1Monday, April 23, 2018

PRIVATE EQUITY 101: FROM VENTURE CAPITAL TO LBOs

The Private Equity world

2

Private Equity Overview

Global PE activity

Investment Mgmt & Divestitures

Cash cycle of a PE fund

Introduction Contractual Structures

▪ Private equity the investment in equity of unlisted firms

▪ 4 different types of investments

▪ LBOs: investment made using a large amount of debt

▪ Growth Capital: minority equity investments in mature

companies

▪ Mezzanine Capital: investment in subordinated debt or

preferred stocks, no voting control of the company

▪ Venture Capital: equity investments in young companies

3

Characteristics of PE Transactions

Ideal Targets

Participants Standard measure of profitability: IRR

▪ Robust and stable cash flows

▪ Leverageable Balance Sheet

▪ Low capital expenditures

▪ Quality & non-core assets

▪Co-invest with the private equity fund in the new equity of the acquired company

▪Manage the company on behalf of the PE fund

▪ Provide the committed capital

▪ Introduce potential acquisition targets

▪Help out in negotiating the price

▪Provide loans & underwrite high-yield bond offerings

▪Assist during the exit strategy

▪Select the LBO target

▪Negotiates the acquisition price

▪Oversees the activities of the acquired company

▪Decides when and how to sell

▪ Basic idea of a PE valuation: Given the estimated cash

flows, the amount of debt, and the estimated exit price,

the acquisition price to pay today is set to give the PE

investor a desired rate of return (IRR) – ca. 20-25%.

Lawyers Accountants Tax Experts Others …

▪ Room for cost cutting

▪ Good Management

▪ Mature market

▪ Strong market position

4

Value Creation

GrowthDeleverage Arbitrage

The Bet: at exit debt is completely

repaid, no growth and no new

investments

Example: entry in t0 EBITDA=100;

multiple 6x; outstanding Debt = 500;

Equity = 100

Result: exit in t5 EBITDA=100;

multiple 6x; outstanding debt = 0;

equity value = 600

The Bet: EV/EBITDA at exit is higher

than the initial value of the multiple

(debt can be refinanced)

Example: entry in t0 EBITDA=100;

multiple 6x; outstanding Debt = 500;

Equity = 100

Result: exit in t5 EBITDA=100;

multiple 8x; outstanding debt = 500;

equity value = 300

The Bet: EBITDA at exit is higher

than the initial value (debt can be

refinanced)

Example: entry in t0 EBITDA=100;

multiple 6x; outstanding Debt = 500;

Equity = 100

Result: exit in t5 EBITDA=133.3;

multiple 6x; outstanding debt = 500;

equity value = 300

Private equity acquisitions:

▪ Introduce uncertainty

▪ Temporary owners

▪ Bring in new capital

▪ Better knowledge of management practices

▪ Reduce agency problems

▪ Limit management discretion (high debt levels)

And stimulate:

▪ Higher productivity

▪ Innovation

▪ Organic growth

Improvements

5

The Fundraising Process

Marketing the Fund

• Appointment of the team

• Soliciting investors

• Formulation of the fundraising plan

• Initial terms discussion and PPM setup

Term Negotiation

• Negotiation with prospective investors

• Finalization of fund structure

• Preparation of documents (e.g. LPA) for the initial closing phase

Initial Closing

• Acceptance of initial investors’ commitments which become legally bound

• Launch date for the fund (operations are commenced)

• First calls are made

Subsequent Closings

• Additional closings on new commitments

• Subsequent closing period subject to any limitations in fund documents

• Fundraising period ends at final closing

6 to 12 months marketing

period

3 to 6 months negotiating

period

1 year or more subsequent

closings period

6

4 Major Trends in the 2017 Fundraising Scene (1/2)

1. COMMITMENTS AT POST-RECESSION HIGH 2. CAPITAL CONCENTRATION

During 2017, PE firms raised more capital than at any point in time

since 2007-2008. Almost $667bn were raised through the use of

1,091 funds.

If in 2006 1,576 funds raised capital for a total of $576bn, 10 years

later - in 2016 - 333 funds less were accounting for a $50bn more

of total capital raised - $626bn.

