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WROCŁAW UNIVERSITY OF ECONOMICS
FACULTY OF MANAGEMENT, COMPUTER SCIENCE AND FINANCE
Tomasz Szerzad
Value Creation Strategies in Private Equity Transactions
in US, Europe and Asia Pacific Markets
Master’s Thesis
Tutor:
prof. dr hab. Krzysztof Jajuga
Katedra Inwestycji Finansowych
i Zarządzania Ryzykiem
Master Studies in Finance
*
I accept this dissertation and I am putting forward
a motion to allow it for further proceedings.
……………………………………………………
tutor’s signature
Wrocław 2015
2
Table of contents
Introduction ......................................................................................................................... 7
1. PRIVATE EQUITY AS AN ASSET CLASS
1. Characteristics ............................................................................................................ 9
2. Types of Private Equity transactions ......................................................................... 9
1. Seed/Venture Capital ...................................................................................... 11
2. Leveraged/Management Buyouts ................................................................... 13
3. Market overview and development history ............................................................. 16
1. United States ................................................................................................... 17
2. Europe ............................................................................................................. 18
3. Asia Pacific ..................................................................................................... 19
4. Comparison between geographies .................................................................. 20
2. STRUCTURE OF PRIVATE EQUITY FUNDS
1. The role of partnerships ........................................................................................... 22
2. General and Limited Partners .................................................................................. 23
3. Costs of investing in Private Equity funds ............................................................... 27
4. Motivations to invest in Private Equity ................................................................... 28
3. BUYOUT STRUCTURE AND PROCESS
1. Capital sourcing ....................................................................................................... 30
2. Deal sourcing and dry powder ................................................................................. 31
3. Holding period ......................................................................................................... 33
4. Exit options .............................................................................................................. 34
4. VALUE CREATION TACTICS IN PRIVATE EQUITY TRANSACTIONS
1. Top line growth ........................................................................................................ 39
2. Operating and margin improvements ...................................................................... 40
3. Cash flow conversion optimization ......................................................................... 41
4. Multiple arbitrage and expansion ............................................................................ 43
5. Leverage and debt utilization ................................................................................... 44
6. Market timing and divestment route ........................................................................ 45
3
7. Synergies between value creation drivers ................................................................ 46
8. Merit and subsistence of value creation ................................................................... 48
5. EMPIRICAL RESEARCH OF VALUE CREATION
1. Research methodology used .................................................................................... 49
2. Case A: Silver Lake Partners and Dell Computer Corporation ............................... 50
3. Case B: Mittel, Carlyle Group, Eurazeo Capital and Moncler ................................ 61
4. Case C: Mid Europa Partners, KKR and Serbia Broadband .................................... 68
5. Case D: CVC CP, CSPEL and Infastech ................................................................. 72
Conclusions ....................................................................................................................... 77
Bibliography ...................................................................................................................... 79
List of charts and diagrams................................................................................................ 82
List of tables ...................................................................................................................... 84
4
UNIWERSYTET EKONOMICZNY WE WROCŁAWIU
WYDZIAŁ ZARZĄDZANIA, INFORMATYKI I FINANSÓW
Tomasz Szerzad
Strategie budowania wartości
w transakcjach private equity
na rynkach Stanów Zjednoczonych, Europy i Azji
Praca magisterska
Promotor:
prof. dr hab. Krzysztof Jajuga
Katedra Inwestycji Finansowych
i Zarządzania Ryzykiem
Master Studies in Finance
*
Pracę akceptuję i wnioskuję o jej dopuszczenie
do dalszych etapów postępowania.
……………………………………………………
podpis promotora
Wrocław 2015
5
Spis treści
Wstęp ................................................................................................................................... 7
1. PRIVATE EQUITY JAKO AKTYWO INWESTYCYJNE
1. Charakterystyka ......................................................................................................... 9
2. Rodzaje transakcji Private Equity .............................................................................. 9
1. Seed/Venture Capital ................................................................................... 11
2. Leveraged/Management Buyouts ................................................................ 13
3. Opis i historia rozwoju rynku .................................................................................. 16
1. Stany Zjednoczone ....................................................................................... 17
2. Europa .......................................................................................................... 18
3. Azja .............................................................................................................. 19
4. Porównanie międzyregionalne ..................................................................... 20
2. STRUKTURA FUNDUSZY PRIVATE EQUITY
1. Funkcje spółek ......................................................................................................... 22
2. General i Limited Partners ....................................................................................... 23
3. Koszty inwestowania w fundusze Private Equity .................................................... 27
4. Argumentacja inwestowania w Private Equity ........................................................ 28
3. STRUKTURA I PROCES TRANSAKCJI WYKUPU
1. Pozyskiwanie kapitału ............................................................................................. 30
2. Dobór inwestycji i “dry powder” ............................................................................. 31
3. Okres inwestycji ...................................................................................................... 33
4. Opcje wyjścia z inwestycji ...................................................................................... 34
4. SPOSOBY BUDOWANIA WARTOŚCI W TRANSAKCJACH PRIVATE
EQUITY
1. Wzrost przychodu .................................................................................................... 39
2. Usprawnienia operacyjne i marży ............................................................................ 40
3. Optymalizacja konwersji przepływów pienięznych ................................................ 41
4. Arbitraż wskaźnikowy ............................................................................................. 43
5. Dźwignia finansowa i użycie długu ......................................................................... 44
6
6. Dobór czasu i sposobu wyjścia z inwestycji ............................................................ 45
7. Synergie między sposobami kreowania wartości .................................................... 46
8. Zasadność i obecność zjawiska budowania wartości .............................................. 48
5. BADANIA EMPIRYCZNE
1. Metodologia badań .................................................................................................. 49
2. Przypadek A: Silver Lake Partners i Dell Computer Corporation ........................... 50
3. Przypadek B: Mittel, Carlyle Group, Eurazeo Capital i Moncler ............................ 61
4. Przypadek C: Mid Europa Partners, KKR i Serbia Broadband ............................... 68
5. Przypadek D: CVC CP, CSPEL i Infastech ............................................................. 72
Wnioski.............................................................................................................................. 77
Bibliografia ........................................................................................................................ 79
Lista wykresów i diagramów............................................................................................. 82
Lista tablic ......................................................................................................................... 84
7
Introduction
Recent years have seen a rapid growth of the private equity as a method of both
investment and financing. Increasing mobility of capital and growing complexity
of enterprise management fueled the popularity of PE as a method of acquiring capital.
Growing liquidity in the financial markets has on one hand fostered development of
public equity, yet also opened new ways for and fostered profitability of many
impressive PE divestments. As an answer to the popular demand, an
"institutionalization" of private equity investing followed suit.
Having put the private equity as a sole method of venture financing aside, questions
arose on the degree of influence the investors extend over their portfolio companies. As
this method mitigates the aspects of ownership and management dilution, prevalent in
publicly owned equity, it allows for an increasingly efficient decision-making,
concentrated in hands of a limited number of managers. As such, it emphasizes both the
power of and the expertise required from the transitive owners in the process.
As arguably every form of investment, private equity seeks to profit from the growth
in value of the held assets. Due to the above reasons however, and in contrast to other
asset classes, private equity funds rarely depend on external, independent factors to
achieve this aim; they opt for active management instead, crafting the shape of target
companies on all levels following the initial cash injection, in order to achieve the goal
referred to as "value creation".
The hypothesis addressed by this dissertation states that value creation in private
equity transactions is indeed possible. This statement is going to be supported by
adduction of four empirical cases: management buyout of Dell Computers Corporation
in US, buyouts of Moncler and Serbia Broadband in Europe, and a leveraged buyout of
Infastech in Singapore.
The choice of case studies for the purposes of this thesis was aimed to include
examples from different geographies, with a variety in deal mechanics value creation
methods and exit routes used. Intentionally, the selection includes target companies
operating in different industries and retailing goods and services ranging from mass to
luxury, in order to seek value creation phenomenon presence in differential conditions.
8
The empirical research is concluded by analyzing different indicators of a successful
value creation process.
Chapter 1 of this thesis introduces the subject of private equity as an asset class,
providing its definition and characteristics from both corporations' (investees') and
investors' perspective. It describes Venture Capital and Buyouts as sub-categories of
private equity, indicating stages in company growth they find their application.
Afterwards, it moves to concise overviews of PE in US, European and Asia Pacific
markets.
Chapter 2 describes the most common structures of PE firms, focusing on the
relations between and responsibilities of general and limited partners. It also debates the
motivations to invest in private equity and determinants of an effectively operated PE
fund.
