rsm international conference, singapore 2007 rsm mcgladrey inc. and the private equity industry jeff...

RSM International Conference, Singapore 2007

RSM McGladrey Inc. and the Private Equity Industry

Jeff Johnson, Executive Managing DirectorTom Dobosenski, Executive Vice-President, Business Consulting


AgendaAgenda

• Overview of the PEG market• TSS practice in the states• PEG international strategies and activities• Questions


United States market definition – summary United States market definition – summary

Number of Targeted

Private Equity Firms

Portfolio Holdings

(Number of Companies)

Summary – U.S. 1,237 7,422

PEG Clients – RSM McGladrey

174 480


Market definitionMarket definitionPortfolio Funds under Percentage

# of Firms Holdings Management CountryUS Region (Buyouts/PEGS) (# companies) ($000,000) Coverage

NortheastNY 352 2,112 139,418.0$ 29.3%CT 91 546 33,206.0 7.0%NJ 41 246 11,817.0 2.5%MA 81 486 32,806.0 6.9%

565 3,390 217,247.0 45.6%Western US

CA 228 1,368 78,515.5 16.5%WA 15 90 3,655.0 0.8%OR 5 30 1,326.0 0.3%

248 1,488 83,496.5 17.5%Midwest

IL 146 876 41,884.1 8.8%MN 21 126 5,113.0 1.1%MI 31 186 9,972.0 2.1%MO 11 66 3,450.0 0.7%IA 6 36 895.0 0.2%

215 1,290 61,314.1 12.9%Southwest

TX 109 654 29,675.0 6.2%AZ 9 54 2,301.4 0.5%

118 708 31,976.4 6.7%Southeast

NC 16 96 3,746.0 0.8%SC 3 18 900.0 0.2%VA 19 114 4,460.0 0.9%GA 18 108 3,875.0 0.8%FL 35 210 10,743.0 2.3%

91 546 23,724.0 5.0%

Grand Totals 1,237 7,422 417,758.0$ 87.7%

U.S. PEG Profile


Private equity groups (PEGs): Private equity groups (PEGs): Key points about the market Key points about the market

• PEGs are national in scope (usually concentrated in a geography)– Many have multiple deal sourcing and deal making locations.– Owned or targeted portfolio companies are located throughout

the U.S. and internationally.– Example clients:

– American Capital – eight U.S. and two international offices; 160 portfolio companies.

– Audax Private Equity – two U.S. offices; 34 transactions over two years; portfolio companies across the country.


PEGs: Key points about the marketPEGs: Key points about the market

• Significant flow of capital into the private equity space — in conjunction with the PEG national/international “make money wherever you can” philosophy — creates a widely dispersed market opportunity.

• Size, complexity and geographic dispersion of the market sector demands a planned and sophisticated level of relationship management and coordination.

• While transaction support services (TSS) and due diligence is the typical service line entry into a private equity entity, traditional firm services generate another two to three times the annual revenue developed by TSS.



• PEG corporate dealmakers and portfolio managers want to be served seamlessly through a key “relationship point” — addressing both service needs and the ability to resolve issues quickly and efficiently.– Flexibility in our relationship management and service delivery

processes is important, as many PEGs have unique desires and expectations on how they want to be served.

– Additionally, it is critical to have dedicated audit and tax expertise, such as purchase accounting and deal structure tax capabilities, in proximity to portfolio company locations.



• Because the private equity sector is cyclical, continued growth is dependent upon our ability to develop and support non-traditional services beyond TSS, audit and tax.– A Corporate Analytics Practice — including M&A, reverse due diligence,

corporate finance and turnaround services — leverages the skills of many TSS personnel and allows the firm to maintain core personnel, market share and profitability during an economic downturn.

– Requires investment, structure decisions, business plan development, methodology design and rollout and staffing plans.