0

500

1000

1500

2000

$0M

$100B

$200B

$300B

$400B

$500B

$600B

$700B

$800B

$900B

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018YTD

Source: PitchBook Data, Inc.Total Capital Raised Fund Count

7

4 Major Trends in the 2017 Fundraising Scene (2/2)

3. PREVALENCE OF BUYOUT MEGA-FUNDS 4. SHRINKING IN FUNDS’ CLOSING TIME

15% 14%

25% 26% 25% 29%

19%14%

19% 15% 21%23%

21%

17%

14% 16%15%

15%

19%

26%

20% 18% 15%

17%

25% 29%22% 24% 25%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016 2017 YTDSource: Preqin Data

More than 24Months

19-24Months

13-18Months

7-12 Months

Less than 6Months

Buyout54%

Venture Capital13%

Fund of Funds10%

Growth/Expansion6%

Infrastructure6%

Secondaries5%

Mezzanine5%

Real Estate1%

Source: PitchBook Data, Inc.

In 2017 funds took on average 13.2 months to be

closed, almost 17% less than the 16.8 months in 2016.

During 2017, 54% of the total committed capital was

raised by buyout funds.

8

Venture

Capital

Growth

EquityBuyout Distressed

Sa

les

Time

Investing Over Company’s Life Cycle

Extremely

specialised

investors, deep

technical

expertise

requiredIt usually

exploits

complex legal

procedures to

obtain returns

9

How the Buy-Out Works

ASSETS

DEBT

EQUITY CASHDEBT

EQUITY

ASSETS

DEBT

DEBT

EQUITY

OpCo

SPV

SPV

ASSETSDEBT

EQUITY

NewCo

ASSETS EQUITY

NewCo

1 2

3 4

New Debt

Pre-Existing

Debt

Debt has been

completely

refinanced

Debt has been

paid out fully

10

Case Study: KKR Purchase of Safeway Stores

Target: Safeway Stores Inc.

Buyer: Kohlberg, Kravis, Roberts & Company

Year: 1986

Sector: Supermarket Chain

Country: USA

Rationale: Unprofitable supermarket chain stores, with too

much leverage, lots of money-losing stores and frequent union problems

Strategy: Sell off unprofitable stores to repay debt quickly,restructure the company’s business model and re-sell it

DEAL HIGHLIGHTS

• Target company was already very

much in debt at the time of the

acquisition

• The US supermarket store

business is extremely crowded

and competitive

• KKR paid $6bn in cash and

securities

• Stores were closed, employees

laid off and unions’ issues settled

• KKR turned around the

company, making it profitable

again after years of losses

11

Case Study: Blackstone Purchase of Celanese

Target: Celanese AG

Buyer: The Blackstone Group

Year: 2003

Sector: Chemical

Country: Germany

Rationale: Extremely cyclical business, company relatively

undervalued on the German Stock Exchange (the same kindof companies trade at 1x multiple more in the US)

Strategy: Take the company private, move it to the US, trim out unnecessary operations, list it on NYSE

DEAL HIGHLIGHTS

• German takeover laws are very

restrictive, giving much power to

employees’ representatives

• The purchase of shares had to

reach at least 95% to be able to

relocate it in the US (key)

• Blackstone paid €3.1bn and also

assumed around €1.5bn of debt

• Relocation, sale of non-core

assets and relisting in US took

place in less than 18 months

• Eventually, Blackstone realised

5 times the cash invested in

under 2 years → stellar IRR

12

Exit Strategies

SALE OF BUSINESS

IPO

M&ASECONDARY

BUYOUT

DIVIDEND RECAPITALIZATIONBELOW-PAR DEBT

REPURCHASE

13

Exit Trends

14

Case Study: JLL Partners LLC sells Patheon NV to Thermo Fisher Scientific

2007

$150 MILLION RESTUCTURING INVESTMENT

2014 2017

$462 MILLION ADDITIONAL INVESTMENT

PHARMACEUTICAL DIVISION

‘S

+

51% STAKE

49% STAKE

PHARMACEUTICAL DIVISION

‘S

$7.2 BILLION(including $2.2 billion of debt)

100% STAKE

BOTTOM LINE: JJL Partners earns $2.2 billion out of its $462 million investment, implying a 4.8x multiple in three years

15Monday, April 23, 2018

Thank you for your attention!