Chapter 3 moves to a detailed description of the buyout structure and process,
following its individual stages one by one and pointing the areas where factors specific
to PE can be most effectively utilized for its benefit.
Chapter 4 lists and depicts the major groups of value creation strategies in PE
transactions, as well as their combinations and synergies arising from them. It also
mentions common arguments raised against its possibility and presence.
Chapter 5 presents the results of empirical studies over four distinct private equity
cases and determines the areas where value creation was proven successful.
9
1. Private Equity as an Asset Class
1.1 Characteristics
Private equity is in most general terms classified as an asset owned by a private
entity, rather than available publicly on recognized exchange markets.
From corporations’ perspective
From corporations’ perspective, private equity is perceived as a method of funding
alternative to public offering or debt financing. Similarly to other methods however, the
collected capital can be subsequently utilized for any of the company’s needs, including
business development, restructuring, organic growth or further acquisitions.
From investors’ perspective
Taking the investors’ perspective, private equity investing consists of providing
medium- or long-term financing to an unlisted company in return for an equity stake in
said firm.
The private equity market development has led to a creation of “private equity firms”
managing “private equity funds” – entities specialized in collective capital raising, deal
selection and execution, and distribution of achieved return among original backers
(later referred to as “limited partners”). In most developed markets, private equity
capital is originally sourced from institutional investors, including pension funds,
insurance companies or family offices. Regardless of the source of capital however, the
general aim of all private equity transactions is to create value during the “holding
period” in order to exit the investment with recognition of a higher ultimate value. It
should be noted since that private equity transactions are rarely passive investments in
their nature.
1.2 Types of Private Equity transactions
One of the methodologies of private equity transactions division is based on the
target’s development: “seed” and “venture capital” in case of companies remaining in
earlier stages and “buyout” for mature, already established companies, but often
experiencing difficult financial condition.
10
Whereas VC and buyout sub-categories share many characteristics (like lack of
liquidity and basic fee structures), they do display differences in associated risks and
produced returns.
Chart 1.1 Private equity investments in company lifecycle stages
Source: own development
In chart 1.1, the left side of the spectrum represents “early stages” of the company
growth, where the venture capital transactions are conducted, taking shape of seed
investments, start-up rounds up to “expansion capital”. It shall be noted that it is
impossible to draw a solid line between the possible timing of venture capital and
buyout transactions on the company growth timeline; instead, the shift is rather
progressive, and the in-between development stages are often financed from other
sources. With the establishment of real assets and increase in stability, depicted by the
right-hand side of the curve, the feasibility of private equity buyouts increases. Once the
peak, or maturity, is reached and the slowdown symptoms occur, the firms display the
highest financial stability measures, with solid and sustainable cash flows. This moment
is crucial for buyout transactions, which are aimed to re-new the opportunities to grow
or open access to new products, services and locations.
VENTURE CAPITAL BUYOUTS
Seed stage /
“Start-up”
Growth stage
Maturity stage Turnaround stage
Time
Rev
enues
11
1.2.1 Seed/Venture Capital
Venture capital (“VC”) financing refers to investments in companies which remain in
seed, start-up or expansion phases of their business cycle; as such, these transactions
represent a significantly increased amount of associated risk. In most cases, VC
transactions are investments in small, “young” businesses, aimed to help them mature
and generate value by injecting capital into them. The targets are selected diligently
from the notable newly-started companies with strong growth potential. Contrary to
buyout transactions, which occur in later stages of business lifecycle, the equity capital
acquired via seed/venture capital transactions is in most cases injected directly into its
balance sheet and invested. The VC transactions are often performed before the true
revenue potential of targets is validated. Hence, they are high-risk/high-potential
investments.
In the same time, often due to specificity of underlying business operations, the
management over the company is normally retained, with the private equity investor
influence limited to oversight and advice provision. The expertise of the manager is
hence capitalized.
Recent years have seen a sustained popularity of high-tech businesses, including IT
and biotechnology. As such, VC financing plays an integral role of development of
these sectors, which in turn have a chance to constitute to the overall economic
development, expanding beyond its initial industry and market.
Since the early stages of company life are associated with diverse sub-stages, the VC
transactions can be further divided into “seed”, “start-up” and “growth” capital
categories.
1) “Seed” capital allows new companies to take first steps in its lifecycle:
create a business plan, conduct required research, and produce prototype
products/services before moving to mass manufacturing. Despite the fact that the
seed capital transactions tend to be insignificant in size (often below $250,000),
they require careful due diligence and require specialized approach in order to
identify high-potential business ideas. In many cases, VC funds disperse their
investments into multiple targets in this stage, with an expectation to profit from
only selected ones.
12
2) “Start-up” capital typically allows the company to develop its product or
service and finance the required research and development or
marketing/advertising expenses. This is particularly crucial for high-tech
companies, which might require large amounts of capital to develop new
technology solutions.
3) “Growth” VC strategy is focused on selecting companies with
established product, service and operational models, with an aim to finance
scaling of their business. Nevertheless, such targets still experience some degree
of commercial uncertainty – this fact distinguishes the growth capital funding
from buyout transactions.
In selected occasions, the funds in venture capital transactions are provided by
individuals referred to as “business angels”, who may have some knowledge of the
target’s industry, yet remain anonymous advisers, in exchange for a significant equity
stake in the company they invest in.
13
1.2.2 Leveraged/Management Buyouts
Buyout transactions typically target mature companies, with strong operating cash
flow, with an outline to increase its value by introducing performance-enhancing tactics
distinct for their stage of development and carefully tailored to each case, often
involving restructuring. Due to the specificity of this stage in business lifecycle, and as
opposed to seed/VC investments, the capital paid by investor in a buyout transaction is
often used to pay off the existing shareholders. “Leverage buyouts” (“LBO”) is a name
applied to transactions involving purchase backed by significant amount of debt with
some equity. The target company is then expected to pay out dividends to the new
owners, which are to be utilized to pay the debt instalments and interest. The equity
stake in the company itself is used as collateral for the debt structure.
As the leverage ratio (measured as debt/equity ratio) in LBO transactions is
substantial, the associated loan or issued bonds are not considered investment grade, but
rather as “junk bonds” instead (i.e. offering high yields). On the other hand, the cost of
debt has a lower cost relative to equity in most cases; this leverage contributes to
increased returns. Nevertheless, this phenomenon serves as an incentive to the financial
sponsors to use excessive amounts of debt in the balance sheet, which in turn may lead
to “over-leveraging” the target company. Unless the new capital structure allows the
company to generate sufficient cash flows to sustain its operation and service its own
debt, it may become effectively insolvent – particularly severe in its impact if a third-
party capital had been used as liability (e.g. a bank loan).
Historically, the success of LBO investments proves to be dependent on the
following factors:
the intrinsic value and quality of target;
stability of cash flows;
leverage ratio pre- and post-transaction;
the management quality of the acquirer/financial sponsor;
economic/industrial conditions.
Management buyout (“MBO”) or buyin (“MBI”) deals are in most cases initiated by
existing or new management of the company in question, which either seeks for
external financing to redeem the control from the previous owners or enters an alliance
14
with an external party (e.g. private equity firm). Representatives of said management
retain operational decision-making rights in the company, often leveraging their already
gained subject-matter expertise.
Whereas management buyin traditionally refers to deals initiated by external parties,
the background reasoning to administer a management buyout transaction may arise
from two distinct sources:
existing owners – willing to exit the equity stake and sell it to the
managers;
existing managers – given their perception of value being destroyed by
existing owners’ decisions.
Due to their nature, leveraged and management buyouts/buyins shall not be
understood as mutually exclusive. In fact, most MBO transactions have to be conducted
in cooperation with external capital providers to finance the transaction.
15
The most important factors distinguishing the seed/venture capital and
leveraged/management buyout transactions are summarized in table 1.1:
Venture capital Buyout
Development stage when
the investment is made
Early (seed, start-up,
growth) Mature/turnaround
Value creation aim and
source
By assisting the target
company to mature and
generate value
By introducing
performance-enhancing
strategies
Expected risk Very high High
Leverage None to immaterial 60%-90% (Kaplan
& Stromberg)
Typical relative amount
of capital invested as
equity
Low-medium High
Frequency and degree
of intervention to target’s
business operations
Low-medium High
Table 1.1 Venture capital and buyout investment strategies comparison
Source: own development
16
1.3 Market overview and development history
Whilst many seek the roots of private equity in the beginnings of societies, the
inception of the private equity industry in its contemporary definition dates to the
1950s. Ever since then, the private equity industry has seen a rapid development both in
terms of deal size and numbers.
