ian armitage chief executive mercury private equity private equity

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Ian Armitage Chief Executive Mercury Private Equity Private Equity

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  • Ian ArmitageChief Executive Mercury Private EquityPrivate Equity

  • Dissecting Private EquityWhat is Private Equity?Why Should Your Clients Do It?Why Should Your Clients Not Do It? Investment Routes Have new investors missed the boat?

  • What is Private Equity?Venture CapitalLeveraged Buy-out (LBO) Business

  • Venture Capital R&D Start-up Early StageExpansion Late StageExpansion Pre- flotationSeedRisk

  • Luminar - Venture CapitalOperator of theme bars

  • The LBO BusinessTurnaround Replacement capital Institutional buy-out Management buy-in Management buy-outSeller__________ Orphan Assets _____________ Business with no Owner Succession __ManagementNoNoYes but supplementRisk

  • Dechra - An LBO From Gehe AGThe UKs leading distributary vetenary drugs

  • Sources of Capital & Risk Profile

  • The Case For Private EquityPrivate equity out performs over the long term Source: WM Company/BVCA Performance Measurement SurveyIt is a loosely-correlated asset May be able to increase performance without materially increasing risk

  • 1999 Private Equity Returnsper annum %3 years5 years10 yearsPrivate Equity*31.127.220.0FTSE All-Share20.420.314.9FTSE 100 22.2 21.8 15.6FTSE SmallCap 15.5 15.6 10.8Source: BVCA WM Company* median return

  • 1999 Private Equity Returnsper annum %3 years5 years10 yearsTotal31.127.220.0Early Stage15.816.68.7Expansion Capital 30.3 26.9 12.6Mid MBOs 19.9 22.1 17.3Large MBOs 31.0 26.4 22.9Source: BVCA WM Company

  • The Case Against Private EquityHigh RiskLow Liquidity

  • RiskSingle company risk: Leveraged} Young}Moderate to high Smaller}10 Year Record

    Loss Ratio 7%

    Returns 46.8% paPortfolio risk:Low

  • 500Liquidity

  • LiquiditySelf-liquidatingGrowing secondary market

  • Other IssuesMFRValuations

  • Private EquityAll UK pension funds should consider an allocation to private equity

  • How do you invest in private equity?DirectPrivate Equity ManagerFund of FundsQuoted Investment Trust

  • How do you select a managerIn the normal way: People Performance Processes Philosophy/Strategy

  • Have Investors Missed The Boat?

  • Europe Is Restructuring

  • PII Group

  • E-Commerce Dot.comClassic internet company -usually retail or portals.Amazon.comQXL.comFreeserveNew ChannelClicks and mortar.New secondary on-line revenue streams.Tesco, Dell, Clinphone*MapQuest.com*, 1-800 Batteries*, Trados*Global People Network*FulfilmentBricks and mortar.Outsourced back office (e.g. logistics) of Dot.com businesses.Bertrams*Irish Express CargoBraitrim*WincantonInfrastructureBricks and mortar.Suppliers of equipment, software, services etc to Dot.com businesses.IBMCISCOBT, Vitria*Agora*

  • Bertram Group

  • Private EquityLong-term out-performanceRisk & liquidity concerns are overplayedUse to increase returns without materially affecting riskExpert funders of change at a time of restructuring

  • Definition of Terms

    Investment Return

    Detailed Schematic of MPE Investment Process

    MPE Organisation Structure

    Extract from MPE Business Planning Process

    Appendices

  • Venture Capital:Early Stage (Seed to Start-up): Capital for businesses in the conceptual stage or where products are not developed and revenues and/or profits may not have been achievedExpansion Late Stage (First stage to Mezzanine): Growth or expansion capital for mature businesses in need of product extension and/or market expansion. Sometimes referred to as development capital

    Buy-out Capital: Equity capital for acquisition or refinancing of a larger company

    Restructuring Capital: New equity capital for financially/operationally distressed companies

    Mezzanine (/subordinated) debt:Intermediate debt capital between equity and senior debt for acquisition or refinancing transactionsThe debtholder participates in equity appreciation through conversation features such as rights, warrants or options

    Carried Interest (carry): This represents the share of a private equity funds profit that will accrue to the general partners

    Fund of funds: Private equity funds whose principal activity consists of investing in other private equity funds. Investors in fund of funds can thereby increase their level of diversification

    General Partner (GP) /Sponsor: Managing partner of a Limited Partnership, who is responsible for the operations of the partnership and, ultimately any debts taken on by the partnership

    Hurdle Rate (or Preferred Return): A hurdle return allows investors to get preferential access to the profits of the partnership. In absence of reaching the hurdle return, the general partners will not receive a share of the profits

    Limited Partnership: Most private equity firms structure their funds as limited partnerships. Investors are the limited partners and private equity managers the general partners

    Appendices - Definition of Terms

  • Appendices - Investment ReturnPrivate equity investment return in a partnership typically follows a J-curve e.g. in the early years while investments are being made a Private Equity fund will show negative returns.

  • Growth buy-out 105m

    Support Services Sector

    Deal introduced by primary contact

    Initial Appraisal:Market and technology leader, under managed, requiring first class CEO

    Conversion:British Gas wantedspeedy and comprehensiveresponse - certainty

    Diligence:3 month exercise: key issues werelong term contracts, intellectual property and R & DNegotiation &Structure:Transneft contract

    Exit:1) Sale to leading oil-services group:Dresser, SchlumbergerBaker Oil & Tool2) IPO

    Business PlanCore business- improve utilisationAcquisition- acquire Pipetronix/RosenNew Products- fitness for purpose servicesOrganisation- make market facing, change cultureFinancials- double EBIT in 3 years

    Appendices - Detailed schematic of MPE Investment Process: PII

  • Appendices - MPE Organisation Structure

  • Appendices - MPE Business Planning ProcessProcess: The investment process is different to that employed by public security investors. The best is data driven, disciplined and designed to minimise judgement calls with the intent to add value. Here is the MPE process: Deals do not flow

    Requires consistentmarketing

    Normal disciplines

    Get the first callKey skill

    Decision to allocate resource

    Win confidence of counterpartiesAn important skill. Not all value items measured in S agreementLegal completion output is:

    Shareholders

    Employment contractsBanking documents

    Sale & Purchase agreement

    Warranties & Indemnities

    Other contracts e.g. supply contracts

    Management incentivesComplete through strategy review and business planIdentify and effect improvements in operationsDetailed exercise for exit, c.2 years ahead of timeEither float, trade sale or recapitalisationCombine internal resources

    People

    Accounting system & controls

    Market positiondynamics

    Technology

    Facilities

    Environmental

    Insurance

    Legal

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