Private equity overview presentation delivered to Drexel University students. Presentation highlights overall private equity market, fund structure, economics, and terms, as well as investment process.

1. Private Equity Overview
October 20, 2015

2. 2
Background
Justin Shuman
Drexel Class of 2007
E-mail: Justin.Shuman@gmail.com
Education
• $20 B pension fund
• $5 B private equity
allocation
• Invested in $750
MM+ of LBO, VC, RE
funds, as well as co-
investments and
secondary interests
• Boutique M&A
investment bank
• Predominantly sell-
side advisory
• Executed 5 live
transactions; 3 sell-
side and 2 buy-side,
worth $1 B +
• Fund-less private
equity sponsor
• Focused on
transitional investing
in micro-cap
companies
• Sourced 3
investments; worth
$75 MM +
• Healthcare IT
company
• Focused on reducing
laboratory costs for
insurance companies
• Responsible for
managing sales
pipeline from
introduction to
contract
Professional Experience
Drexel University Cornell University
Invested in private equity
funds
Sold companies for
private equity funds
Sourced investment
opportunities and
invested
Build a company for a
private equity fund
DuPont Capital
Management
Analyst
Harris Williams & Co.
Associate
Woodlawn Partners
Senior Associate
Avalon Healthcare
Solutions
Director
2002 – 2007
B.S., Business Administration
Concentration: Finance
2009 – 2011
M.B.A.
Concentration: Investment Banking
2007 2011 2013 2014

3. 3
Execute Summary
Private Equity & Market Overview
Fund Structure and Economics
Investment Process
Recommended Reading

4. 4
Private Equity
Venture
Capital
Leverage
Buyout
Mezzanine
Distressed
Debt
Real Estate
• Investors acquire an entire company or other asset using significant amounts of debt and equity
• Investors use substantial leverage make acquisitions to optimize the amount of equity capital
necessary, thereby increasing potential returns and also increasing overall investment risk
• Investors provide capital to a start-up in exchange for equity, convertible debt, or some other
security to fund company development and growth
• Investors with a tolerance for high-risk participate in this asset class because start-ups generally
do not have access to capital markets
• Investors acquire a hybrid of debt and equity securities, with little or no collateral provided by
the borrower to secure the investment
• Investments are aggressively priced to provide 20 – 30% IRR returns to the investor
• Investors purchase debt securities that are trading at a distressed level, in anticipation that
those securities will have a higher market valuation and generate profit at a future selling point
• Investors often time purchase debt securities in an attempt to take control, through bankruptcy
proceedings
• Investors purchase both debt and equity investments in property
• Investments typically involve an active management strategy ranging from moderate
repositioning or releasing properties to be extensively developed or redeveloped

5. 5
Market Overview
North
America
$290 B
Source: Prequin Global Private Equity and Venture Capital Report
Portfolio Unrealized Value and Dry Powder, 2004 – 2014
Capital Raised by Private Equity Funds in 2014
273 VC
Funds LBOs
Raised
$177 B
11%
CAGR
Top Challenges Facing LP Investors in 2015
Significant capital raised Substantial economic representation
Fees are investors’ big concernGrowing portfolios and dry-powder
39%
24%
21%
21%
18%
16%
0% 10% 20% 30% 40% 50%
Fees
Economic Environment
Regulation
Performance
Transparency
Investment Opportunities
554 675 8981,265
1,204
1,4131,7832,029
2,332
2,546
2,644
404
559
796
9991,066
1,057
954
1,002
940
1,0741,144
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
17%
CAGR
($ Millions)
• U.S. Private Equity (“PE”) Firms: 3,883
• PE Owned Companies: 12,992
• Employees of PE Owned Companies: 11.3 million
Market Statistics

6. 6
Execute Summary
Private Equity & Market Overview
Fund Structure and Economics
Investment Process
Recommended Reading