The United States of America and Europe have traditionally lead the development of
private equity; however, due to saturation and growing penetration of these geographies
in mid-1990s, the emerging markets, including Asia Pacific and Latin America, have
proven to be more attractive destinations for interested investors.
Value Region 2013 2014 Y/Y change
Fundraising US $ 202.4 $ 217.6 +7.5%
Europe $ 63.7 $ 62.1 -2.5%
Asia Pacific $ 16.8 $ 17.6 +4.8%
Investments US $ 159.4 $ 168.5 +5.7%
Europe $ 88.5 $ 91.3 +3.2%
Asia Pacific $ 30.3 $ 29.5 -2.6%
Exits US $ 171.7 $ 214.7 +25.0%
Europe $ 97.7 $ 120.2 +23.0%
Asia Pacific $ 58.1 $ 122.0 +110.0%
Table 1.2 Buyout market statistics globally, 2013-2014 ($ bn)
Source: own development basing on Thomson ONE, S&P Capital IQ, Asian
Venture Capital Journal database
17
1.3.1 US
The North America remains as the globally largest and most mature buyout market
so far. After experiencing its peak of funds raised in 2007 at $353 bn, the 2008-9
financial recession had a severe impact on the market in US, effectively cutting this
value in half; this forced numerous private equity firms to concentrate on turnover and
distressed debt investments.
As of 2014, the size of the market is returning to its historical highs, with $217 bn
raised by buyout funds alone. The capital referred to as "dry powder", i.e. excessive, not
invested funds, has found its utilization in other regions, including the emerging
markets.
Chart 1.2 End-to-end pooled IRR of US buyout funds and S&P 500 mPME index
(as of July 2014)
Source: own development basing on Cambridge Associates
0%
10%
20%
30%
1 year 3 years 5 years 10 years 20 years
Time horizon
US buyout
funds
S&P 500
mPME
18
1.3.2 Europe
Closely following US in terms of growth pace in recent years, Europe was also
negatively influenced by the 2008-9 economic crisis. The value of investments is
unevenly distributed between European countries, with as much as 43% coming from
UK and Ireland, 27% from France and Benelux, 11% from DACH region, 8% from
Southern Europe, and only 3% from CEE.
The benefits of private equity as an industry facilitating economic development has
been noted by many EU members, who attempt to introduce favorable fiscal and legal
environments to foster its growth.
Chart 1.3 End-to-end pooled IRR of US buyout funds and MSCI Europe mPME index
(as of July 2014)
Source: own development basing on Cambridge Associates
0%
10%
20%
30%
40%
1 year 3 years 5 years 10 years 20 years
Time horizon
EU buyout
funds
MSCI
Europe
mPME
19
1.3.3 Asia Pacific
Fuelled by the rapid overall economic growth in the region, Asia has attracted
significant amounts of capital coming from both foreign and domestic investors. Last
20+ years have shown a diverse spectrum of both successful and failing private equity
transactions in Asia. One of the reasons for this matter is the relative “late” start
compared to other more mature PE markets like Europe and United States; in many
forms, this industry is still being explored there. As of 2014, Mainland China remains
the most frequent destination of foreign private equity investment in Asia.1 As the
economic conditions, regulatory regime and political challenges in this region vary
greatly in comparison to other markets, investing in Asia requires a tailored approach.
In fact, one of the most severe risks related to investments in emerging market is the
currency risk, still notable. On the other hand, contrary to their US or European
counterparts, the Asian companies tend to rarely approached by external investors,
which makes them more available to private equity firms. With growing easiness of
capital flow and investments however, the emerging markets in the region represent
lucrative investment opportunities for global players, who attempt to benefit from
progressing convergence to US and Europe.
Chart 1.4 End-to-end pooled IRR of Asia Pacfic buyout funds and MSCI All Country
Asia mPME index (as of July 2014)
Source: own development basing on Cambridge Associates
1 "Asia's Favorite Money Pit?" AVCJ Private Equity and Venture Capital Report CHINA (Inclusive
Media Investments Limited, 2012)
0%
10%
20%
30%
1 year 3 years 5 years 10 years 20 years
Time horizon
APAC
buyout funds
MSCI All
Country Asia
mPME
20
With a historically modest share in the global private equity industry (5% in 2003),
the Asian markets have since caught up. It should be noted that contrary to US and
Europe, the Asian Pacific PE funds have displayed the highest premium over the public
market in all time horizons:
Chart 1.5 Unleveraged private equity alpha by region (annual return in %), 2012
Source: Capital Dynamics, Value Creation in Private Equity
The most notably quoted background of private equity alpha in Asia-Pacific
surpassing other regions has traditionally been higher relative GDP growth. Other
factors include positive demographic changes and the emergence of middle-class
population. As these fundamental phenomena have been already observed and
accounted for in Europe and North America, the resulting gap is justified.
What is equally important however is that since alpha in this meaning is understood
as the premium over public stock returns, the relative underdevelopment of public
capital markets in Asia, together with low perceived penetration of financial industry in
the overall economy, shall be taken into consideration. Due to the above reasons, money
managers in North America and Europe (and Asia, depending on the pace of
convergence of demographic and economic indicators) are empowered to seek for
innovative approach in private equity investing.
As an outlook for the future, the investors’ interest in Asia-Pacific PE markets is
deemed to be sustainable. The demand from global investors, accompanied by growing
supply of capital from expanding domestic market, is expected to fuel the market
44%
10%
22%
0% 25% 50%
Asia-Pacific
Europe
North America
21
development in the nearest future, especially given the aforementioned modesty in
valuations relative to European and North America counterparts.
As of mid-2015, the size and relevance of private equity markets (as measured by
volume and size of capital raised, executed transactions, and exits) is close to returning
to pre-2008 levels.
22
2. Structure of Private Equity Funds
2.1 The role of partnerships
The typical structure of a private equity fund is a general partner-limited partner
contract with the following division of responsibilities:
general partner (“GP”), responsible for investing of funds provided by
limited partners on a fiduciary basis;
limited partners (“LP”), supplying the capital.
As described in chapter 3 of this thesis, the LP transfer a certain amount of capital in
the commencement of the fund with an expectation to “call” it back from the GP after
the fund finishes its life.
Diagram 2.1 Structure of a typical private equity fund
Source: own development
The structure of the private equity firm does not remain without influence on the way
it operates and is managed. Firstly, the collection of knowledge and skills of investment
General
Partner
Limited
Partner I
Limited
Partner II
Limited
Partner #
PRIVATE
EQUITY
FUND
Portfolio
company 2
Portfolio
company 1
Portfolio
company #
Fund management
Fund ownership GP ownership
Co-investment
23
managers, remarkably one of the most crucial factors determining fund’s performance,
can be derived from multiple deals and funds, if the latter are active simultaneously. On
the other hand, the time commitment required for diligent and effective investment
management may prove extensive and volatile; hence, the utilization of effort capacity
needs to be allocated precisely, as it otherwise may imply prejudicial effect on the
results.
2.2 General and Limited Partners
General Partner
General Partner is a name given to the entity responsible for fund management, often
with a significant degree of independence in selecting and managing the fund’s portfolio
companies. The general partner decision-making process is often facilitated by
investment advisors.
Limited Partners
Limited Partners are fund investors, who normally take limited liability and passive
role in the investment process. In many cases they form an advisory committee, which
is a grouping of largest investors with direct contact to the GP and some voting powers
to intervene in the operations of the fund.
Due to characteristics of private equity as an asset class, described in detail in the
next section, vast majority of PE investors are institutions with long-term investment
horizons. Nevertheless, the LP universe is composed of diversified categories of
entities, each with varying capital allocation, risk attitude, liquid preference and
henceforth different expectations towards the PE firm.
Alignment of interests between General and Limited Partners
Optional co-investment in the fund by GP is often perceived positively by fund’s
prospective clients. It emphasizes the sincerity of fund managers and helps to assure the
alignment of interest between the PE firm and LP.
In well-structured PE firms with strong governance, the interests of GP as fund
managers and LP as investors are hence in line: both parties benefit from each other’s
objectives and are able to pursue their goals.
24
Furthermore, ensuring LP best interests allows fund managers to build and expand
their long-term reputability and confidence of investors. These factors become crucial
for capital and deal-sourcing of subsequent ventures.
