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PRIVATE EQUITY

PRIVATE EQUITY. Jay Jodway, Morgan Truscott March 20, 2006. What is Private Equity?. Large pool of capital Buy down-but-not-out companies Fix those companies Lower their cost of capital Improve operations. Who’s investing?. Wealthy Individuals Pension Funds

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PRIVATE EQUITY

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  1. PRIVATE EQUITY Jay Jodway, Morgan Truscott March 20, 2006

  2. What is Private Equity? • Large pool of capital • Buy down-but-not-out companies • Fix those companies • Lower their cost of capital • Improve operations

  3. Who’s investing? • Wealthy Individuals • Pension Funds • Provide 40% of the $600-800b in PE funds • Corporate pensions with big stake in PE: • Eastman Kodak - 20% • Delta - 13% • GM - 10%

  4. Big Business • Industry controls $600b-800b in capital • The big three employ > 907,000 people • Carlyle • KKR • Blackstone Group • Annual returns for PE > 20% • S&P 500 averages about 5%

  5. Dunkin’ Brands Inc. Neiman Marcus MGM Toy ‘R’ Us AMC Entertainment Linen ‘N Things Fairmont Hotels MEMC Electronic Materials Seagate Technology TRW Automotive Burger King PE Big Acquisitions

  6. Barbarians at the Gate • RJR Nabisco (1989) - $31b • Hertz (2005) - $15b • TDC (2005) - $12b • Sungard Data Systems (2005) - $11.4b • Browning-Ferris Industries (1999) - $9.6b • Qwestdex (2003) - $7.1b • Toys ‘R’ Us (2005) - $6.6b • Neiman Marcus Group (2005) - $5.1b • Metro-Goldwyn-Mayer (2005) - $4.9b

  7. Investment Bank Payday • How I-bankers benefit • Collect fees for: • Brokering or advising on tender offers • Underwriting Bonds • Arranging bank debt to pay acquisition costs • Selling off assets to pay back debt • Taking target firms public again • Fees collected in 2005 > $11.8b • $35b raised from Reverse LBOs • Blackstone paid out > $358m to I-banks in 2005

  8. IPO Outlook • Reverse LBO • Bought out company taken public again • 40% of all IPOs in 2003 and 2004 • IPOs returning 18% in 2005, 10% so far in 2006 • Profitless IPOs are 40% vs. 80% during tech bubble • Avg. age of IPOs up to 15 in 2002, vs. 4 in 1999

  9. MONEY AND FREEDOMThe benefits of private equity

  10. MONEY “It’s like Moses brought down a third tablet from the Mount – and it said ‘2 and 20’”

  11. Money • Partners typically receive… • 2% of assets as management fee • 20% of returns • Tax benefit: 15% capital gains vs. 35% • Executive compensation • Allowed to purchase stake in company, sometime as much as 20% • Tied to turnaround success • Long term success, not quarterly results

  12. FREEDOM “It’s the difference between driving a speedboat and driving an ocean liner. When you want to turn a speedboat, you turn the wheel. For an ocean liner, you have to plan two days ahead.”

  13. Freedom • Less annoyance from SOX • Public CEOs may have to reveal compensation • Less costs • Fundamental nature of PE is different • CEOs have a freer hand • Don’t have to answer to shareholders • Can make tough but necessary decisions • Focus on long-term success, not quarterly • No activist hedge funds

  14. Lou Gerstner, former IBM CEO and chairman of the Carlyle Group, on:Why Private Equity • Restructuring • Impact if information and networking • Excess Capacity • Eliminate dysfunctional short-term focus • Longer time frame - build value over time • Direct alignment of shareholders and management

  15. Careers “Managers now understand that involvement in the private-equity world is potentially more interesting, more lucrative, and less of a hassle,” • PE firms don’t recruit on campus • PE seen as the new fast track to owning your own shop • Private Equity is hot for B-schoolers • In the 1980’s it was I-Banking • In the 1990’s it was tech-related venture capital

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