7. 7
Investments
Private Equity Structure
General Partner
(“GP”)
Investor #2
Limited Partner
(“LP”)
Investor #1
Limited Partner
(“LP”)
Private Equity Fund
• Pension Funds
• Endowments
• Foundations
• Bank Holding
Companies
• High-Net-Worth
Individuals
• Insurance Companies
• Family Offices
• Corporations
Venture
Capital
Leverage
Buyout
Mezzanine
Distressed
Debt
Real
Estate
Company Start-up
Senior
Debt
Mezzanine
Debt
Real
Estate
Capital Commitment $
Investment $
Carried Interest $
Portfolio Fees $
1
2
3
4
Source: Private Equity Fund Formation; Scott W. Naidech, Chadbourne & Parke LLP

8. 8
Fund Terms & Economics
Term Definition Market
Fund Life Private equity funds have long lives.
The term of a fund begins following
the first fund closing.
10 – 12 years
Investment Period Capital contributions are funded on an
as-needed basis to make investments.
New investments are sourced for the
fund during an investment period and
investments are made on a deal-by-
deal basis.
4 – 6 years
Management Fee Investment Period % of committed capital 2%
Harvest Period % of invested capital 1%
Carried Interest % of profits, normally after a preferred
return
20%
Preferred Return1 Guaranteed return to LPs, before
carried interest
8%
(1) Venture capital funds typically do not guarantee investors a preferred return
Source: Private Equity Fund Formation; Scott W. Naidech, Chadbourne & Parke LLP

9. 9
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Committed Capital 100,000$ 100,000$ 100,000$ 100,000$ 100,000$ 100,000$ 100,000$ 100,000$ 100,000$ 100,000$
Invested Capital (20,000)$ (20,000)$ (20,000)$ (20,000)$ (20,000)$
Realized Capital (Cost Basis) 20,000$ 20,000$ 20,000$ 20,000$ 20,000$
Cumulative Invested Capital (20,000)$ (40,000)$ (60,000)$ (80,000)$ (100,000)$ (80,000)$ (60,000)$ (40,000)$ (20,000)$ -$
Management Fee 2,000$ 2,000$ 2,000$ 2,000$ 2,000$ 800$ 600$ 400$ 200$ -$
Year 1 Realization 60,000$
Year 1 Pref Return (21,600)$ (23,328)$ (25,194)$ (27,210)$ (29,387)$
Year 1 Net Profit (Less Pref Return) 30,613$
Year 1 Carried Interest 6,123$
Year 1 Invested Capital (20,000)$
Year 1 Total Return 60,000$
Year 1 Total Profit 40,000$
LP Preferred Return 9,387$
LP Profit Share 24,491$
GP Profit Share 6,123$
Fund Economics Example
Assumptions
• 20% carried interest
• $20MM invested each year
• 5 year hold, before realization
• 3.0x return on invested capital
Investment compounding at 8% annually
20% of profits, after preferred return
2% of committed capital 1% of cumulative invested capital
• $100MM committed to private equity fund
• 2% management fee during investment period
• 1% management fee in harvest period
• 8% preferred return
Carried interest dilutes LP
ROIC from 3.0x to 2.7x or
IRR from 25% to 22%

10. 10
Execute Summary
Private Equity & Market Overview
Fund Structure and Economics
Investment Process
Recommended Reading

11. 11
Investment Process
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
1 – 2 Weeks 4 – 6 Weeks 4 – 6 Weeks 4 – 6 Weeks 4 – 6 Weeks
• Personal network
• Lawyers
• Accountants
• Industry
Associations
• Conferences
• Brokers
• Investment
Banks
• Create financial
projections and
returns model
• Propose
valuation and
transaction
structure to
seller
• Execute binding
Letter of Intent
(“LOI”)
• Evaluate
competitive
landscape
• Valid financial
statements
• Confirm growth
plan
• Assess
management
• Seek to uncover
all business and
legal risks
• Negotiate
purchase price
and related
terms, including
roll-over equity,
earn-out, and
seller note, if
applicable
• Employment
contracts for key
management
• Create Private
Placement
Memorandum
(“PPM”)
• Approach debt
and equity
investors to fund
transaction
An investment can take 4 months to 6 months to identify and close

12. 12
Required Skills by Phase
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
Broad business skill-set required to execute investment from beginning to end
Interpersonal
Writing /
Contracting
Financial Statement
Analysis
Valuation
Business Acumen
Marketing  
   