Chart 2.1 Number of LP by investor type as of 31 December 2013
Source: own development basing on Preqin
0%
5%
10%
15%P
rivat
e S
ecto
r P
ensi
on F
unds
Foundat
ions
Publi
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unds
Endow
men
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lans
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ager
s
Insu
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Com
pan
ies
Ban
ks
& I
nves
tmen
t B
anks
Inves
tmen
t C
om
pan
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Corp
ora
te I
nves
tors
Ass
et M
anag
ers
Gover
nm
ent
Agen
cies
Pri
vat
e E
quit
y F
irm
s
Super
annuat
ion S
chem
es
Sover
eign W
ealt
h F
unds
25
Chart 2.2 Breakdown of aggregate capital in PE by investor type as of 31 December
2013 excluding funds of funds and asset managers
Source: own development basing on Preqin
Taking into account the number of limited partners by investor type and the average
capital commitment, presented on charts 2.1 and 2.2, a conclusion can be derived stating
that the amount of funds invested into PE varies greatly, and is most likely dependent
on the applied investment time horizon preferred by each group, as well as risk aversion
and regulatory constraints. Together with its highest relative total size, this explains the
tallest aggregate capital of Public Pension Funds in PE.
In the same time, the relation of size to number is the highest for Sovereign Wealth
Funds; this is especially reflected by the growing investments of selected governments
into international private equity ventures, most notably Saudi Arabia and Public
Republic of China, with more countries following suit.
0%
5%
10%
15%
20%
25%
30%
Pri
vat
e S
ecto
r P
ensi
on F
unds
Fou
ndat
ions
Publi
c P
ensi
on F
unds
Endow
men
t P
lans
Fam
ily O
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Fund o
f F
unds
Man
ager
s
Insu
rance
Com
pan
ies
Ban
ks
& I
nves
tmen
t B
anks
Inves
tmen
t C
om
pan
ies
Corp
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te I
nves
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Ass
et M
anag
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Gover
nm
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Agen
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Pri
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26
It should be noted that a single PE firm can administer a number of funds at the same
time, each with its own investment strategies and LP:
Diagram 2.2 Multiple funds management by a single General Partner
Source: own development
As stated previously, diligence in time and effort allocation into multiple funds
operating under a single PE firm needs to be applied, and the expected benefits and
impediments balanced.
General Partner/PE firm
Target company A1
Target company A2
FUND B
Target company B1
Target company B2
Limited
Partners A
Limited
Partners B FUND A
27
2.3 Costs of investing in Private Equity funds
The easily observable costs born both GP and LP in a fund relate to set-up costs,
management (custodian, audit fees) costs, due diligence (for both accepted and rejected
projects), and others not directly affecting the fund's investment performance.2 The list
also includes so-called "friction" costs, which refer to the capital paid to intermediaries
in fees associated with each undertaken transaction, and comprise investment banking,
due diligence, or business advisory services. The friction costs accumulate in case of
high rotation of fund's assets and impede the eventual returns.
For limited partners, aside from carried interest paid to general partners as
a performance fee, a "hidden" cost of private equity is the constraint of capital
commitment and the dependence of return collection on the timing of exit and fund's
closure. Hence, alongside with both illiquidity and postponement of profit, the
opportunity costs need to be taken into account when creating risk profiles and portfolio
planning. To some extent, these factors are mitigated in case of "listed" private equity.
The most publicized measures of return in PE are the multiple indicators, which in
their nature do not capture the lack of marketability and timing inflexibility; hence,
Internal Rate of Return (IRR) of projects may be deemed superior in its accuracy and
materiality. However, IRR still only accounts for the periods of actual investment in
target companies, failing to capture the impact of periods no reinvestment opportunities.
From an external observer's perspective, the utmost discrepancy between high IRR and
low multiples indicates fund's inability to source sustainable and recurrent targets to
invest in.
Considering the above as obstacles to properly measure the fund's performance using
traditional methods, the research on value creation arises as a mean to objectively assess
and evaluate the long-lasting effects of actions undertaken by the GP in portfolio
companies operations and strategy. As the empirical cases analyzed deeply in chapter 5
show, the positive addition to target's intrinsic value shall be prevalent even after the
divestment.
2 Demaria C., Introduction to Private Equity: Venture, Growth and Turn-Around Capital, 2nd Edition,
John Wiley & Sons, 2013
28
2.4 Motivations to invest in Private Equity
From investors’ perspective, the private equity displays the following features,
distinctive against other asset class:
illiquidity over a longer, but usually specified period of time;
very limited level of regulation resulting in little apparent protection for
investors;
significant transactions cost and multiple layers of fees, both fixed and
performance-based, and high entry tickets;
unpredictable cash flows, both to and from the fund (incl. un-called capital);
limited transparency, making portfolio diversification difficult to take effect;
returns potentially generated in non-cash items;
a great degree of difficulty to benchmark performance due to the diversity of
strategies followed;
non-standard performance evaluation tools, leading to uncertainty in reported
returns.3
In order to outweigh the adverse features of investing in PE, investors expect high
level of returns compensating for the significant relative risk. As such, multiple factors
are taken into account as means to effectively offset the associated hazards. The skill
and expertise of the fund manager in reference to all stages of the investment process
(i.e. deal sourcing, value creation in the holding period, exit strategy) remains crucial,
especially considering the concentration of decision-making management in the GP. In
turn, LP ability to commit funds for a long term, in most cases preferred by pension
funds and endowments, allows for establishment of long-term strategies and benefitting
from position investing.
What is more, PE (including VC) funds are renowned for their ability to invest in
high-potential, novelty industries, typically unavailable via public financial markets
(e.g. companies operating in modern technologies), as well as access to potentially
attractive markets and geographical locations. Last but not least, the diligent and
deliberate injection of funds pooled from multiple sources allows for economies of scale
benefits to occur.
3 Megally E., van Swaay H., Leleux B., Private Equity 4.0: Reinventing Value Creation, John Wiley &
Sons, 2015
29
3. Buyout structure and process
The private equity funds, taking the form of limited partnerships, are most often
created for a definite period time. When their lifetime end is reached, they liquidate
their investments and distribute the proceeds (excluding fees) to investors (limited
partners). Besides management fees, the cost imposed on LP includes cost of carry, i.e.
set percentage of the difference in investment enter and exit values; this system serves
as an incentive to GP to create value in the deal.
A typical length of a private equity fund lifetime is 10 years with a 2-year statistical
variation, but it can be decided on freely by GP and investors in the Limited Partnership
Agreement.
Diagram 3.1 Private equity fund investment stages
Source: own development
As denoted by diagram 3.1, the private equity fund operation is commenced by
capital rising, which is subsequently used to enter precisely and diligently chosen
investment projects. In many cases, especially for leveraged transactions, additional
financing is used, and takes form of bank loans and/or a bonds issuance. After the
holding period, in which the fund extends its active management in order to achieve
positive value creation, the fund’s position in a portfolio project is liquidated for the
capital and potential gains to be distributed amongst LP. The following sections
describe each stage in more detail and provide commentary on the observed trends.
Capital
sourcing
Fund
launching
Deal
sourcing
Deal
financing
Value
creation Exiting
Fund
liquidation
30
3.1 Capital sourcing
Before the fund’s inception, its managers outline a strategy and potential area of
operation for it. Subsequently, the “capital sourcing” is a name given to the stage when
the general partners attempts to “sell” the fund to new limited partners. The amount and
pace of capital collection is therefore largely affected by a variety of factors:
external economic conditions;
past effectiveness of the fund managers (“track record”);
potential investors’ demand for PE transactions;
marketing and sales skills of the private equity firm.
The first investments can be done by the fund even before the fundraising stage
concludes, as long as the collected capital is sufficient, i.e. after the “first close”. To
incentivize investors, and discourage attempts to wait the inception of a new fund,
limited partners entering the fund shortly before the “final close” are sometimes faced
with higher fees for the delay.
Chart 3.1 Global buyout capital raised (2005-2014) ($ bn)
Source: own development basing on Dealogic and Preqin
362
543
666 685
318 295
343 392
528 499
0
200
400
600
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
31
3.2 Deal sourcing and dry powder
After the fund is eventually launched, its managers proceed to creating a “deal flow”,
i.e. collecting lists of investment opportunities for the private equity firm. Although it is
most typical for a PE fund to commit to 10-15 investments in its lifetime, the number of
screened targets amounts many times more; this is because the deal sourcing process is
arguably the most crucial of all ones, since appropriate targets selection and due
diligence are the fundaments of the success.
Many private equity fund managers often conduct the selection process on their own
and their effectiveness is considered as a “selling point” of a fund. Nevertheless, to
ensure appropriateness and completeness of the deal flow, some of its elements are
outsourced to external parties (e.g. specialized investment boutiques or management
consulting companies).
Chart 3.2 Global buyout deal value (2005-2014) ($ bn)
Source: own development basing on Dealogic and Preqin
It should be noted that the occurrences of raised PE capital exceeding the value of
completed deals result in presence of “dry powder”, i.e. not invested funds. Such
circumstances suggest demand for PE investments to outweigh the available range of
projects to utilize them.
