Execu Net P.E. 101 Mike Lorelli

p.e. 101
An ExecuNet Coffee Break

Presented by
Mike Lorelli

1
ExecuNet 2010 All Rights Reserved

EBITDA

Earnings Before:
▬ Interest

▬ Taxes

▬ Depreciation

▬ Amortization

2

Stages

Idea Up & Running Mature
• Trailing EBITDA

VC PE

3

Agenda
 How the p.e.‟s made/make money
 Terminology
 Where they are; where their companies are
 Some names
 The p.e. model*
 p.e. compensation
 Performance measures
 The Funnel
 Getting to a p.e.
 Know who you‟re getting in bed with
 Management Compensation
 The p.e.‟s Plan
 LinkedIn
 Resources
 (*The p.e. model)
 (Debt and Covenants)

4

Worse than real estate brokers in Darien, CT
 1978: 80 „Leveraged Buyout Groups‟ in US
 2008: Estimated 3,000 around the world

- 2,000 U.S.

5

Private Equity as a % of U.S. M& A Activity

35

30

25

20

15

10

5

0
'90 '95 '00 '05 '09

ExecuNet 2010 All Rights Reserved 6

How They Made Money: ‟70‟s and ‟80‟s and today
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Late 70s Mid 80s Late 80s Early 90s Late 90s Today
Origination Revenue Growth

Financial Engineering Acquisition

Source: David Offensend, Evercore Capital Partners

WSJ: “Buyouts Leave Simmons Little Rest”

8

Terminology

 The providers of capital: Limited Partners, or
LP‟s
- who are they?

 The fund manager: General Partner, or
GP, or p.e.

9

10

Percentage of Capital by LP type
LBO Funds

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Private Equity Firms Portfolio Companies
% of % of
States total States total
1 New York 23.3% 1 California 18.8%
2 California 15.1% 2 Texas 8.8%
3 Illinois 9.4% 3 New York 6.6%
4 Texas 7.4% 4 Massachusetts 5.9%
5 Massachusetts 7.0% 5 Florida 4.5%
6 Connecticut 6.5% 6 Pennsylvania 4.2%
7 Pennsylvania 3.7% 7 Illinois 4.2%
8 Virginia 2.4% 8 New Jersey 3.7%
9 Florida 2.2% 9 Georgia 3.2%
10 Michigan 2.0% 10 Ohio 3.0%
11 Ohio 2.0% 11 Colorado 2.7%
12 Colorado 1.9% 12 North Carolina 2.5%
13 North Carolina 1.9% 13 Virginia 2.4%
14 New Jersey 1.8% 14 Minnesota 2.2%
15 Georgia 1.7% 15 Michigan 2.0%
16 Washington DC 1.6% 16 Washington 2.0%
17 Minnesota 1.6% 17 Connecticut 1.9%
18 Maryland 1.4% 18 Maryland 1.9%
19 Indiana 0.8% 19 Wisconsin 1.8%
20 Wisconsin 0.8% 20 Tennessee 1.8%

Sample Size: 1,000+ private equity firms, 10,000+ portfolio companies

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Many ways to categorize the 3,000
 By size
▬ Large $1 billion+ revenues
▬ Mid-market > $150 million
▬ Small < $150 million
 By sector specialty
▬ Health care
▬ Consumer
▬ IT
▬ Financial services
▬ etc.
 And those that chase everything that moves
 Net-net, sector first; and mid-market; not lower
or upper

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Excellent

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Top 50 Fund Managers
Rank Firm City Capital
($Millions)

1 Carlyle Group LP Washington $32,000
2 Permira Advisers LLP London $27,388
3 Bain Capital Inc. Boston $26,000
4 Blackstone Group New York $25,000
5 Kohlberg Kravis Roberts & Co. New York $24,300
6 Credit Suisse Private Equity New York $22,100
7 GS Capital Partners Inc. New York $21,500
8 Apax Partners Worldwide LLP London $20,750
9 Texas Pacific Group Inc. Fort Worth, TX $20,000
10 CVC Capital Partners London $18,784
11 Thomas H. Lee Partners Boston $18,000
12 HarborVest Partners Boston $16,800
13 Cerberus Capital Management LLC New York $16,500
14 Welsh Carson Anderson & Stowe New York $16,000
15 Apollo Advisors LP New York $15,000
16 Adams Street Partners LLC Chicago $12,700
17 Lehman Brothers Merchant Banking New York $12,600