• Client service personnel indicate the keys to capture market share include: – Treating the PEG entity as a national/international organization

without regard to internal firm boundaries.– Nationally-focused practice with international capabilities.– Dedicated resources (subject matter expertise).– Ability to leverage resources and knowledge — including

industry expertise — across the firm.– Speed to market – in the context of service delivery.



– Rapid response to service needs and timelines.– Dedicated teams of professionals in TSS, audit and tax.– Consistent work product from all locations including

international.– Audit and tax providers for the portfolio companies who know the

technical aspects and capital structure issues that are common in the PEG arena .

– Middle-market knowledge and expertise can be a differentiator.– The PEG must feel that they are the ultimate client.



• Some private equity corporate dealmakers show high interest in sourcing deals. – Provides entrée to key decision makers and opens a

relationship- based dialogue.– Generates opportunities and revenue in TSS and traditional

services at both the PEG and portfolio companies.– Leveraging RSM EquiCo for this.


PEG mission and service line diagramPEG mission and service line diagram

“Our Pitch and our Brand” “Market Entry Points”

Private Equity Group (PEG) Established Fund buys companies, owns and operates portfolio companiesRequire four types of services:• Fund services• Transaction services• Portfolio services• Other services

Transaction Support Services (TSS)The transaction support team - • Reviews the transaction details• Advises on the deal • Assists in acquisition matters as neededThese services are primarily quality of earnings oriented and are provided by transaction support specialists and tax specialists.

(An integrated service line strategy)


Mission statement: Transaction support servicesMission statement: Transaction support services

• RSM McGladrey entities and RSM EquiCo will be the leading providers of professional services to PEGs and their portfolio companies in the U.S.

• Provide transaction support services and certain specialized tax services to PEGs through a national service line delivery model.

• Attest (M&P), tax and consulting services will be delivered by dedicated specialists from economic units within geographic boundaries.

• Establish RSM McGladrey as the best alternative to the Big Four service providers.

• Through a center of excellence leadership structure, we will use our international affiliates to seamlessly provide transaction support and other key professional services throughout the world.


Value proposition: Transaction Value proposition: Transaction support services “A key entry point to the PEG”support services “A key entry point to the PEG”

• National practice in the U.S.– Integrated practice approach– Regional centers

• Middle-market focus• Experienced, dedicated transaction support specialists• Broad industry coverage


U.S. transaction support services teamU.S. transaction support services team

• Basic principles and team philosophy

– On call– Travel ready– Quick, but effective– Consistent Quality – Coverage– Not geographic focused

• Team snapshot • Key numbers

Managing Directors 6Directors 11Managers 13Senior Associates 13Support Staff 4Total 47

National TSS Team― Projected TSS FY08 Revenue $15 million― Projected FY08 Revenue From PEG industry $65 million― On pace for 200 deals in FY08


Transaction support services Transaction support services for private equity and strategic buyersfor private equity and strategic buyers

• Buy-side due diligence representation– Financial– Operational– Tax– Technology– Human Resources

• Reverse/vendor diligence– Carve-outs– Divestitures– Spin-offs– Sale planning


How do we add value?How do we add value?

• Detailed analysis of the business– Identify the drivers and various trends in the business in a short

amount of time– Bridge the gap between historical and projected operating

results• Deal issues and breakers

– TSS professionals are skilled at determining which issues are important to the buyer

– Examples: revenue recognition, changes in accounting, margin sustainability, accrual reversals, customer analysis



• Quality of earnings– Validate EBITDA on a “normalized” basis

– Examples: non-recurring items, lack of accruals, out of period adjustments, accounting adjustments, run-rate

– Most transactions valued on multiple of EBITDA• Quality of net assets

– Assess how adjustments to EBITDA impact the balance sheet– Many purchase agreements include tangible net worth criteria



• Working capital– Assess historical fluctuations in working capital levels due to

seasonality and other factors– Assist client negotiations and establish the estimated working

capital as of the closing date– Working capital adjustments are dollar for dollar adjustments

based on a closing balance sheet


Targeting PEGs is fundamental to Targeting PEGs is fundamental to our success – focus is power – our PEG criteriaour success – focus is power – our PEG criteria