    
Strategy
 
 
  
   

13. 13
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
• Business
Owners
• Personal
network
• Industry
Associations
• Conferences
More
Proprietary
Less
Proprietary
• Lawyers
• Accountants
• Investment
Banks
Prospecting Methods
• Brokers
Networking ReferralsCold CallingE-mail Campaigns
Prospecting Sources
• Brokers list
• Databases (e.g. LexusNexus,
Dun & Bradstreet, etc.)
• LinkedIn
• Industry Association Lists
• LinkedIn
• Industry Association Lists
Finding quality investments requires resourcefulness and hustle

14. 14
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
Indication of
Interest (“IOI”)
No Exclusivity
Negotiations
Letter of Intent
(“LOI”)
Exclusivity
• Valuation
• Management roll-over
equity
• Transaction Structure
• Valuation
• Management roll-over
equity
• Transaction Structure
Principal
Agreement
Binding
Agreement
Valuation and transaction structure are key to gaining exclusivity

15. 15
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
(1) Total debt less cash
(2) Discount applied to equity value to adjust for size difference between transaction set and target
(3) Premium that investors are willing to pay for the equity of a public company, in order to have a controlling interest
Public Comparable Valuation Analysis
Equity Market Valuation Multiple
Company Value Enterprise Value Sales EBITDA EBITDA $10,000
Company Z $15,000.0 $15,310.0 0.9x 5.9x Multiple 6.0x
Company Y $12,300.0 $12,500.0 1.9x 3.4x
Company X $14,500.0 $16,200.0 2.3x 7.3x Implied Enterprise Value $60,000
Company W $21,000.0 $18,400.0 1.7x 6.0x
Company V $32,000.0 $35,900.0 4.7x 9.3x Less: Net Debt1
$20,000
Low of Entire Group $12,500.0 0.9x 3.4x Equity Value $40,000
Median of Entire Group $16,200.0 1.9x 6.0x Size Discount2
10%
Control Premium3
20%
High of Entire Group $35,900.0 4.7x 9.3x Adjusted Enterprise Value $63,200
• Identify public
companies as similar
to the target as
possible, with respect
to service or product
offering, customer
base, geography, and
other factors
• Identify closed
transactions, as
recent as possible;
typically 18-24
months is reasonable
• Companies that are as
similar to the target
as possible, with
respect to service or
product offering,
customer base,
geography and other
characteristics
Comparable Transaction Valuation Analysis
Valuation Multiple
Target Acquirer Enterprise Value Sales EBITDA EBITDA $10,000
Company A Company 1 $640.0 1.7x 11.7x Multiple 9.8x
Company B Company 2 $1,190.0 1.4x 9.8x
Company C Company 3 $315.0 1.7x 8.9x Implied Enterprise Value $98,000
Company D Company 4 $155.0 0.4x 4.3x
Company E Company 5 $3,010.0 0.8x 17.2x Less: Net Debt1
$20,000
Low of Entire Group $155.0 0.4x 4.3x Equity Value $78,000
Median of Entire Group $640.0 1.4x 9.8x Size Discount2
10%
High of Entire Group $3,010.0 1.7x 17.2x Adjusted Enterprise Value $90,200

