berkshire partners hbr case
TRANSCRIPT
Corporate Strategy of Berkshire Partners
- Group 5
Ajit (B10065)
Himanshu (B10080)
Pinaki (B10095)
Shriya (B10110)
PE Industry
Raised money from investors Invested in portfolio companies Provided returns on sale of portfolio
companies MDs served as Funds General Partners
(GPs) : Active Outside Investors : Passive
PE Industry
Early History Conglomerate business, out of favour in 1970 Pension funds allocate more funds to PE and Hedge
funds New source of funding
1980s Leverage Buyout Revolution LBOs became popular
• Small Equity and high debt (high yield bond market)
Debt financing imposed financial discipline• Not covering debt risked moving to bankruptcy• Robust monitoring tool for each portfolio company
– Value Added boards– Tranparent financial reporting
PE Industry
1990s Industry Evolution LBO Regulations Industry moved to Advisory services
• Revenue growth, Margin expansion and Synergistic acquisitions
• Venture capital in technology and biotechnology
Renaissance and diversification in 2000s Abundant in expensive debt High involvement in M & A activities (25%) Launch of specialised funds Diversification into hedge funds
PE Industry
Emergence of Club Deals Many PEs joint hands to take on larger
targets for portfolio diversification
Founders sell General Partners stakes Major restructuring in PEs
The PE Industry in 2008 AUM is $ 2.5 trillion Collapse of many big banks stalled the PE
fundraising
Background of Berkshire Partners
First fund in 1984 5 Founding MDs divided stakes equally Invested in over 90 companies Capital came from large institutional
investors “Stay small” philosophy “Provide constantly superior returns to our
investors”
The Investment Process
Sourcing Deals : Targeted companies with EV of $200mn to
$2bn Invested $50mn to $500mn of equity in a
company and borrowed the rest Generalist equity investor – not separated by
sector or region 40% in retail, 26% industrial sector, 25%
business service
On POINT initiative
Formalize best practices in developing relationships within industry
Developing sector expertise Staffing across deals remained flexible Still needed more degree of industry
specialization
Analyzing deals
Highly selective investment process Consensus method of deal analysis (Monday
morning Firm Meetings) Multiple MDs worked on the same deals to
seize it Majority voting by the staff before acquiring a
company A conservative approach
Adding Value: Its reputation was important in bidding process Invested sufficient time and resource to help
portfolio companies improve performance
Existing Investments Held portfolio companies for 3-7 yrs Exited a high proportion through private sales Exit was dependent on the capital markets
which provided financing for buyers
Economics
Fees Charged annual management fee of 2% of
AUM Carried interest was the principal longterm
incentive fee
Returns Annualized net returns after fees were 29%
apprx The market average was 20%
Stockbridge
Recent Diversification: 2005 Internal public securities investment fund Investment strategy:
Publicly traded securities in 10-20 U.S. firms Period: 3-5 years
Not deep value investors Not high value, short term
Stockbridge
TEAM Led by Robert Small By 2008:
• Was a growing team- familiarity with firm’s culture, strategy & processes
• Had solid investment record
FUNDING Till now Berkshire : sole investor Future: raising capital from LP’s
Recent changes at Berkshire
Institutionalization of best practices Centralized corporate functions in
business development, legal, human resources and capital markets
Executive oversight committees Recruitment
The Board room of Berkshire Partners
Issues on the table Continued evolution of firms governance model Future challenges regarding professional
development Retaining Berkshire’s culture amidst expansion Integration of Stockbridge
• Required material investments and new business effort• When and how to begin marketing public securities
Alignment of Berkshire’s, Stockbridge’s & fund Investor’s teams