.0 Total Senior Debt 400.0 New Senior Subordinated Notes (12%) 250.0 Total Debt 650.0 New PIK Preferred / Seller Paper (14%) 75.0 Acquiror’s Equity / Strategic Cash 200.0 Total Sources $925.0 Total Uses $925.0 42 HC. TBS. 2014-2015
  • 43. 43  Equity • New equity injection from LBO sponsor • Potential equity contribution from existing management • Potential continuing equity investment by existing shareholders (“rollover”) • Equity from a strategic partner  Debt • Bank debt (“senior” debt) • High yield debt (“subordinated” debt)  Mezzanine securities • Can be structured to be more “debt-like” or more “equity-like” depending on the situation 43 HC. TBS. 2014-2015
  • 44. 44  Senior secured (most senior debt)  Flexible, interest rate is floating  Matures before other debt classes, amortizing  Typically callable/prepayable at par  Quarterly interest payments  Maintenance covenants  Structured at the operating company level  Underwritten via syndication  Diligence, commitment, launch, syndicate, fund 44 HC. TBS. 2014-2015
  • 45. 45  Revolving Credit Facilities vs. Term loans • Revolvers allow multiple drawings for working capital and general corporate needs • Term loans funded at closing  Pro Rata facilities • Revolver and Term Loan A – held by commercial banks • Buy and hold mentality, shrinking segment  Institutional tranches • Consist of Term Loans “B”, “C” or “D”- held by insurance companies, CLOs and CDOs, growing segment • Purely transactional, liquidity in the secondary market • Minimal front-end amortization 45 HC. TBS. 2014-2015
  • 46. 46  Usually subordinated and/or unsecured  Interest rate is fixed, maturity of 8-10 years  “Bullet” maturity after full bank debt amortization  Usually not callable at par in early years, typically 1-5 years  Structured at the operating company level  Publicly quoted security  Incurrence covenants  Diligence, document, roadshow, price and fund 46 HC. TBS. 2014-2015
  • 47. 47  Subordinated to bank debt and high yield bonds  Flexible, typically floating interest rate  Non-amortizing, “bullet” maturity typically after 10 years  Cash & PIK coupon payment further enhanced with equity warrants  PIK component can “eat” into equity  Structurally subordinated at the holding company level  Incurrence covenants 47 HC. TBS. 2014-2015
  • 49. 49  Objective • Validate business concept • Verify market • Appraise management • Validate forecasts  Valuation • Diligence establishes basis for valuation, price and negotiation • Diligence is expensive and time consuming  Diligence strategy • Preliminary evaluation to identify “deal-breakers” before spending time and money on detailed due diligence 49 HC. TBS. 2014-2015
  • 51. 51 What is the concept/opportunity? Is the opportunity sustainable? Potential size of the opportunity? How can the target company capitalize on the opportunity? Is the proposed plan/strategy realistic? How does the target business fit to its markets and region? Why are we so smart or lucky? 51 HC. TBS. 2014-2015
  • 52. 52  Market characteristics, segments, size, growth, cyclicality, key metrics, demographics?  Projected market share and sales volume?  Low barriers to entry into the market?  Is target’s business model sustainable?  How will the business be perceived by customers?  Regulatory issues? 52 HC. TBS. 2014-2015
  • 53. 53  Who are the direct competitors?  Relative size, scope, cost basis, brands and market share?  What are the key factors/levers of competition in the industry?  How is target’s business strategy different than competitors’?  What are target’s competitive advantages?  What are the target’s competitive disadvantages?  Threat from potential new entrants? 53 HC. TBS. 2014-2015
  • 54. 54  Who are the customers?  Current and future customer base?  What specific market and customer needs does the target business serve?  How do customers make their purchase decisions? Key criteria?  Customer satisfaction and retention?  Does the projected number of customers or sales make sense? Realistic?  How will the target acquire new customers? 54 HC. TBS. 2014-2015
  • 55. 55  Product life cycle, penetration trends?  Product pricing?  Product profitability?  Productivity versus competition?  Maintain or “jettison” certain products?  Plant consolidation?  Inventory optimization?  CAPEX requirements?  Development plans? 55 HC. TBS. 2014-2015
  • 57. 57  What is the optimal capital structure?  Are revenue and cost projections comprehensive, realistic, reasonable?  What are the underlying business assumptions of the projections?  Impact of various business case scenarios?  How does cash flow in this business?  How much capital investment needed? When?  Correct accounting treatment?  What are the key sensitivities? 57 HC. TBS. 2014-2015