293
687 673
189
77
204 203 199
256 252
0
200
400
600
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
32
Chart 3.3 Private equity buyout funds “dry powder” by fund type (2005-2015E) ($ bn)
Source: own development basing on Preqin 2Q2015 Buyout Deals Update
Chart 3.3 displays the levels of unused funds in total PE capital raised in last 10
years. After the 2008-2009 recessions which exhausted investment opportunities and
resulted in “dry powder” levels exceeding 140% of annual fundraising for buyout funds,
its prevalence became visible once again in 2015, with an estimate nearing 100%.
On one side, this may suggest prospering saturation in PE capital market, probably
fostered by raising valuations of public markets (i.e. IPO) as an alternative method of
financing; however, it also implies funds’ readiness to extend their investments into new
targets. With increased capital mobility, the latter resulted in growing cross-border
investments, later discussed in the empirical research section of this dissertation.
0
200
400
600
800
1000
1200
1400
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Buyout Real estate Venture captial Growth
Distressed PE Mezzanine Other
33
3.3 Holding period
The "holding period" refers to the timeframe the portfolio company is owned by the
private equity fund. Typically the holding period stretches to 4-6 calendar years, with
allowed variations, yet limited by the life of the fund itself. As previously stated, PE
firms tend not to remain passive investors; hence, they thrive to create value in their
companies, which is discussed in detail in the subsequent sections of this thesis.
The following methods are frequently implemented by result-oriented GP:
management changes in the investee: not necessary, yet if decided on, most
likely done in the beginning of the holding period, in order to maximize the
possibility of success by strengthening the management team;
focused incentive: including rewards systems, fostering improvements in top
line and operational excellence;
external support: utilizing third-party advisory services (also applicable in
other stages of a PE investment), e.g. management consulting firms;
the "human factor effect": using the experience and expertise of the GP
themselves to directly boost performance of the target company.4
4 Megally E., van Swaay H., Leleux B., Private Equity 4.0: Reinventing Value Creation, John Wiley &
Sons, 2015
34
3.4 Exit options
As the finite length of the holding period lays in the nature of most private equity
fund, divestiture is a crucial stage of every investment, having a significant (if not the
most significant) impact on the achieved returns. Generally speaking, private equity
investors make decisions in regards to timing of the exit (often announced prior, yet
rarely followed) and the chosen method of the divestment.
For the latter, the private equity funds are given a wide range of possible routes.
Examples include, yet are not limited to:
trade sale (most common);
sale to another private equity firm;
initial public offering (listing on a recognized public market);
restructuring;
write-off.
Chart 3.4 Global buyout exit value (2005-2014) ($ bn)
Source: own development basing on Dealogic and Preqin
As the empirical research and market feedback suggest, the choice of exit method is
most frequently dictated by the implied condition of public markets; due to limited and
predisposed lifecycle length of a fund, it may be forced to liquidate its position in the
portfolio company at an imposed moment in time. Unfavorable valuation from the stock
252 232
354
150
68
254 273
239 274
456
0
100
200
300
400
500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
35
exchanges encourages GP to seek divestment other than initial public offering, like
trade sale, transaction with another fund or, in some cases, restructuring (sometimes
backed by additional leverage).
Chart 3.5 Global number of private equity-backed exits by type with average value
Source: own development basing on Preqin 2Q2015 Private Equity Update
Divestment methods breakdown in chart 3.4 depicts the high degree of inverse
correlation with economic environment not only of public offerings, but also trade sales
and PE exits activity in general. In 2008-2009, these exit routes were often substituted
with restructuring attempts. Since then, both the volume and average value of
divestment transactions returned to pre-recession levels, mostly driven by recovery in
buyouts and the rapid development of VC-backed investments with high valuations.
480 606
478 328
567 746 795 812 831 822
275
363
230
104
293
384 400 402
494 482
158
163
56
117
223
213 208
298
294 290
8
9
59
117
60
56 52
56 46 35
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
0
200
400
600
800
1000
1200
1400
1600
1800
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
Trade sale Sale to GP IPO Restructuring Average value ($ bn)
36
4. VALUE CREATION IN PRIVATE EQUITY TRANSACTIONS
As a matter of fact, the “value creation” process arguably starts already at the fund’s
inception: a proper selection of target companies, accompanied by effective cooperation
of general and limited partners with aligned goals and incentives, is a prerequisite for
a successful private equity transaction. This step has been already described in chapter 3
of this thesis.
Fortunately for the purposes of this research, the effectiveness of individual buyout
transactions can be quantified by analysis of the acquisition and exit values of a target.
Straightforward as it is, this approach allows for understanding of the key driver of
value. As private equity funds tend to hold their equity position in portfolio companies
for a limited and predefined period of time, the comparison of its beginning and ending
prices serves as an adequate indicator of the value being created or destroyed.
Within the PE industry, the intrinsic value of a company is widely estimated using
a classic earnings multiple valuation formula. This method is used to reflect firm’s
ability to deliver stable earnings.
𝑉0 = 𝐸𝐵𝐼𝑇 0 × 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒0
where:
V0 is the present valuation of the firm;
EBIT0 is its current Earnings Before Interest and Taxes (in some cases, EBITDA
is used instead);
Multiple0 is a multiple obtained from comparable companies/transactions from
publicly listed or private equity markets.
As such, the formula assumes that the value of the company is directly proportional
to its level of earnings and indirectly proportional to its risk profile (reflected by the
multiple). The “comparables” approach is based on empirical readings, as the
components are sourced from company’s financial statements and actual market
transactions, under the assumption that the latter operates efficiently.
From this perspective, for the purposes of this thesis, the following methods of value
creation will be distinguished:
37
a) top line growth, i.e. increasing revenues by growing volumes and/or unit
prices;
b) operating and margin improvements, i.e. cost-effectiveness improvements;
c) cash flow conversion, i.e. enhancing the efficiency of the cash conversion
cycle;
d) multiple arbitrage and expansion, i.e. increasing the multiple applied to EBIT;
e) leverage and debt utilization, i.e. introducing or expanding financial and
operational leverage to successfully scale targets’ business operations;
f) market timing and divestment route, i.e. determining the disinvestment
moment and disposal method to maximize the target’s exit value.
The selection of method of value creation varies basing on the substance of each deal
and development stage of the target company. Chart 4.1 compares the significance of
value creation drivers in distinct regions globally.
Chart 4.1 Impact of value creation drivers in private equity transactions by region
Source: Capital Dynamics, Value Creation in Private Equity 2014
The comparison of value creation drivers across geographies allows drawing
differentiating findings. EBITDA growth, most significant factor for US transactions,
47%
33%
44%
33%
23%
52%
10% 9%
-2% 6%
12%
16% 14%
18%
23%
31% 32%
21%
-20%
0%
20%
40%
60%
North America Europe Asia-Pacific
EBITDA Sales Margin FCF Multiple Leverage
38
accounted for much lower % readings in Europe and Asia-Pacific. The latter shows the
higher degree of dependency on actual top-line growth, as displayed by Sales; this is
precisely connected to lower impact of margin as value creation driver in this region,
which turns out to be negative, whilst 10% and 9% for US and Europe, respectively.
Nevertheless, this is offset by the impact of free cash flow optimization, highest in Asia
at 16%. The multiple effect contributes even more, reportedly due to stronger
dependence on public market and less efficient market mechanics in this region.
Leverage on the other hand remained most influential in North American and European
transactions. This is caused by the maturity of financial engineering solutions, as well as
lower perceived risk of leveraged transactions in these regions – which in turn translates
into lower costs of debt.
In conclusion, it can be derived that the value creation in model PE transactions in
US is targeted on highly leveraged, mature companies, which display little possibilities
for margin or cash management improvements; hence, the value is statistically most
frequently created on top-line and EBITDA growth.
European PE market shows the most balanced mix of value creation drivers. Top line
expansion is hindered in domestic markets. Leveraging is widely available and utilized.
This even-tempered approach – or large variety of value creation techniques by
European PE funds – does not lead to exceptional results: to recall chapter 1, the
empirical return benchmarks relative to public markets prove to be the lowest in this
location.
Asian deals however are based mostly on sales-boosting campaigns, which can
benefit from incomplete penetration in market for products and services; cost reduction
initiatives are impeded by already low costs in the region. In the same time, multiple
and leverage utilization is not well developed at this moment, which however should be
expected to increase in importance, in line with other geographical locations.
39
4.1 Top line growth
The top line growth, which encompasses all methods to increase direct revenue, is an
area which aims to possibly increase:
per unit price: cost charged by the company for the product or service;
quantity sold: volume of products/services provided.
