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Gain insights into Euro LBO transactions, private equity structures, investor bases, and deal economics in this comprehensive market overview. Learn about transaction types, funding plans, and the role of private equity firms in M&A. Discover how different investor bases impact leveraged acquisition markets.
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Sponsor Based Leveraged AcquisitionMarket Overview Joseph V. Rizzi Amsterdam Institute of Finance November, 2009
EURO LBO Volume € # 200228.4 75 2003 29.5 91 2004 44.4 127 2005 103 192 2006 115.8 250 2007 140 274 2008 49 103 2009 2.26 14 (through August) Source: S&P LCD Amsterdam Institute of Finance November 2009
Transaction Types • Sponsor to Sponsor • Club Transactions • Dividend Recapitalizations • Public to Private • Private Company Sales • Middle Market Amsterdam Institute of Finance November 2009
A Typical Private Equity Structure Diagram US Investors Fund manager US Exempt Investors General Partner Carried interest partner LP A LP B LP C Non-US Investors FUND Nominee Investment Investment Investment Investment CLO Hedge funds High Yield Investors Leverage finance syndicate participants Hold Co. Bank Hold Co. Mezzanine Investors FLL Bridge finance Syndicate participants Operating Entity SLL Amsterdam Institute of Finance November 2009
Private Equity LBO Transaction Economics - $ millions - NowIn 5 yrs EBITDA of Acquired Firm 125 188 (c) Sale value @ 8 x EBITDA 1,000 1,500 Financing Plan: Equity @ .20 200 Debt @ .80 800 Total Capital Raised 1,000 Fees 30 50 Net Sale Proceeds on Exit 1,450 Original Debt 800 Less: Debt pay down over 5 years 260 Debt at end of 5 years -540 540 Return of Original Equity -200 Net gain to be allocated 710 10% to mgmt options 71(a) 20% to general partner 142 70% to limited partners 497 (b) Total 710 • Share to CEO 2% points or $14.2 x 1 = $14.2 • Share to next 4 senior officers 1% points or $ 7.1 x 4 = $28.4 • Share to next 8 key players 1/2% points or $ 3.6 x 8 = $28.4 • Total Management share $71.0 (b) Equals a 28.4% compound annual rate of return on investment. (c) Assumes $12 taken out of cost structure immediately and 6.5% growth/year in EBITDA thereafter. Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions Transaction Harvard Business School case 9-206-1 Rev 10/16/06 Amsterdam Institute of Finance November 2009
Private Equity Value Added • Increased Debt (lower taxes) • Bargain Purchase • Operating Improvements • Improved Governance • Bondholder Value transfer • Opportunistic Sale Amsterdam Institute of Finance November 2009
Movement on Transactions and Fundraising 2003-2007 (U.S.) 20032007 Fundraising $30B $244B Purchase Price Multiple 7X 9.6X Funded Debt EBITDA Multiple 4.6X 6.2X LBO Volume $47B $433B Average Deal Size $716M $2.1B Percent of P2P LBO Volume 15% 45% Amsterdam Institute of Finance November 2009
Different Investor Bases – Loan Market • Banks (Relationship Driven) • Typically invest in the pro-rata portion of bank facilities (Revolver and Term Loan A) • Seek first priority claim on assets • Preference for price stability over liquidity • Institutional Investors (Yield Driven) • Primarily looking for high coupon/yield. Embedded option and subordination translate to higher coupons • Cross over investors (relative value between bank loans and high yield bonds) • Hedge Funds (unknown impact) Amsterdam Institute of Finance November 2009
Amsterdam Institute of Finance November 2009 Amsterdam Institute of Finance November 2009
Top Bookrunners for Leveraged Loans * Leveraged Loan Commitments**$bn (figures show holdings as percentage of original face value) Deutsche Bank 96 Citigroup 97 Goldman Sachs 95 Credit Suisse 94 Merrill Lynch 97 JP Morgan 95 Morgan Stanley 91 Lehman n.a. RBS 95 Barclays 98 UBS 96 Credit Agricole 94 HSBC 98 BNP Paribas 92 Societe Generale 96 ** Including both funded and unfunded commitments. Exposures and writedowns are net of hedges. Figures as of Dec. 2007 except Goldman, Lehman and Morgan Stanley which are Nov 2007 Deal ValueNo. of ($bn)Deals JP Morgan 274.8 564 Bank of America 177.4 656 Citigroup 150.3 282 Credit Suisse 113.8 241 Deutsche Bank 104.5 172 Goldman Sachs 100.8 177 Lehman Brothers 73.1 146 Merrill Lynch 69.2 150 RBS 65.7 129 Wachovia 62.7 269 *Global syndicated since Jan 2007 to date. Source: Dealogic; Standard & Poor’s LCD Amsterdam Institute of Finance November 2009
Fixing the Broken Deal – Price and Structural Flex Increase spread Original issue discount Eliminate PIK Reduce debt Add a subordinate tranche More equity Add covenants Reduce Price Seller Paper MAC Amsterdam Institute of Finance November 2009
Disclosure This information has been prepared solely for informational purposes and is not intended to provide or should not be relied upon for accounting, legal, tax, or investment advice. The factual statements herein have been taken from sources believed to be reliable, but such statements are made without any representation as to accuracy or completeness. Opinions expressed are current opinions as of the date appearing in this material only. These materials are subject to change, completion, or amendment from time to time without notice and CapGen Financial is not under any obligation to keep you advise of such changes. All views expressed in this presentation are those of the presenter, and not necessarily those of CapGen Financial. Amsterdam Institute of Finance November 2009