  • 58. 58 Financial and accounting diligence is primarily focused on drilling into the basic components of valuation Recurring EBITDA (adjust for extraordinary items) CAPEX Working Capital Cash Flow Multiple 58 HC. TBS. 2014-2015
  • 59. 59  General issues – exclusions, accounting changes, pro forma adjustments  Revenue – components, method of recognition, customers, customer arrangements, pricing/volume  Margins – components of cost of sales, gross margin trends  Reserves – under/over statement of profits  Compensation – benefits, headcount needs, transition issues, bonus  SG&A – components, trends, discretionary costs, fixed vs. variable, cost savings  Other – restructurings, acquisitions, contingencies 59 HC. TBS. 2014-2015
  • 60. 60 Determine normalized annual CAPEX • Maintenance or mandatory CAPEX Determine expansion CAPEX • Discretionary CAPEX CAPEX between signing and closing of transaction reduce net cash position Important to have correct CAPEX assumptions in calculating exit value 60 HC. TBS. 2014-2015
  • 61. 61 Analyze working capital cycle Components of B/S accounts Needs and trends Savings opportunities Potential closing balance sheet issues Important to have correct working capital assumptions in calculating exit value 61 HC. TBS. 2014-2015
  • 62. 62 Conducted in tandem with business, financial and accounting due diligence Structure the transaction in the most tax efficient manner Understand the legal aspects of target’s business and assets being acquired Identify and evaluate liabilities Materials are typically made available for review in a data room 62 HC. TBS. 2014-2015
  • 63. 63  No real competitive advantage of PE firm  Long list of things that have to go right to make the deal work  “Build it and they will come” is not a good business strategy  Aggressive estimates of future growth  Employing the wrong management team  True downside case is not adequately evaluated 63 HC. TBS. 2014-2015
  • 65. 65  Preliminary documents designed to provide a framework for negotiations between investors and the target company  Provides collective understanding of the proposed transaction, basic terms and conditions  Generally focuses on the target’s valuation and the conditions under which investors agree to provide financing  Term sheet eventually transforms into a formal agreement known as the Purchase Agreement, which is a legal document that details • who is buying what • from whom • at what price • when 65 HC. TBS. 2014-2015
  • 66. 66  Acquirer  Target  Valuation  Structure of acquisition  Management compensation  Debt financing  Board of directors  Rights  Transaction fees  Management fees 66 HC. TBS. 2014-2015
  • 67. 67 Transaction terms and structure Description of asset sold Calculation of purchase price Closing date Reps and Warranties – buyer and seller Conditions to closing – seller Conditions to closing – buyer Conditions for termination 67 HC. TBS. 2014-2015
  • 68. 68  Clarity regarding key financial and deal terms  Business/assets being acquired and the liabilities being assumed  Arrangements for asset sharing going forward  Protecting the acquirer from contingent or undisclosed liabilities  Locking up the target, no “shopping” of the deal  Representations and Warranties – verification of factual matters covered during the due diligence  Pre-closing operations  Closing conditions – fiduciary outs, break up fee  Purchase price adjustments – post closing adjustment 68 HC. TBS. 2014-2015
  • 69. 69  Statement of fact at a particular point in time  Purpose • Provides basis for refusal to close the transaction if untrue (pre- close) • Provides basis for post-closing indemnification for damages if untrue (post-close)  Mainly refers to areas covered in due diligence • Financial statements, liabilities, contracts, real estate, litigation, taxes  Both buyer and seller gives Reps & Warranties  Buyer’s objective – understand what I am buying  Seller’s objective – increase certainty of closing 69 HC. TBS. 2014-2015
  • 70. 70  Agreements to act or refrain from acting in the future  Positive vs. Negative covenants  Necessary because signing and closing are not simultaneous  Pre-closing covenants • Largely to the benefit of buyer • Objective is to preserve the asset to be purchased and ensure closing occurs  Post-closing covenants • To the benefit of seller • Objective is to protect certain interests once seller no longer owns the business 70 HC. TBS. 2014-2015
  • 71. 71  Pre-closing • Operations in the ordinary course of business • No solicitation of proposals from competing buyers • No dividends and distributions • No issuance of equity or incurrence of debt • No acquisitions and divestitures • No execution of significant contracts • No change in accounting practices  Post-closing • No changes to compensation • No hiring or firing of key management employees 71 HC. TBS. 2014-2015