Very Respectable Mid-Market
 American Capital  Fenway Partners
 Capital Partners  Frontenac
 Founders Equity  Hamilton Robinson
 Mid-Ocean  Pegasus
 Nautic Partners  HIG
 North Castle  Charter House Group
 Riverside Company  Gemini Investors
 Wind Point  Lincolnshire
 Goodrich Capital  MCG Capital

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The LBO model

 Purchase  Sale
▬ 7.0 X $9m = $63 ▬ 8.0 X 13 = $112
▬ Cash 27 ▬ Debt 32
▬ Debt 36 ▬ Proceeds 80

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The LBO model

 Purchase  Sale
▬ 7.0 X $9m = $63 ▬ 8.0 X 13 = $112

▬ Cash 27
▬ Debt 32
▬ Debt 36 ▬ Proceeds 80

= 3.1 X cash-on-cash

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Maslow‟s Hierarchy of Needs

Air

19

p.e. Hierarchy of Needs

Air

Water

EBITDA

Sex

Self-actualization

Clothing

Shelter

Social Needs

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The p.e. / L.P Model Pelosi 2008
Fund

Sale

A D
F

C E
B

F
J
C
A D G I

Purchase B H
E

2008 2009 2010 2011 2012 2013 2014 2015 2016


The p.e. / L.P Model Pelosi 2008
Fund

Sale

A D
F

C E
B

F J
C
A D G I

Purchase B H
E

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Invest Harvest


The “Vintage Year”

24

p.e. Compensation

 2% of managed capital
▬ pays salaries, rent, and nominal bonuses
 20% carried interest from profits on distributions*

* pre-Obama

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Performance Measures

 IRR 20% 28% 33+%

 Cash-on-cash return 2X 3X 5+X

 Hold period years 8+ years 6 years 3 years

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Buyout Fund Sample
Capital Capital Dist. As of Net IRR
Partnership/Year Committed (M) Cont. (M) (M) As of (%)

02/28/09 02/28/0
9
Endeavour Capital Fund III LP/2000 $25.0 $24.5 $41.9 29.6
Endeavour Capital Fund IV LP/2004 $50.0 $45.6 $16.1 25.2
Wellspring Capital Partners III LP/2002 $75.0 $80.9 $85.4 24.9
TPG Partners III LP/2000 $300.0 $284.5 $549.9 24.5
BDCM Opportunity Fund LP/2002 $50.0 $108.5 $128.1 23.3
Providence Equity Partners IV LP/2000 $150.0 $210.1 $243.9 22.5
2000 Riverside Capital Appreciation Fund/2000 $50.0 $45.9 $68.0 22.4
Green Equity Investors III LP/1999 $50.0 $49.4 $104.1 21.7
Hicks Muse Tate & Furst Europe Fund LP/1999 $99.3 $116.8 $195.9 21.6
Fox Paine Capital Fund II LP/2000 $50.0 $42.0 $47.8 20.0
Castle Harlan Partners IV LP/2002 $100.0 $98.3 $90.7 18.4
KKR European Fund LP/1999 $400.0 $532.0 $737.3 18.1
OCM Principal Opportunity Fund II LP/2001 $50.0 $61.3 $79.4 17.3
Aurora Equity Partners III LP/2004 $50.0 $39.0 $20.8 16.9
Providence Equity Partners III LP/1999 $100.0 $106.4 $157.2 15.6
2003 Riverside Capital Appreciation Fund/2003 $75.0 $72.2 $29.2 15.6
Matlin Patterson Global Opportunities Partners/2001 $75.0 $76.6 $117.1 15.2

OCM Opportunities Fund V LP/2004 $50.0 $50.0 $66.3 13.9
Vestar Capital Partners IV LP/1999 $100.0 $97.6 $101.1 13.9


