1 / 56

The Private Equity Play

The Private Equity Play. Mike Lorelli. EBITDA. E arnings B efore: I nterest T axes D epreciation A mortization. Idea. Up & Running. Mature. Trailing EBITDA. VC. PE. Stages. Agenda. History Returns Where is the money coming from? Terminology

lew
Download Presentation

The Private Equity Play

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Private Equity Play Mike Lorelli

  2. EBITDA Earnings Before: • Interest • Taxes • Depreciation • Amortization

  3. Idea Up & Running Mature • Trailing EBITDA VC PE Stages

  4. Agenda • History • Returns • Where is the money coming from? • Terminology • Where they are; where their companies are • The p.e. model • Some names • p.e. compensation • Results and Performance Measures • “The Funnel” • Management Compensation • The Return Drivers • The p.e.’s Plan • In The News • Importance of a good LinkedIn profile, and resume

  5. Worse than real estate brokers in Darien, CT • 1977: Kohlberg, Kravis, and Roberts leave Bear Stearns, forming KKR • 1978: 80 ‘Leveraged Buyout Groups’ in US • 2012: Estimated 2,800 around the world • 1,800 U.S.

  6. Value Creation

  7. 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. Returns Well Out-Performed S&P

  10. Returns Comparisons

  11. Percentage of Capital by LP typeLBO Funds

  12. The “Vintage Year”

  13. ‘Add-On’s now fully half of Deals

  14. LP’s pushing for Exits (i.e. distributions)

  15. 1/4th of Exits are now to another p.e. firm 16

  16. Geography

  17. Many ways to categorize the 1,800 • By size • Large $1 billion+ revenues • Mid-market > $150 million • Small < $150 million • By sector specialty • Health care • Consumer • IT • Financial services • etc. • Net-net, sector first; and mid-market; not lower or upper

  18. Excellent

  19. Don’t unnecessarily limit where you can play 20

  20. Top Fund Managers

  21. Top 12 p.e. Investors in 2012 22

  22. Purchase 7.0 X $9m = $63 Cash 27 Debt 36 Sale 8.0 X $14.1m = $113 Debt 32 Proceeds 81 The LBO model

  23. Purchase 7.0 X $9m = $63 Cash 27 Debt 36 Sale 8.0 X $14.1m = $113 Debt 32 Proceeds 81 = 3.0 X cash-on-cash The LBO model

  24. The p.e. / L.P Model Pelosi 2008 Fund Sale A D F C E B F J C I D A G Purchase H B E

  25. The p.e. / L.P Model Pelosi 2008 Fund Sale A D F C E B F J C A D G I H B E Purchase Invest Harvest

  26. A lot of fish vs. Fortune 1,000 and Russell 2,000 28

  27. p.e. Compensation • 2% of managed capital • pays salaries, rent, and nominal bonuses • 20% carried interest from profits on distributions* * pre-Obama

  28. Performance Measures GoodGreatAwesome • IRR 20% 28% 33+% • Cash-on-cash return 2X 3X 5+X • Hold period 8+ years 6 years 3- years

  29. Buyout Fund Sample

  30. A typical 10 company fund result • 2 out-of-the-park • 1 triple • 2 doubles • 3 singles • 2 the bank took the car keys

  31. Riverside Company • 20% of the invested money will lost • If less, we’re not taking enough risk • Not sweat the duds, but rather the ones we missed

  32. The Funnel 300 teasers 100 books 7 LOI’s 2 due diligence 1 close 20 Meetings with Mgmt

  33. Options for Executives Working with Private Equity Operating Partner salary+bonus+carry Portfolio Company Managementsalary+bonus+equity Fund Commit- ment Deal Executive / Executive in Residenceretainer+upside Advisor expenses+upside Expert Network / Interim Executive hourly comp Executive’s Income David Teten, www.Teten.com/executive

  34. Who the p.e. wants to meet Target-Driven Deal Exec Thesis-Driven Deal Exec Deal Resource Job Seekers Source: Andy Thompson, Notch Partners

  35. Management Compensation • CEO $200K - $350K 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

  36. The Three Primary Return Drivers • Leverage • Value Improvement: EBITDA Growth • Exit Multiple Expansion Courtesy: Wind Point Partners

  37. The Deal

  38. 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

  39. Project NTL 100 Day Plan • Full Court Press on Basic Revenue Projects • GROWING THE BASE BUSINESS- will be relatively easy for an organization in this space that focuses, prioritizes and executes. The ISI partners have for the last two years been focused and spending the majority of ISI's time and resources on acquisitions, strategic alliances, new ventures, etc and have not focused on ISI core brands and business. To date none of these ventures have been successful but have utilized significant management time and expense. A sharp focus on the core business / brands with the some advertising/ promotion and introduction of new products in these brands will result in strong growth. In addition, providing more products and new and improved products to existing customers and improving current service levels and fill rates to existing customers will definitely provide positive growth. New domestic customer opportunities will also be a focal point. • INTERNATIONAL-there is still currently a strong demand for ISI products, especially Twin Lab in the International arena. Again, during the last two years because of the intended Pharmaton acquisition, ISI basically ignored existing International distributors, never hired a new head of International sales and never entertained new distributors that contacted us for our product. ISI is now beginning to refocus on that area with a European head of Intl sales. More resources and specific plan for Int'l growth on a number of fronts could result in strong and quick Int'l growth. • HERBS AND TEAS- these brands have essentially been allowed to run themselves for the last three years. Despite that they have only declined slightly in revenues. Lack of focus and strategy are the primary reasons for these declines. Reversing these revenue declines and growing these brands, which are both in comparatively active and hot growth areas, is not that difficult. We need to hire a brand manager to work with our customers and suppliers to revitalize and contemporize these lines. Both Alvita and Nature's Herbs are well recognized and trusted brands that still have a loyal following. We need to add some new more popular flavors which customers have been asking for and update our packaging. We can also easily look to expand the channels of distribution for these brands.

  40. 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 • 30% IRR • 3.7x cash-on-cash return • CEO • Assuming • CEO co-invest of $750k • CEO gets 7.5% of common • CEO receives over $10 million Courtesy: Wind Point Partners

  41. At CloseY1Y2Y3Y4Y5 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 Components of Equity Value Creation As EBITDA grows, the value of the enterprise increases. At the same time, free cash flow reduces debt. $ millions Courtesy: Wind Point Partners

  42. 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

  43. WSJ

  44. Private Equity Analyst- November 2012

  45. Private Equity Analyst- November 2012

  46. The Trades

More Related