In many cases, the goal is to acquire a "platform company", which is later used to
consolidate the market it operates in. Given the amount of capital available to a PE fund
(including leverage), purchasing a leader is an effective way to do so. The options
include:
organic growth: actions to expand the existing business by building on it
(buy-and-build strategy);
horizontal integration: overtaking subsequent companies (consolidation)
and/or producers of complementary items to foster market share gains;
vertical integration: acquiring clients (forward v. i.) and/or providers
(backward v. i.) of the target to create an integrated offer.
In order to maintain a steady growth of sustainable turnover, the managers need to
utilize methods of both customer capturing and retention. Systematic revenue analysis is
crucial to provide a measure of the results of efforts and be able to leverage current
customer relationships. Moreover, expanding towards new markets becomes a
necessity; it is especially valid for buyout transactions due to their focus in mature
companies.
In recent years, more and more focus is attributed to top line growth at the expense of
other value creation methods. Since operational excellence is considerably easier to
achieve – and more straight-forward – than turnover expansion, revenue growth
increases in importance in delivering long-term, sustainable returns. Unless a stable
growth in the top line is ensured, it might eventually become a cap for business
development and expansion. Even if said horizon exceeds the PE fund's holding period,
future prospects remain essential for exit valuation.5
5 KKR, Unlocking to-line growth, 2012
40
4.2 Operating and margin improvements
Historically this cluster of efforts, aimed to affect the bottom line of the business,
was the primary source of value creation in case of private equity deals on mature
companies. This is still true for many cases, especially in emerging markets, which
might host numerous cost take-out opportunities. In combination with top line growth,
additional benefits from economies of scale can be achieved, also by synergies or
outsourcing certain elements of operation.
For the purposes of this thesis, this category shall include all actions conducted to
minimize the costs associated with the acquired business. In broad terms, these shall
include:
restructuring and/or consolidation;
identifying and utilizing synergies with remaining companies in the fund’s
portfolio;
introducing lean manufacturing management;
outsourcing or offshoring selected parts of the business to low-cost locations.
With reduced management dilution after buyouts and the time constraints coming
from the holding period length, the operating-level adjustments are typically introduced
and implemented more rapidly and easily than beforehand. Additionally, private equity
funds are frequently able to identify the potential areas of improvement before
executing the transaction, as they are encouraged to assess their feasibility and
profitability in order to undertake the buyout decision itself. In fact. in many cases, the
planned efficiency adjustments take form of a detailed plan, which is later carefully
executed.
41
4.3 Cash flow conversion optimization
As stated above, proper cash management capability remains a necessary condition
for successful private equity transactions. Besides sourcing it from bottom line growth
however, the improvements in cash conversion cycle management are increasingly
important.
By definition, cash conversion cycle (CCC) is a measure of the length of time that an
entity needs to convert resource inputs into actual cash flows. As such, it is desirable to
keep CCC low. It is calculated as:
𝐶𝑎𝑠ℎ 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐶𝑦𝑐𝑙𝑒 = 𝐷𝐼𝑂 + 𝐷𝑆𝑂 − 𝐷𝑃𝑂
where:
DIO, Days Inventory Outstanding, is the number of days required to sell an
entire inventory;
DSO, Days Sales Outstanding, refers to the length of time of sales collection
(i.e. accounts receivable conversion into cash);
DPO, Days Payable Outstanding, measures the number of days the company
can take to pay its own accounts payable.
Many general partners seek for potential targets with poor existing cash
management. This is frequently prevalent in mature companies, which reached the peak
of their cash generation capabilities; however, this state is often achieved solely from
long-term relationships with suppliers and customers, where the details were negotiated
and contracted long time earlier. The initial cash injection serves as a remedy to mend
the status quo, yet temporarily. Nevertheless, it opens the possibilities for expansion by
capital expenditures. Further, sustainable optimization of the cash conversion cycle is
very much needed.
42
Taking into consideration the components of the CSS formula one by one, examples
of methods include:
increasing inventory turnover, possibly by changes in the range of products
and services offered and more effective sales;
increasing efficiency of the cash collection systems;
re-negotiating the accounts payable terms with suppliers;
adjustments to the capital structure, minimizing the debt service expenditures.
Many of these adjustments take advantage of the actual cash injection into the
portfolio company after the buyout and would be difficult or impossible to achieve
otherwise.
43
4.4 Multiple arbitrage and expansion
This category pertains to actions aimed to affect the EBIT multiplier between entry
and exit transactions. Typical tactics here include:
re-positioning of the portfolio company;
utilizing the bargaining power between the buyer and the seller.
Basing on the degree of direct involvement, the multiple arbitrage can be further split
into:
passive time arbitrage, also referred to as “multiple surfing” – timing of the
investment to the moment favorable to the investor, e.g. periods of low
demand for the potential targets;
“multiple engineering” – attempting to justify an increase in EBIT multiple,
e.g. by decreasing the perceived risk or expanding the growth prospects.
The latter option can be often facilitated by requesting fairness opinions from outside
vendors; to give an example, a commercial due diligence analysis performed by a third-
party firm can successfully justify the assumptions of the divested entity’s business
plan, as well as indicate areas of potential development. Both are useful for the eventual
purchaser and provide transparency to the otherwise opaque target to the market.
This category also encompasses the beneficial effects an acquisition of the target
may have on acquirer financial ratios – i.e. positive impact on ROA or P/E multiples of
merged companies within a portfolio managed by a private equity firm.
44
4.5 Leverage and debt utilization
Corporate finance literature distinguishes the following favorable features of debt
financing utilisation:
multiplier effect on return on equity;
creating tax shield, given that interest charges are tax deductible;
discipline imposed on managers, both in form of debt covenants and the
obligation to cover interest payments in timely manner, indirectly
encouraging maintaining operational risk ratios and focusing on cash
generation.
The use of debt, or financial leverage, in private equity transactions allows benefiting
from all of the above. The degree of said leverage is therefore mostly dependent on the
price and availability of money on the debt market; both are also affected by the risk of
each investment. Indirectly, the external economic conditions affect the feasibility of
such transactions. This fact is reflected by the number of leveraged buyout and buyins
done, surging in periods of economic development, and declining during recessions.
Adding to the above, usage of significant amount of borrowed funds allows private
equity firms to enter deals otherwise unattainable due to their sheer size; in other words,
leverage reduces the amount of equity contribution required to acquire a fund's target
company.
Arising from the structure of most private equity funds, a moral hazard arises for the
managers to use the financial leverage to artificially inflate the return on investment
measures. Excessive usage of debt financing may therefore allow for:
increased profits for the private equity fund managers coming from the carry
rate and success fees;
unjustified perceived successful track record of the general partners,
facilitating their efforts to find investors for and finance their next fund.
In connection to gradually increasing debt-to-EBITDA rations in the industry, the
above risk should draw attention to appropriate risk measurement in relation to
evaluation of private equity fund performance.
45
4.6 Market timing and divestment route
Depending on the specificity of the transaction, this category may overlap with
previously described multiple expansion. As the events having the most impact on the
feasibility of the investment, means of entry and exit are most crucial when it comes to
momentum, negotiations between the parties and chosen financing structure.
In some cases, the holding period can be shortened given that:
the fund finds a lucrative opportunity to exit the investment faster;
the PE firm is forced to liquidate the specific investment as the overall
lifecycle of the fund reaches its end.
The choice regarding divestment route, i.e. the exit method, is carefully made taking
into account the current economic conditions, as well as expectation towards the
demand from public or private investors. As the decision on means is not binding until
far into the transaction, historically it is frequently changed in the last moment, as the
existing holders reevaluate their options. The latter retain their full discretion, especially
since most private equity deals are announced to the public only once all the economics
and counterparties are settled and already decided upon.
The ultimate choice of disposal method remains at the GP discretion; as such, they
strive to evaluate the options and possible proceeds to maximize the exit price during
the negotiation and/or order book building.
46
4.7 Synergies between value creation drivers
In addition to the intended remunerative impact of the aforementioned methods on
the eventual enterprise value, empirical studies suggest occurrence of particular added
benefit to using them in tandems:
Chart 4.2 Value creation drivers (“times money” basis breakdown ) in global private
equity transactions in 2013
Source: own development basing on Capital Dynamics
In 2013, the average “times money” value creation achieved by private equity funds
amounted to 2.51, down from 2.72 the year before. By analyzing the individual impact
of the previously described value creation techniques, and comparing them to their
combined effect on EBITDA and EV, particular “combo effects” can be observed;
considerably, this implies a specific form of synergies holding between these methods.