  • 72. 72  Transaction will not close until all conditions are satisfied  Representations and warranties are true  Absence of material adverse change in the business • Excludes general economic or industry conditions, stock price movements, failure to meet forecasts, matters known to buyer  Receipt of required government approvals and major third party consents  Debt financing available on terms and conditions set forth in commitment letters  Termination is cessation of both parties’ obligations • “Drop dead” date – financing and regulatory • Breaches - break up fee ~5% • Fiduciary out  Buyer’s objective – to be able to walk away if anything major is wrong  Seller’s objective – to have some certainty that transaction will close if things are in reasonable order 72 HC. TBS. 2014-2015
  • 73. 73 Initial screening of deals “Heads up” memorandum Non-binding indications / term sheets Detailed due diligence and evaluation Formal and detailed presentation to the investment committee Final approval and funding 73 HC. TBS. 2014-2015
  • 74. 74  Why is the company being sold?  What is the investment thesis?  How does the opportunity fit with the PE firm’s investment strategy and skill base?  What are the size, structure and timing of the investment?  What is the PE firm’s “edge” in the process?  What is the due diligence road map?  How will the PE firm exit the investment?  What are the expected returns and key assumptions driving the projections? 74 HC. TBS. 2014-2015
  • 75. 75  Analysis of the deal opportunity, the business, the transaction, the process, industry trends, due diligence results  Detailed discussion of risks and opportunities  Detailed analysis of operating and financial projections  Detailed scenario analysis and projected returns  Key questions to answer: • Why do we want to do this deal? • What is our edge? • What value do we bring to this deal? • Who is the competition? • How and when will we exit? • Impact of this deal on the rest of the portfolio? 75 HC. TBS. 2014-2015
  • 77. 77  Year 1 – Figure out what you just bought • Fix problems, focus on 2-3 key areas to improve • Assess and change out management  Years 2-3 – Strategic Plan and Execution • Develop strategic business plan • Make investments, pursue acquisitions • Execute plan • Pay down debt  Year 4-5 – Prepare for Exit • Windows dressing, clean up • Sell on good performance 77 HC. TBS. 2014-2015
  • 78. 78  Takes place at least quarterly  Candid and open discussion on the status of each investment  Progress of investment thesis  Value already created  Problems experienced  Changes needed to the “game plan”  Basis for valuation  Exit planning and timing 78 HC. TBS. 2014-2015
  • 79. 79  Information gathering is crucial  Board seats provide meaningful access  Monthly financial and operational statistics are provided to PE investors  Regular interaction (weekly/monthly conference calls) with management  Weekly PE firmwide meetings  Quarterly MD&A write-ups from portfolio companies  Annual audit reports 79 HC. TBS. 2014-2015
  • 80. 80  Strategic and operational advice  Financial engineering expertise  Recruitment of top management and board members  Leveraging industry contacts for identifying future partners, markets  Revenue growth  Gross margin improvement  Operating expense reduction  Cash flow improvement  Crisis management  Corporate governance  Exit preparation  Degree of involvement varies with type of investment 80 HC. TBS. 2014-2015
  • 81. 81  Board Representation • GPs are extremely influential and effective outside directors • GPs have the resources and staff to monitor portfolio companies  Allocation of Voting Rights • GP investment is large enough to achieve majority ownership • In some situations, GPs may obtain voting control even if they are not majority shareholders • In general, a GP’s voting rights do not depend on the type of stock issued. For example, holders of convertible preferred stock may be allowed to vote their shares on an as converted basis  Control of Access to Additional Financing • Venture Capital is provided in several rounds • Influence of original investor is high on new GPs’ willingness to participate in subsequent rounds 81 HC. TBS. 2014-2015
  • 82. 82  Interact regularly with the management and gather timely information  Focus on top 2-3 priorities and deliver strategic and operational assistance  Evaluate progress made vs. plan  Identify problems early  Adjust “game plan” as needed  Value portfolio companies conservatively  Prepare for exit at least one year in advance 82 HC. TBS. 2014-2015