• Committed fund, active pledge fund, or active family office• Fund size between $100 million and $1 billion• Target company size of $20 million to $500 million• Active transaction history – three to four acquisitions

annually• Propensity to use RSM McGladrey• Portfolio consistent with firm and practice strengths


Principles of serving the PEG industry: Principles of serving the PEG industry: Basic elements and organizational assumptionsBasic elements and organizational assumptions

• Relationship management – one point of contact• Knowledge of who owns the PEG and how it is managed• Knowledge of what a PEG owns (associated portfolio

companies)• Knowledge of the service opportunities from every angle –

penetration of the PEGpenetration of the PEG• Earning the right to advance, developing a PEG service

plan


TSS metricsTSS metrics

Our targeted goals1. Number of TSS projects2. Average size3. Realized rate4. Repeat TSS engagements (4 to 1)5. Number of PEGs added and what we are doing for them6. RSM McGladrey EUs engaged (as measured by No. 1 and No. 5)7. RSM McGladrey EUs’ effectiveness

– Integration– Penetration– Cooperation


TSS metricsTSS metrics

Our targeted goals (continued)8. People

– Personnel added (net of losses)– Turnover (below firm average)– Utilization

9. Customer satisfaction reports – all PEG services


PEG international strategiesPEG international strategies

• Follow the flow of investment money to and from U.S. and international locations using knowledge of transactions affecting both client base and PEG activity.

– Identify fit with PEGs who want our approach.• Organize our delivery system in center of excellence format (as required by

clients).• Capitalize on our uniform delivery methodology and jointly build the TSS team,

activity and quality service. Focus the U.S. team on those who have experience to build the center of excellence in international methods and services.

• Capitalize on a more uniform approach to a go-to-market philosophy that incorporates the multiple entry points of service for a PEG and relationship management ($1 of transaction revenue for $3 to $5 of other PEG work).


PEG international activitiesPEG international activities

• Make available and conduct similar methodology training courses for both technical and some methodology. RSM McGladrey will coordinate with RSM International on training.

• Coordinate center of excellence locations on sales and service.• Continue to build resources for TSS support – the U.S. has initiated

a service building plan and will share this result, activity and successful methodology.

• Develop international metrics like the U.S. is currently doing for each of its PEG markets. Assistance from Bob Jensen as required.


PEG international activitiesPEG international activities

• Build TSS activity and relationships on a few internationally-active PEGs where we already have transactions and have proved our service promise (Audax).

• Funnel all client activity through a limited number of TSS partners so that we begin with high-quality deliverables and services. Key – John Schmidt, Bill Spizman and Michael Grossman will be the identified transaction active funnels.

• Provide international community with RSM McGladrey go-to-market PEG materials so they can be modified for the specific locations. Bob Jensen will participate in the go-to-market synergies and pull together market active teams on a center of excellence basis.


QuestionsQuestions


AdditionalAdditional TSS and TSS and PEG industry operational informationPEG industry operational information


PEG: Client service PEG: Client service

• Philosophy for service – single national service format for TSS• Methodology and reporting for TSS• Scheduling – regionalized and weekly• Client services success stories

• Next phase of TSS efforts – integration with tax and assurance leaders • Focus for next six months – integration of industry leadership in TSS

services

– Lake Capital – Service PEG (Chicago)> Four audits> Two TSS > Replaced Deloitte

– Summit – General PEG (Denver)> Called regarding lack of coordination from RSM> Called RSM PEG Assurance contact > Successfully assigned a Managing Director to coordinate

from Denver


PEG: MarketingPEG: Marketing

• The “Diamond” – institutionalize the integrated team approach

• Branding – constant and consistent effort to illustrate we are in this business

• Best practices in presentations (available to all)– SOQ (statement of qualifications)– The team (bios)– The products– The plan for our cross-functional team to get in front of them


PEG: MarketingPEG: Marketing

• Making the pitch – two situations to be aware of: branded and unbranded

• ACG – branding• A short-term solution is underway to capture PEG activity• Information – a critical element to success of the penetration goal. IT

solution sought to answer these basic questions and link the answers:– Who owns them?– What do they own?– What are we doing for them?


