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
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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
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Leveraged Buyouts
Venture Capital (early vs. late stage)
Special Situations (i.e. distressed)
Mezzanine
Secondary Purchases
Fund of Funds
4
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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
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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
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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
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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
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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
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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
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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
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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
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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
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~ 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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