  • 84. 84  Limited partnerships must be dissolved within a certain time as they need to return capital to LPs  Exit = Monetization and realization of “paper” profits  Exit requires advanced planning and preparation  Sale  IPO  Recapitalization 84 HC. TBS. 2014-2015
  • 85. 85  Need to forecast the evolution of the business  Closely follow macro trends in the industry  Who are the likely buyers? • Strategics vs. financial buyers • Foreigners vs. local buyers  Exit preparation takes time • Execute strategy and hit the budget forecasts • Develop and prepare the management team • Establish a “clean” track record (audits) • Establish a reputable and competent board 85 HC. TBS. 2014-2015
  • 86. 86  Advantages • Buyers usually pay a premium • “Clean” exit with greater certainty • Cheaper than IPO • Faster and simpler than IPO • Convince one buyer vs. the whole market  Disadvantages • May not be welcomed by the management – sale or merger imply reduced independence • Buyer appetite can be unpredictable 86 HC. TBS. 2014-2015
  • 87. 87  Investment bank (target advisor) due diligence  Investment bank (target advisor) writes selling memo  Narrow the universe of potential buyers and place initial calls into buyers  Send and negotiate confidentiality agreements  Send preliminary bid letters  Analyze preliminary bids  Create management presentations  Assemble data room  Buyer due diligence  Send final bid letter  Analyze final bids  Negotiate key terms  Contract negotiations and documentation  Transaction announcement 87 HC. TBS. 2014-2015
  • 88. 88  Advantages • Prestige of becoming a publicly traded company • Currency for future M&A activity • Increased visibility for the company • Preservers a company’s independence and provides continued access to capital  Disadvantages • Not an immediate, “clean” liquidity event for investors • Long and time-consuming • Distraction for management • Expensive process • Information disclosure requirements • Lock ups 88 HC. TBS. 2014-2015
  • 89. 89 1. Due Diligence and Drafting  Meetings with senior management, iterative drafting of registration statement (Business Overview, Risk Factors, Financials, MD&A) 2. Initial Filing with SEC  Generally accessible to the public and does not include the expected share price range for the offering 3. Structuring and Valuation  Selecting co-managers, setting the initial filing range that serves as a valuation guideline for investors during the marketing process 4. Prospectus Distribution  SEC gives comments on each draft of registration statement, the preliminary Prospectus is mailed broadly to potential investors 5. Salesforce Education  On the company’s story before marketing to potential investing clients, management dry runs 6. Targeting Investors  Identification of best potential buyers, determine “anchor” buyers based on their current holdings of stock, one-on-one meetings 89 HC. TBS. 2014-2015
  • 90. 90 7. Syndication  The lead underwriter takes the primary responsibility for this, syndicate members underwrite a fixed amount of stock and may be given additional allotments 8. Roadshow and Bookbuilding  Schedule of meetings with investors in key cities around the world, lasts 2-3 weeks, roadshow team makes formal presentations to investors at these meetings, key investors are met in a one-on-one format, smaller investors are accommodated in a group  In tandem with the marketing effort, the bookbuilding process begins, investors submit indications of interest for shares in the IPO, the lead managers collect these orders and build a book of demand over the course of the marketing period, a critical component is the collection of qualitative feedback on the orders in the book 9. Pricing and Allocation  The quality of the book and aftermarket intentions of investors are critical, share performance in the aftermarket is important, allocations to institutional and retail investors 10. Aftermarket  Balance supply and demand in the aftermarket, over-allotment option, on-going research coverage (after 25 days) and trading support 90 HC. TBS. 2014-2015
  • 91. 91  Usually, the acquired company is highly levered at the beginning  Over time, the company pays off debt with cash flows from its operations  This creates additional capacity to add more debt 1-3 years after the acquisition  When additional debt is issued, excess cash is dividended out to the equity investors  Investors achieve “partial” monetization  Refinancing a mortgage is effectively a recapitalization 91 HC. TBS. 2014-2015
  • 92. 92  Once an investment is “monetized”, the profits will be divided between LPs and GPs according to the partnership agreement  80% / 20% is usually the norm • 80% to the LPs • 20% to the GPs  A minimum return hurdle % for LPs may have to be cleared before GPs can claim their share of profits (I.e. 8%)  Clawback provision  High returns make a strong track record which in turn makes future fundraising easier 92 HC. TBS. 2014-2015