PEG: SalesPEG: Sales

• Identify the PEGs• Use RSM McGladrey’s criteria for selecting PEGs• Go to market and make calls (with BDs)• BD involvement (plan)• Deals by RSM EquiCo• Integration with RSM EquiCo’s Capital Market organization

– Cooperating with PEG involvement– Co-marketing to legal profession– Tracking industry approach


PEG: SalesPEG: Sales

• Know the pitch• Know the resources• Team on market identification and sizing of PEGs• Team on prioritization• Execute role on sales calls• Execute role on relationship


PEG: Audit and accounting PEG: Audit and accounting

• Training issues– Certain areas of GAAP and GAAS are almost always present in PEGs and

the PEG-owned companies:– Convertible instruments, warrants and other similar instruments– Other equity issues, such as stock options and restricted stock grants– Business combination issues– Goodwill and indefinite life impairment– Stock redemption issues– Auditing fair value, including obtaining necessary annual valuations– Understanding PEG motivation and how this affects audit risk

determination


PEG: Tax updatePEG: Tax update

• TSS/M&A leader– Integration of tax advice in TSS and M&A projects should be a

significant element of the leader’s role. – Universal value-add feature of tax consulting in the due diligence

and deal structure: Integrate tax advice into the TSS and M&A process and service offering should be the one of the major duties and responsibilities of the TSS/M&A leader.


Private equity group: Operating structurePrivate equity group: Operating structureExecutive

Managing DirectorSpecialty Consulting Services

ExecutiveManaging Director

Specialty Consulting Services

National Director - TSS& Private Equity Group Services

National Director - TSS& Private Equity Group Services

National DirectorMultiple Office Client Coordinator(50% of National Accounts Office)

National DirectorMultiple Office Client Coordinator(50% of National Accounts Office)

Advisory Council for Delivery and SalesTax

NA&AEquiCo Representative

Sales

Advisory Council for Delivery and SalesTax

NA&AEquiCo Representative

Sales

LocationBusiness Developer

LocationBusiness Developer

Location Business Developer




Governance CouncilGovernance Council

RBDRBD

EVP SalesEVP Sales

Midwest Region Service Line LeaderMidwest Region

Service Line LeaderSouth Region

Service Line LeaderSouth Region

Service Line LeaderWest Region

Service Line LeaderWest Region

Service Line LeaderEast Region

Service Line LeaderEast Region

Service Line Leader

Operations and ProductionOperations and Production


Organizational implementationOrganizational implementation

PEOPLEPEOPLE

TEAMTEAM

RESOURCESRESOURCES

TALENT MANAGEMENTTALENT MANAGEMENTTALENT KNOWLEDGE / UTILIZATIONTALENT KNOWLEDGE / UTILIZATIONHuman Resources – Onboarding, Compensation, Performance Management, Training

Manage the knowledge/talent of the group and schedule and maintain the utilization of the PEG/TSS group

TALENT ACQUISITIONTALENT ACQUISITION Fill the needs of the group through:Full-time ResourcesAudit part-time resources from RSM EUsContract resources (former partners)Engagement ready resources


TSS team responsibilitiesTSS team responsibilities

• Project leaders– Lead fieldwork– Coordinate tax due diligence and IT due diligence, if applicable– Review workbook prior to fieldwork– Coordinate reviews (need to provide reviewers enough time prior to client

delivery)• Team members

– Principally prepare workbook analysis– Analyze for trends and areas of risk– Research logistics, such as hotel– Binder preparation

rsm international conference, singapore 2007 rsm mcgladrey inc. and the private equity industry jeff...

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