16. 16
Discounted Cash Flow Analysis
Net Present Value Calculation Enterprise Value Sensitivity
($ in 000s) ($ in 000s)
Dec-15 hoh5
NPV of Free Cash Flow $49,999 EBITDA Exit Multiples in Year 5
NPV of Terminal Value 154,612 7.0x 7.5x 8.0x 8.5x 9.0x
NPV of Tax Shields 0 14.0% $192,604 $202,698 $212,793 $222,887 $232,982
Enterprise Value $204,611 14.5% 188,898 198,774 208,650 218,526 228,402
15.0% 185,284 194,947 204,611 214,274 223,937
Plus: Cash & Equivalents 12,162 15.5% 181,759 191,215 200,671 210,127 219,583
Less: Total Debt (32,162) 16.0% 178,321 187,575 196,829 206,083 215,337
Equity Value $184,611
Assumptions:
EBITDA Multiple 8.0x
Base Discount Rate 15.0%
Tax Rate 40.0%
WACC
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
Leveraged Buyout Analysis
Enterprise Value: Returns Sensitivity Enterprise Value: Leverage Sensitivity
($ in 000s) ($ in 000s)
EBITDA Exit Multiple EBITDA Exit Multiple
7.0x 7.5x 8.0x 8.5x 9.0x 7.0x 7.5x 8.0x 8.5x 9.0x
21.0% $190,138 $197,631 $205,125 $212,618 $220,112 4.00x $177,941 $184,319 $190,697 $197,076 $203,454
22.0% 187,281 194,472 201,663 208,855 216,046 4.25x 181,776 188,154 194,533 200,911 207,290
23.0% 184,561 191,464 198,368 205,272 212,176 4.50x 185,611 191,990 198,368 204,747 211,125
24.0% 181,970 188,600 195,230 201,859 208,489 4.75x 189,447 195,825 202,203 208,582 214,960
25.0% 179,502 185,871 192,239 198,608 204,977 5.00x 193,282 199,660 206,039 212,417 218,796TotalLeverage
EquityIRR
• Ensure
reasonableness of
sales growth, profit
margin, capex
investment, tax, and
exit multiple
assumptions
• Terminal value can
significantly impact
and potentially skew
valuation
• Determine key
leverage levels and
capital structure
(senior and
subordinated debt,
mezzanine financing,
etc.) that result in
realistic financial
coverage and credit
statistics.
• Solve for the price
that can be paid to
achieve an investor’s
required IRR target

17. 17
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
Enterprise Value
$166 $173 $180 $187 $194 $201 $208 $215 $222 $229 $235 $242 $249
Comparable Public Companies
Comparable Transactions
Discounted Cash Flow Analysis
Leveraged Buyout Analysis
6.00x 6.25x 6.50x 6.75x 7.00x 7.25x 7.50x 7.75x 8.00x 8.25x 8.50x 8.75x 9.00x
Enterprise Value as a Multiple of 2013P Adjusted EBITDA
$211-$239
$190-$218
$218-$245
$203-$231
Overlap of analyses creates a reasonable valuation range for negotiation

18. 18
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
Accounting
• Accounting
controls
• Validate
historical
financials
Market
• Evaluate
market size and
projected
growth
• Assess
competition
Business
• Review
product/service
offering
• Understand
customers,
profitability,
and overall
business drivers
Legal
• Search to
identify legal
liabilities,
which could
impact
transaction
Due diligence is conducted to discover risks, prior to investment

19. 19
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
Purchase agreement codifies valuation, structure, and risk mitigation controls
Valuation
• Purchase Price
• Working
Capital
Estimate
Structure
• Debt
• Equity
• Earn-out
• Seller-
financing
Risk Mitigation
• Tax Liability
Contingencies
• Environmental
Liability
Contingencies
• Escrow
Other
• Management
Employment
Agreement
• Non-Compete
Agreement

20. 20
Source Lead
Underwrite
and Gain
Exclusivity
Due Diligence
Negotiate
Purchase
Agreement
Raise Capital
and Fund
Investor Create
Confidential
Information
Memorandum
(“CIM”)
Distribute
CIM to
potential
investors
Request
Term Sheets
Negotiate
Final Terms
Execute
Subscription
Agreements
Fund Capital
• PE Fund
• Fund-less
Sponsor
• Bank
• Mezzanine
Fund
EquityDebt
Dedicated PE Fund Does Not Require This Process

21. 21
Execute Summary
Private Equity & Market Overview
Fund Structure and Economics
Investment Process
Recommended Reading

22. 22
Recommended Reading
• Books
o “Applied Mergers & Acquisitions” – Robert F. Bruner
o “Investment Banking: Valuation, Leverage Buyouts, and Mergers &
Acquisitions” – Joshua Rosenbaum and Joshua Pearl
• Websites
o www.prequin.com
o www.pehub.com
o www.pitchbook.com
o www.thedeal.com
o www.dealbook.com
o www.altassets.com
o www.bloggingbuyouts.com