The Funnel

300 teasers

100 books

7 LOI‟s

2 due diligence

1 close


“ The Capital Call” Pelosi 2008
Fund

Sale

A D

F

C E
B

C F J
A D I
G
Purchase B H
E

2008 2009 2010 2011 2012 2013 2014 2015 2016


Landing in a Portfolio Company
 CEO  Direct to p.e. Deal Team
(Board Members)*
 Direct to p.e. Board
 CFO or COO Members and portfolio
company CEO
 C-level in „the leverage  Direct to p.e. Board
point‟ Members
and portfolio company CEO
 Other C-Level  Portfolio company CEO

* Check their web site

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Who the p.e. wants to meet

Target-Driven
Deal Exec

Thesis-Driven
Deal Exec

Deal Resource

Source: Andy Thompson, Notch Partners Job Seekers


Elements of a Deal Thesis

 Clear definition of industry – niche, size, geography, etc.
 Outline of value-creation opportunities
 Outline of plan for pursuing those sources of value
 Explanation of why you/ your team are ideally suited to lead
such an effort – include description of team if applicable
 Roster of 5-20 target companies
 Status of discussions with target companies (if any)
 Thoughts on likely exits

Source: Andy Thompson, Notch Partners
32

Management Compensation

 CEO $150K - $300K 50-75% 5.0% equity*
 CFO/COO $125K - $275K 40-50% 1.5% equity
 VP $125K - $225K 25-33% 1.0% equity

* and opportunity to co-invest

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Know Who You‟re Getting in Bed With

 Professionals
▬ results with class

 Sharks
 The tell-tale signs of people who re-use dental floss

 $150K base
 Low bonus
 Minimal equity
 No contract

34

The Plan

 Fleshed out approach for how value will be created
▬ Strategic and operational blueprint

 Rapid change principles
▬ 80/100 rule: an 80% solution that‟s ready to go now,
beats a 100% effective, theoretical solution, ready to go in 4
months
 Make capital work hard
▬ Re-deploy underperforming assets

35

Buyout Example Economics

Investment (Example)

• Acquire a business for 5.5x EBITDA
• Over 5 year horizon
 Sales grow at 7% annually
 Margins improve from 14% to
15.5%
• Sell business in year 5 for 5.5x EBITDA

WPP/Co-Investors Results CEO
• Assuming
• 30% IRR
• 3.7x cash-on-cash return  CEO co-invest of $750k
 CEO gets 7.5% of common
• CEO receives over $10 million

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ExecuNet 2010 All Rights Reserved Courtesy: Wind Point Partners

Components of Equity Value Creation
As EBITDA grows, the value of the enterprise increases.
At the same time, free cash flow reduces debt.

At Close Y1 Y2 Y3 Y4 Y5

EBITDA 25.2 27.5 30.1 32.9 35.9 39.1
Exit Value (5.5x EBITDA) 138.6 151.5 165.5 180.7 197.2 215.2

Cash Available for Debt Pay down 7.9 9.6 11.5 13.6 15.8
Net Debt 100.8 92.9 83.2 71.7 58.1 42.4

$ millions

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The Three Primary Return Drivers

 Leverage
 Value Improvement: EBITDA Growth
 Exit Multiple Expansion

38

WSJ April, 2010

39

APRIL 23, 2010
Blackstone Rides a Better Portfolio
By PETER LATTMAN
NEW YORK—More signs of strength emerged in the private-equity business Thursday, as Blackstone Group LP reported solid first-
quarter earnings results. The firm said the value of its private-equity portfolio rose 16% in the first quarter and its real-estate
holdings increased 12%. Its hedge-fund business, which has about $50 billion under management, also posted good performance.
Shares of Blackstone fell 11 cents, or 0.74%, to $14.84 in 4 p.m. New York Stock Exchange trading.
The report from New York-based Blackstone, the industry's largest player, came as its private-equity peers struck a flurry of
leveraged buyouts in the $1 billion range, underscoring the recovery of the large banks that provide the corporate loans to fund
such deals.

