private equity ppt
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BYVIJAY MEHTA
Private Equity
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Dissecting Private Equity
What is Private Equity?
Why Should Your Clients Do It?
Why Should Your Clients Not Do It?
Investment Routes
Have new investors missed the boat?
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What is Private Equity?
Venture Capital
Leveraged Buy-out (LBO) Business
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Venture Capital
Description
Application
R&D
Prototype
Sells equityto provethe idea
Start-up
Pre-operational
Product development and market testing
Early Stage
Expansion
Business is operational
Hire employees,buy equipment, fund working capital
Late Stage
Expansion
Initial sales encouraging
Workingcapital
Debt-ledfinance forfixed assets
Pre- flotation
Fundingallows plannedflotation
Working capital and second-generation product
Debt-ledfinance forfixed assets
Seed
Idea
Sells equityto investigatethe idea
Risk
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Luminar - Venture Capital
Operator of theme bars
0
5000
10000
15000
20000
25000
91 92 93 94 95 96 97 98 99 2000
PBIT
€000
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The LBO Business
Turnaround Replacement
capital Institutional
buy-out Management
buy-in Management
buy-out
Seller __________ Orphan Assets ___________
__ Business with no Owner Succession __
Management
Receiver
Desperate
Definitely Not
Family Shareholder
Regulatory Sale
Incumbent No No Yes but supplement
Risk
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Dechra - An LBO From Gehe AG
The UK’s leading distributary vetenary drugs
0
2000
4000
6000
8000
10000
12000
14000
96 97 98 99 2000
PBIT
€000
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Sources of Capital & Risk Profile
* Temporary phenomenon
LBOs Pre-flotation Expansion Capital
Start-UpSeed
Private Investors “Angels”
Specialist VCs
Public Markets*
Generalist VCs
Public Markets*
Generalist VCs
Investment Banks
Fund Managers
Buy-out Firms
Investment Banks
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The Case For Private Equity
Private equity out performs over the long term
Source: WM Company/BVCA Performance Measurement Survey
It is a loosely-correlated asset
May be able to increase performance without materially increasing risk
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1999 Private Equity Returns
per annum % 3 years 5 years 10 years
Private Equity* 31.1 27.2 20.0
FTSE All-Share 20.4 20.3 14.9
FTSE 100 22.2 21.8 15.6
FTSE SmallCap 15.5 15.6 10.8
Source: BVCA WM Company
* median return
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1999 Private Equity Returns
per annum % 3 years 5 years 10 years
Total 31.1 27.2 20.0
Early Stage 15.8 16.6 8.7
Expansion Capital 30.3 26.9 12.6
Mid MBOs 19.9 22.1 17.3
Large MBOs 31.0 26.4 22.9
Source: BVCA WM Company
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The Case Against Private Equity
High Risk
Low Liquidity
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Risk
Single company risk:
Leveraged } Young } Moderate to high Smaller }
10 Year Record
Loss Ratio 7%
Returns 46.8% pa
Portfolio risk: Low
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50
0
The cash flow for an investor in a private equity funds follows a J-curve
Years
Cas
hflo
w o
f in
vest
men
t £
1 2 3 4 5 6 7 8 9 10
Liquidity
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Liquidity
Self-liquidating
Growing secondary market
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Other Issues
MFR
Valuations
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Private Equity
All UK pension funds should consider an allocation to private equity
5% to 10% of equities
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How do you invest in private equity?
Direct
Private Equity Manager
Fund of Funds
Quoted Investment Trust
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How do you select a manager
In the normal way:
People
Performance
Processes
Philosophy/Strategy
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Have Investors Missed The Boat?
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Europe Is Restructuring
0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35%
UK
USA
NL
Scandinavia
France
Italy
Germany
Unquoted investment as % of GDP Source: EVCA
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PII Group
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E-Commerce
Dot.com
* Portfolio company of Mercury Private Equity
Profile
Example
Classic internetcompany -usuallyretail or portals.