  • 94. 94  Identify a business need or niche and demonstrate its feasibility  Analyze a product within the context of market and customer  Evaluate the viability of a technology  Describe major goals, objectives, and vision for 1 year, 3 years and 5 years  Assess ability of management to execute  Provide detailed financial projections 94 HC. TBS. 2014-2015
  • 95. 95  Concept/Opportunity  Strategy  Operations  Markets  Customers  Products  Competition  Risks  Implementation 95 HC. TBS. 2014-2015
  • 96. 96  Always stated within the context of an existing or projected market  Translate concept into terms that investors can understand  Clearly highlight which market needs will be filled or issues will be addressed  Have comprehensive knowledge of the competitive environment and the potential reactions from competitors  Analyze the current and future customer base in detail 96 HC. TBS. 2014-2015
  • 97. 97  The process of raising money may have significant costs • Time • Opportunity cost of distraction • Significant amount of questions and information requests • Impact on the organization (I.e. uncertainty) • Direct expenses – travel, legal and accounting  May be beneficial to hire reputable advisors with relevant past fundraising experience and track record 97 HC. TBS. 2014-2015
  • 98. 98  Identify relevant PE firms  May make sense to use advisors  Most effective if someone credible refers you to the PE firm  Do your research in advance  At the initial meeting, impress them and capture their interest  PE firms’ time is the biggest asset 98 HC. TBS. 2014-2015
  • 99. 99  Who are these people?  Do they fit the way we do business?  What is the value and appeal of this business?  Will there be enough customer demand for its products?  What can go wrong with this company?  What needs to be accomplished to justify this valuation?  What are the key trends in the industry and sector?  How dependent is the value of this company on the overall performance of the sector or industry?  What is the likely response from competition?  Do they have the right experience and skills to deliver?  Do they have a realistic, relevant and flexible strategy?  What are the exit implications?  IPO and M&A market trends?  Can we/they win? 99 HC. TBS. 2014-2015
  • 100. 100  Capital  Strategic vision  Growth  Credibility  Global best practices  Investor contacts  Management talent 10 0 HC. TBS. 2014-2015
  • 101. 101  Access to long-term financing  GPs and LPs with significant investing experience around the globe  Valuable strategic insights and operational expertise  Significant financial discipline  Substantial credibility and visibility to target company and the country  Best practices to pursue profitable growth 10 1 HC. TBS. 2014-2015
  • 102. 102  A long-term support to those companies with the potential of success and sustainability  Builds and grows business faster than they otherwise would  Encourages entrepreneurial spirit, technological advancement and job creation  Crucial to the existence, feasibility and success of businesses in the seed/start-up and expansion stages  Teaches discipline of the “buyside” 10 2 HC. TBS. 2014-2015
  • 103. 103 Promote entrepreneurial environment and increase incentives for entrepreneurial investments Facilitate private equity fund formation Develop long-term capital sources Incorporate private equity needs and perspectives into policy-making 10 3 HC. TBS. 2014-2015
  • 104. 104  Minimum regulation and bureaucracy  Simplified requirements of company formation  Support for private equity and entrepreneurial education  Favorable tax regime – capital gains  Equity and options ownership  Awareness of private equity as engine of growth and value creation 10 4 HC. TBS. 2014-2015
  • 105. 105  Access to long-term funding is essential for PE firms  Development of pension funds and relevant regulatory regime is a critical step  U.S. example  Pension funds should be allowed to invest in private equity  Unrestricted movement of capital is a must-have for private equity industry 10 5 HC. TBS. 2014-2015
  • 106. 106 1. Develop your own idea of what a business is worth 2. Avoid auctions 3. Pick your spots 4. Approach each potential transaction with overwhelming force 5. Follow the cash 6. Get timely help from experts, advisors 7. Keep your emotions in check (“deal fever”) 8. Develop trust with your team and managers 9. Make sure acquired company managers concentrate on the few vital objectives 10. When management team is not working, change them as soon as possible 10 6 HC. TBS. 2014-2015