Blackstone Chairman Stephen Schwarzman sees 'concrete signs of economic improvement in our portfolio.„

The private-equity business has settled into a "new normal" after a volatile period. After a buyout bubble during the middle of
last decade defined by record-size acquisitions and reckless lending practices, the financial crisis brought the industry to its
knees. After a sharp recovery, today's environment is characterized by fewer headline-grabbing deals and more-conservative
financing packages.
If there's one concern across the industry, it's the pushback private-equity firms are receiving from their investor base of
pension funds and sovereign-wealth funds. These investors, called limited partners, are arguing for lower fees and greater
disclosure from buyout shops. Fund raising remains difficult; Blackstone is raising its sixth flagship buyout fund and expects to
raise $12.5 billion, according to a person familiar with the fund, down from its $21.7 billion fifth fund.
The private-equity business is certainly heating up again. In particular, firms announced several deals in which one group of
private-equity owners have acquired a business from another private-equity group. Such transactions are less complicated than
selling a business to a public company or via a public offering. Some private-equity investors frown upon the practice, as they
can create the perception that these deals are being done for expediency rather than maximizing value.

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A word on covenants

 Max Capital expenditure $1.5 million
 Min LTM EBITDA 11.0 million
 Fixed Charge Coverage 1.00x
 Total Deb Leverage 3.75x
 Maximum Senior Leverage 4.50x

41

The trades . . .

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A few words about
 Have a killer handle
- Premium Brand Building CEO - Idea Monitizer
- Rapid new revenue streams for brands
 Work hard at your keywords . . . ask the recruiter!
 Refresh your „Activities‟
 A business picture, not a tourist photo
 Reco‟s matter . . . 25+
 Don‟t be “unconnected” . . . 250+
 Consider having it professionally prepared
 Claim your personal URL and put on your resume
www.LinkedIn.com/in/mikelorelli not www.LinkedIn.com/in/02264lorelli9946

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Resources
▬ Private Equity Info
 www.PrivateEquityinfo.com
 Andy Jones
 ajones@privateequityinfo.com
 (512) 771-3943
▬ Galante‟s
▬ E-blasts: Solutions Marketing:
- Llew Smith (203) 655-2601
- LSmith@SolutionsMktg.com
- 2,700 p.e.‟s/VC‟s $499
- 2,700 search + 2,700 p.e.‟s $699
▬ LinkedIn: Jan Wallen
 Jan@LinkedInWorks.com

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Good luck!

Mike Lorelli
CEO and Chief Passionate Officer
WaterJel Technologies, Inc.
(201) 806-3110
MLorelli@WaterJel.com

45

Michael K. Lorelli

Mike Lorelli‟s 30-year career spans a wide range of consumer products and services, and B2B
categories, with responsibilities for both domestic and international units. His years as a line-
operating manager have largely been with Fortune 100 companies: PepsiCo and Bristol Myers
Squibb. For the last decade, as CEO, he has led revitalizations and turnarounds for private
equity firms. For example, Dr. John Rutledge, Chairman of Rutledge Capital, will say: “I would
invade China with Mike alone in a rubber boat.” He is presently CEO of Carlstadt, NJ based
WaterJel Technologies, the leader in burn care products. WaterJel is a Riverside Company.
Previously, he led the growth of Latex International, a Pouschine-Cook company. Mike has also
led CEO engagements for Rutledge Capital, and Cerberus.

Mike‟s assignments at PepsiCo included Executive Vice President – Marketing, Sales and R&D
for Pepsi-Cola North America, President of Pepsi-Cola East, a $1.5 Billion operating company,
and President for Pizza Hut‟s International division where he led a “global or bust” charge,
resulting in expanding the Company‟s presence from 68 to 92 countries, surpassing McDonalds
in country count. During his PepsiCo tenure, he is given credit for authoring the soft drink
company‟s “Big Event Marketing” strategy, which coupled the product with leading- edge events
Michael K. Lorelli in entertainment, sports, consumer electronics, movies and home video.
15 Norman Lane
Darien, CT 06820
Office: 203 655-2444
Mike holds a Bachelor of Engineering degree in Industrial Engineering from New York University,
FAX: 203 655-6916
and an MBA in Marketing from NYU‟s Stern Graduate School of Business. He has traveled to 54
Email: miklorelli@aol.com
countries, is an avid runner, claims to excel at no sport, is an active private pilot, member The
Website: www.Lorelli.net
CEO Trust, former member of YPO, and author of the childrens‟ best-seller “Traveling Again,
Dad?” with profits donated to childrens‟ charities. Mike is a Director of iMedicor (Ticker: VMCI).
He resides in Darien, CT with his wife Nancy.

46

Execu Net P.E. 101 Mike Lorelli

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