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


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


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


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


Tuesday, March 3, 2009
(Quick) Disclaimer

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


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


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



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

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

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




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

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

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




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



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

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


                         Who switched off the light?



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


Tuesday, March 3, 2009
Fundraising Slowdown




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




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




Tuesday, March 3, 2009
Quarterly Distributions
                       Decline!




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


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

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


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



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



                         Yes / No
                                    …yeahs raise your hands!


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

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



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

                    1. What are the PE investment routes?
                    2. Is GREED good?
                    ...
Next Steps...



Tuesday, March 3, 2009
• Find The Time To (TTT)...
                     • Visit and subscribe: jpm.cc
                     • Send your feedback: ...
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BIBF Presentation (With Video)

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Taken at the Bahrain Institute for Banking & Finance

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BIBF Presentation (With Video)

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

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