This document discusses private equity structures and deals. It notes that limited partners who invest in private equity funds include public pension funds, corporate pension funds, endowments, banks, insurance companies, and wealthy individuals. It lists several major private equity firms and the stages of investment. It then describes the private equity deal process from raising a fund to evaluating potential targets to creating value and exiting investments.

1. Private Equity
April 2014

2. Structure

3. Limited Partners
• Public Pension Funds
• California Public Employees’ Retirement System (CalPERS)
• Corporate Pension Funds
• Boeing Company Pension Fund
• Endowments/Foundations
• USC
• Banks & Financial Services
• Wells Fargo
• Insurance Companies
• MetLife
• Corporations
• General Motors
• Wealthy Individuals / Family offices
• Intermediaries / Fund of funds

4. PE Funds
• Blackstone Group
• Carlyle Group
• KKR
• Silver Lake
• CVC Capital Partners
• Warburg Pincus
• 3i
• Bain Capital
• Sequoia Capital
• ABRY Partners
• GTCR
• Harvest Partners
• CIP Capital

5. Companies

6. • Private equity
• Venture capital
• Hedge fund
• Debt / Mezz fund
Raise a fund
• Research
• Investment bankers
• Conferences
• Networking
Find an investment
• The offer
• Haggling over terms
• Getting financing / loans
• Equity / ownership / control
Deal
• Targets are set
• Leaving their mark: processes, new initiatives, new products etc.
• Hand picked management
• Partnerships, M&A
Value creation
• Recapitalization
• IPO
• Sale to financial or strategic buyerReturn

7. Later Stage /
Large
Companies
Development
Stage / SMBs
Early State /
Startup
Family / Angel
Venture
Capital
Middle
Market
Private Equity
Mature Stage
/ LBO
Publically
Traded
• Early stage businesses
without proven technology
or distribution channels
• Limited if any profitability
• Diverse portfolio to include
multiple “zeros”
• Proven business models with
positive cash flow
• Typically single shareholder or
family-controlled businesses
without resources to execute
on range of growth initiatives
• Attractive valuations
• Established businesses
with limited ability for
significant growth or
operational
improvement
• Stable cash flow
Different types of Stage Funding

8. Investment by Industry
B2B Information
Management
Marketing Services
Knowledge
Services
Business Process
Outsourcing
CIP Capital

9. Receive an initial teaser or Information
memorandum (“CIM”)
Submit a tentative/ nonbinding
Indication of Interest (“IOI”)
Perform detailed due
diligence on target
company
Exclusivity /
Third Party
Diligence
Final
Binding
offer
• Value proposition / Customers
• Industry
Market
Opportunity
• Competitors
• Barriers to entry
• Product differentiation
Competitive
Landscape /
Market Share
• Geographic expansion
• New product / market entry
• Acquisitions
Growth
Opportunities
• Track record
• Macro drivers
• Pricing
Profitability
• Organization
• Post-Closing execution plan
Operations
Deal Sourcing & Closing Business Diligence

10. Value Creation
Provide “large company” expertise, investment and resources that were
previously unavailable given their small / middle-market size
Accelerate the achievement of strategic
initiatives
Geographic
market
expansion
Market priority
analysis /
product
suitability
launch
Introduction of new product lines
Buy vs. Build Prioritize rollout
Identify
customer
demand
M&A
Identify Targets
and Approach
Targets
Due diligence &
Close
Transactions
Tactical initiatives
Efficiency improvements in sales, marketing and
operations
Identity new
sales and
marketing
channels
Organization
build out
Third party
resources
Construct
financial
reporting
metrics to
track progress
Report findings
on daily, weekly
and monthly
basis

11. • You buy a company for 10.0x EBITDA multiple
• You raised 30/70 debt to equity; Debt costs 10%
• Company generates $50 million in revenue with a 40% EBITDA margin
• Revenue is expected to increase by $12.5 million every year
• Capital expenditures are 10% of sales; Depreciation is $5 million every year
• Tax rate is 40%
• You’d like to exit in five years
Uses: Sources: % of Total
TEV $200 Equity $140 70%
Debt $60 30%
Total $200 Total $200
Ending EBITDA $45
Multiple 10.0x
TEV $450
Less Debt $8
Equity Value $442
MOC (x) 3.2x
IRR 33%
$ in millions Year 1 Year 2 Year 3 Year 4 Year 5 CAGR
Income Statement
Revenue $50 $63 $75 $88 $100 19%
COGS $13 $16 $19 $22 $25 19%
Gross Profit $38 $47 $56 $66 $75 19%
Fixed (Rent) $5 $5 $5 $5 $5 0%
Variable (Payroll) $13 $16 $19 $22 $25 19%
SG&A $18 $21 $24 $27 $30 14%
EBITDA $20 $26 $33 $39 $45 22%
Margin% 40% 42% 43% 44% 45%
D&A $5 $5 $5 $5 $5
Interest (@10%) $6 $6 $6 $6 $6
EBT $9 $15 $22 $28 $34
Taxes (@40%) $4 $6 $9 $11 $14
NI $5 $9 $13 $17 $20
Free Cash Flow
EBITDA $20 $26 $33 $39 $45
Less:
Capex $5 $6 $8 $9 $10
Cash Taxes $4 $6 $9 $11 $14
Cash Interest $6 $6 $6 $6 $6
Free Cash Flow $5 $8 $10 $13 $15
Debt $60 $60 $60 $60 $60
Cumulitive Cash $5 $13 $24 $37 $52
Return: Illustrative LBO example

12. • Investment in the target company
• Capital investments, operational
changes etc.
• May well take many years
J-Curve Effect

13. Returns since 1986

14. Questions?