2.510.79
1.720.090.18
0.26
0.26
0.930.040.21
0.68
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
Margin
change
Multiple
(GP)
Leverage
COMBINATION
EFFECT 2
EBITDA
growth
COMBINATION
EFFECT 1 Top line
growth Multiple
(market) Unleveraged
impact FCF
Value
Creation
47
It should be noted that in both situations depicted above the combination effect is
positive.
The additional benefit to EBITDA increase, accompanying sales growth and margin
change (COMBINATION EFFECT 1) is most probably created from the changes
in products mix to those with higher profitability, and possibly economies of scale.
Aside from cash management contribution and multiple expansion capabilities of the
GP (deal-specific) and coming from the market itself, the additional effect on the
unleveraged enterprise value (COMBINATION EFFECT 2) is most likely the result of
changes in currency exchange and inflation rates for multinational entities, as well as
particular premiums paid in buyouts from public markets.
48
4.8 Merit and subsistence of value creation
Amongst the arguments raised by the opponents of the presence of private equity
investing returns superior to the remaining asset classes is the advantage apparently
sourced solely from the premium compensating for hindered liquidity of assets
(liquidity premium).
Furthermore, the apparent value creation might be coming largely from the mixture
of business and financial advisory provided by LP to portfolio companies. If held true,
this would imply that their ownership over the entity is not a necessity, and substituting
it with a provision of a range of consulting services can have an equivalent ending
result.
Lastly, many propose the relatively short-term strategies of private equity funds.
With holding periods rarely exceeding 10 years, and occasionally being as short as 1
year, it may exhibit features common with speculative investing. The statement that PE
funds effectively sell future premises is often hard to reject, taking into account the
difficulty of establishing sustainable intrinsic value in such short timeframe. On the
other hand, divesting in the most popular form of a trade sale involves a transfer of
ownership to long-term shareholders, which utilize the actual asset value of the acquired
entity in real economy.
Mean return Standard deviation
Venture Capital 23.17% 19.66%
Leveraged Buyouts 18.21% 12.78%
Overall private equity 19.87% 10.63%
S&P500 17.70% 17.26%
Bonds 10.43% 8.49%
Table 4.1 Risk and return profiles of asset classes in the US, 1980-2000
Source: CalSTRS, Venture Economics, Ibbotson & Associates
49
5. EMPIRICAL RESEARCH OF VALUE CREATION
5.1 Research methodology used
For the purposes of this thesis, the following four empirical case studies from four
distinct markets were done:
US – a large-cap Dell Computer Corporation leveraged buyout by the
company’s founder, Michael Dell, in cooperation with Silver Lake Partners
private equity firm (hence, an management buyout by definition), completed
as a privatization from NASDAQ stock exchange in October 2013;
Western Europe – the international expansion of Moncler, French luxury
winter outerwear producer, supported from 2008 by Mittel, Carlyle Europe
Partners and Eurazeo Capital, with an IPO exit in December 2014;
Central and Eastern Europe – regional expansion of Serbia Broadband into
other former Yugoslavia states following a buyout by Mid Europa Partners
fund, divested in 2014 via a sale to KKR;
Asia Pacific – a mid-cap leveraged buyout of GEC and Advel by CVC
Capital Partners and Standard Chartered Private Equity Limited from
Acument Global Technologies, completed in 2010, subsequently consolidated
into Infastech and sold in a trade sale to Stanley Black & Decker in 2012.
The background of each deal is provided at each sub-chapter; afterwards, the
research progresses to addressing the utilisation of value creation methods described
previously.
The research is then concluded by an assessment of the feasibility and success of
each deal using available data.
All analyses are based on statistical and growth measures, and financial indicators,
calculated by financial models developed specifically for the purposes of this thesis,
unless otherwise specified.
50
5.2 Dell and Silver Lake Partners
Target company information
Dell Computer Corporation (“Dell” throughout) is a US-based entity headquartered
in Round Rock, Texas, dealing within the computer and computer accessories industry.
It is engaged in hardware manufacturing, servicing and providing turnkey solutions to
both retail and business clients. Founded in 1984 by Michael Dell, it has since grown
into a 3+bn company and is one of the largest technology corporations in the world,
operating in all markets globally.
Dell has developed its business model basing around their competitive edge of
direct-sales and providing their customers with customized, yet pre-configured plug-
and-play computers. In 2000s, they have expanded its product base to IT solutions and
services, following a successful acquisition of Perot Systems.
Shortly after its inception, Dell had its initial public offering in 1988 at $8.50 per
share and became listed on NASDAQ floor. The raised funds allowed the company to
foster its growth to global markets. Together with rapid development of the computers
market, its market capitalization peaked at close to $65.00 in spring 2000. The burst of
the dotcom era bubble had a severe impact on Dell’s PPS, which fell to regions below
$30.00 for 3 years. The stock had its post-dotcom era high in July 2005 at $40.00.
Intensive market competition from alternative hardware providers, together with
slowing down industry growth rates, forced Dell to downsize its operations.
Unsuccessful turnaround attempts, accompanied by of with missing its financial
projections, effectively brought its share price to $1x.00 levels. Since mid-2012, Dell’s
public stock remained in a price tunnel between $8.00 and $14.00, far behind its all-
time highs and representing a very modest premium over its IPO price, not justifying its
25 years of history to its investors.
51
Chart 5.1 Dell Computer Corporation public stock price per share 1998-2013
(closing prices) as listed on NASDAQ stock exchange market
Source: own development basing on NASDAQ
2012: Privatization
Prepositions of “going private”, i.e. performing a buyout ending with de-listing of
target’s stock from the public market, were introduced to Dell’s Board of Directors and
Michael Dell himself by some of the stakeholders in 2012; however, they were not
accepted initially. Forecast analyses performed by The Boston Consulting Group
(“BCG”) showed negative prospects, with an expected drop in sales from $62 billion to
$54.3 to 2017.
Negotiations
Feasibility studies, provided in the form of fairness opinions by Goldman Sachs, JP
Morgan and Evercore, suggested practicability of a buyout. Dell has reportedly been
approached by a number of prospective buyers, including some of its major
shareholders (e.g. Southeastern Asset Management). Company’s founder, Michael Dell
himself, has expressed his willingness to become of the buyers.
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
98/01 99/12 01/12 03/12 05/11 07/11 09/10 11/10 13/10
52
Before the news of a potential buyout surfaced, the Dell’s stock was traded at ca.
$11.00 per share. This value was used as a starting point for negotiations. However,
public statements by minority stakeholders, including Carl Icahn, criticized this number
as a significant underestimate. A letter published by Southeastern Asset Management
suggested a fair value of $23.72 per share or more. In fact, in comparison to its peers,
Dell’s trading multiples were undoubtedly low:
Traded company Market
Capitalization
Enterprise
Value EV/EBITDA
Dell 23,314.19 19,642.19 4.73
Median 27,937.88 32,786.79 8.69
Hewlett-Packard Co 32,358.74 49,890.74 3.46
International Business Mach. 229,139.01 251,403.01 10.01
Apple Inc 429,933.18 308,682.18 5.27
Unisys Corp 1,049.65 865.55 1.75
Lenovo Group Ltd 83,500.02 56,593.90 8.73
Xerox Corp 9,814.65 17,549.65 6.06
Acer Inc 2,409.87 1,302.43 9.7
Asustek Computer Inc 8,846.98 7,082.84 8.64
Cognizant Technology Solutions 23,517.03 20,653.27 13.6
Accenture PLC 51,084.48 44,920.32 10.06
Table 5.1 Dell stock trading comps ($ bn)
Source: own development basing on Bloomberg
After months of negotiations, the shareholders voted for an approval of a buyout by
Michael Dell and private equity fund governed by Silver Lake Partners at a price of
$13.75 per share, with an additional dividend of £0.13 per each. The total deal value,
which was going to be a leveraged buyout (LBO), was henceforth set at $24.9 billion.
The transaction was completed on October 29, 2013, which was also the last day of
trading in DELL stock on the NASDAQ public market.
Similarly to the case of trading comps, the ultimate buyout price was considerably
insignificant in comparison to similar non-public transactions.