Amazon.comQXL.comFreeserve
New Channel
‘Clicks and mortar’.
New secondary on-line
revenue streams.
Tesco, Dell, Clinphone*MapQuest.com*, 1-800 Batteries*, Trados*Global People Network*
Fulfilment
‘Bricks and mortar’.
Outsourced back
office (e.g. logistics)
of Dot.com
businesses.
Bertrams*Irish Express CargoBraitrim*Wincanton
Infrastructure
‘Bricks and mortar’.
Suppliers of equipment, software, services etc to Dot.com businesses.
IBMCISCOBT, Vitria*Agora*
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Bertram Group
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Private Equity
Long-term out-performance
Risk & liquidity concerns are overplayed
Use to increase returns without materially affecting risk
Expert funders of change at a time of restructuring
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Definition of Terms
Investment Return
Detailed Schematic of MPE Investment Process
MPE Organisation Structure
Extract from MPE Business Planning Process
Appendices
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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 achieved– Expansion 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 transactions– The 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 fund’s 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
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Appendices - Investment Return
6.5%
15.5%
20.0%
-2.0%-1.0%
13.5%
14.5%
-5.0%
-10%
-5%
0%
5%
10%
15%
20%
25%
0 1 2 3 4 5 6 7 8 9 10 11 12 13
YearYear
Illustrative data onlyIllustrative data only
IRRIRR
Portfolio construction
Harvesting
Value creation
Private 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.
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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 wanted
speedy and comprehensive
response - certainty
Diligence: 3 month exercise: key issues were
long term contracts, intellectual property and R & D
Negotiation &
Structure: Transneft contract
Exit: 1) Sale to leading oil-services group: Dresser, Schlumberger
Baker Oil & Tool
2) IPO
Business Plan Core business - improve utilisation
Acquisition - acquire Pipetronix/Rosen
New Products - fitness for purpose services
Organisation - make market facing,
change culture
Financials - double EBIT in 3 years
Appendices - Detailed schematic of MPE Investment Process: PII
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Appendices - MPE Organisation Structure
R ich a rdM a th e w s
B enH e w e tson
Je re m yS h a rm an
S u p p o rt S e rv ic es
T h ie rryd e p an a fleu
N ic kM a rtin
M e d ia
Jo n a th onR e g is
T re vo rB a y le y
IanA rm ita ge
In fo rm a tio n &C o m m un ica tion
T e c h n o lo gy
T h o m asM ita rd
L in d sayD ib d e n
H e a lth c a re
S p e c ia lis tS e c to rT e a m s
R o m anP e lka
A n d re wH a y d en
T B A
N ic kT u rn e r
L B O
Jo a ch imP e ip e r
T re vo r B a y ley
F ra n k fu rt
G e n e ra lis tT e a m s
P h ilip p eS ch w a lb e r
T B A
P h ilip p e P o lle t
L isaS to ne
L o n d on
B u s in e ssA n a lyst
P o o l
F ra n ce s Ja cobH e a d o f Inve s tm e nt
Ia n A rm ita geM a n a g in g P a rtn e r
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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:
SELL!Deal
SourcingExit
PlanningOperationsInitial
AnalysisAppraisalDiligence Strategy
Negotiation Structuring Completion
Deals do not flow
Requires consistentmarketing
Normal disciplines
Get the first call
Key skill
Decision to allocate resource
Win confidence of counterparties
An important skill. Not all value items measured in £££’S agreement
Legal completion output is:
Shareholders
Employment contractsBanking documents
Sale & Purchase agreement
Warranties & Indemnities
Other contracts e.g. supply contracts
Management incentives
Complete through strategy review and business plan
Identify and effect improvements in operations
Detailed exercise for exit, c.2 years ahead of time
Either float, trade sale or recapitalisation
Combine internal resources
People
Accounting system & controls
Market positiondynamics
Technology
Facilities
Environmental
Insurance
Legal