53
Target company Announcement date Total Value TV/EBITDA
Dell 02/05/2013 16,435.60 4.86
Median - 325.00 13.63
Oracle America Inc 04/19/2009 5,708.40 8.31
Gateway Inc 08/26/2007 754.69 65.27
Bull SA/France 05/25/2014 581.49 6.37
Mitac International Corp 04/09/2013 421.04 26.27
Palm Inc 06/03/2007 325.00 13.63
Eten Information Systems 03/02/2008 225.97 8.93
Aaeon Technology Inc 12/09/2010 166.10 14.83
Advantech Co Ltd 09/29/2005 151.31 21.92
Quintec SA 08/09/2011 112.21 8.78
Table 5.2 Dell deal comps ($ bn)
Source: own development basing on Bloomberg
Silver Lake Partners
Silver Lake Partners (“SLP” throughout) is a multinational private equity firm
founded in 1999, specialized in LBO in technology industry. The funds managed by
SLP cover a wide spectrum of deal sizes, from medium to large cap companies. Aside
from Dell, SLP track record includes investments in Skype, Avaya, Sabre and many
others technology-related companies. Since its first fund, Silver Lake Partners provided
its investors with an overall gross internal rate of return of 27 percent and net internal
rate of return of 18 percent per year.
Deal structure
It was decided that Michael Dell shall retain his original 15% stake in Dell’s equity;
hence, the SLP and affiliates’ buyout itself pertained to the remaining 85%.
54
Chart 5.2 Dell Computer Corporation ownership structure pre- and post-2013 LBO
Source: own development basing on Dell Computer Corporation filings
The debt used for leverage was to be sourced from 2 tranches. First-lien secured debt
totaling $7.5 billion, and the second-lien notes equal to $1.25 billion, due in 2021. $2
billion would come from Microsoft, Dell’s long-term business partner, in a form of a
subordinated loan; such arrangements between key strategic partners are very rare in
nature.
15%
78%
85%
22%
0%
25%
50%
75%
100%
Pre-LBO (-2013) Post-LBO (2014-)
Silver Lake
Partners
Institutional
Investors
Michael Dell
55
Pre-LBO (-2013)
Current assets 28.0
Current liabilities 19.6
Long term assets 19.6 Long term liabilities 17.3
Equity 10.7
Total assets 47.5
Total liabilities and equity 47.6
Post-LBO (2014-)
Current assets 17.5
Current liabilities 19.3
Long term assets 33.4 Long term liabilities 27.9
Equity 3.7
Total assets 50.9
Total liabilities & equity 50.9
Table 5.3 Dell Computer Corporation balance sheep structure pre- and post-2013 LBO
($ bn)
Source: own development basing on Dell Computer Corporation filings
The following changes in Dell’s balance sheet are notable as the result of a leveraged
buy-out:
utilisation of Cash as Current asset component;
increase in Goodwill as a Long term asset;
jump in debt reflecting Long term liabilities.
Value creation in Dell after LBO – plans
The planned value addition following the late-2013 LBO is still ongoing; the planned
sources of economic creation are, by a subjective order of magnitude:
utilisation of Michael Dell’s and Silver Lake Partners’ expertise in the
technology sector to achieve operational performance gains (operating and
margin improvements);
56
tailoring the products mix to focus on more profitable business lines (top line
growth);
transaction momentum – performing the buyout in historical lows of the stock
(implied market undervaluation) (market timing);
attractive financial structure pre-LBO (long term debt/equity ratio at 1.6) and
ability to obtain leverage financing at relatively low cost (leverage and debt
utilisation);
more efficient decision-making coming from avoidance of voting rights
dilution to multiple shareholders (multiple arbitrage and expansion).
Value creation in Dell after LBO – results
A complete quantitative measurement of Dell’s management buyout profitability is
not feasible at the moment of this thesis creation, as the deal is still ongoing the holding
period and none of the involved parties exited their investments so far.
Fortunately, contrary to its stock, the Dell’s debt is still traded on public markets;
hence, the market’s reaction and expectations towards the company’s operation can be
clearly observed by following its market price and rating. At the same time, it shall be
noted that while the company is now private and opaque, its financial statements are
available upon request of Qualified Institutional Investors and Debt Securities Holders.
57
Pre-LBO Post-LBO
Year ended Dec 2011 2012 2013 2014 2015
Income statement ($ mn)
Revenue 61,494 62,071 56,940 57,112 57,076 % change YoY n/a 0.9% -8.3% 0.3% -0.1%
Gross Profit 11,453 13,860 12,253 11,440 11,552 % change YoY n/a 21.0% -11.6% -6.6% 1.0%
Operating Income 3,800 4,871 3,427 2,359 2,546 % change YoY n/a 28.2% -29.6% -31.2% 7.9%
Net Income, cons. 2,874 3,778 2,642 1,621 1,799 % change YoY n/a 31.5% -30.1% -38.6% 11.0%
EBITDA 4,770 5,807 4,571 2,969 3,610 % change YoY n/a 21.7% -21.3% -35.0% 21.6%
Profitability margins
Gross margin 18.6% 22.3% 21.5% 20.0% 20.2% P.p. change YoY n/a 3.7 p.p. -0.8 p.p. -1.5 p.p. 0.2 p.p.
Operating margin 6.2% 7.8% 6.0% 4.1% 4.5% P.p. change YoY n/a 1.7 p.p. -1.8 p.p. -1.9 p.p. 0.3 p.p.
Profit margin 4.7% 6.1% 4.6% 2.8% 3.2% P.p. change YoY n/a 1.4 p.p. -1.4 p.p. -1.8 p.p. 0.3 p.p.
EBITDA margin 4.7% 6.1% 4.6% 2.8% 3.2% P.p. change YoY n/a 1.4 p.p. -1.4 p.p. -1.8 p.p. 0.3 p.p.
Return on equity
Total equity 7,766 8,917 10,701 3,700 5,600
Return on equity 37.0% 42.4% 24.7% 43.8% 32.1% % change YoY n/a 1.6 p.p. -1.3 p.p. -2.8 p.p. 1.1 p.p.
Table 5.4 Selected Dell Computer Corporation financials pre- and post-LBO (GAAP)
Source: own development basing on Dell CC filings and Bloomberg
58
A top-level analysis of Dell’s income statement pre- and post-LBO enables to
conclude that the company financials are in an upward trend; the following effects of
planned value creation methods are already observable as of 2015 fiscal year:
revenue recovery after 2013 down-turn;
aversion of the decline projected by BCG in 2012;
remaining profitable by retaining major profitability margins at pre-LBO
levels, despite debt burden and turnaround efforts;
jump in return on equity, mostly caused by reduction of the latter.
As stated previously, detailed financial statements of Dell Computer Corporation are
no longer available to the public; however, the credit ratings provided by rating agencies
can be successfully utilized to obtain an understanding of the company’s improving
financial condition.
Rating agency Bond rating Effective date of upgrade
Moody's
Ba2 09/11/2013
Ba1 02/04/2015
Standard & Poor's
BB+ 09/11/2013
BBB 12/04/2014
Fitch BBB- 03/16/2015
Table 5.5 Changes to Dell Computer Corporation corporate bonds agency ratings on the
example of USU2386GAA95/ 5 5/8 10/15/20
Source: own development basing on Bloomberg
Since Dell’s corporate credit (best represented by an example of the debt issued to
finance the analyzed 2013 leveraged buyout) rating was raised by two of the major
providers, a positive trend in company financials can be assumed.
An increase in debt investors’ confidence in Dell’s credit rating is also well reflected
by the increase in its debt market price, as presented in chart 5.3.
59
Chart 5.3 Dell Computer Corporation corporate bond clean prices 2013-2015
(reported) on the example of USU2386GAA95/ 5 5/8 10/15/20
Source: own development basing on Bloomberg/TRAC
One of the arguments raised by the pre-LBO minority stakeholders for the
underestimation of the buyout price was the lack of reflection of Dell’s recent
acquisitions in the market price of the stock. Unfortunately, as these elements of their
balance sheet have not resulted in significant profits so far, this factor shall not be
assessed at this time.
In conclusion, despite still awaiting its exit, Dell’s MBO can be evaluated positively.
The available symptoms suggest evidence of successful value creation. Arguably,
Michael Dell’s aspirations to regain control over the company were fulfilled; and, as it
turned out soon enough, the privatization opened doors to subsequent ventures for Dell
as a company.
During the creation of this thesis, on October 12, 2015, now privately owned Dell
officially announced its plans for an acquisition of EMC Corporation (“EMC”), an IT
service provider, at a striking price of $33.15 a share – a 27% premium over the last
market price of EMC shares from before the deal emerged. Exceeding $60 billion in
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total value, the transaction is the largest ever takeover in the technology industry, and
naturally far surpasses the Dell Computer Corporation alleged value.
Backed by Michael Dell and Silver Lake, as of the moment of writing of this thesis,
the acquisition is going to be financed with a leverage based on a substantial bank loan
package. The market expects a “significant” portion of the debt to be rated investment-
grade.
The EMC acquisition announcement serves as another virtue of the positive
outcomes of the 2013 privatization. Not only Dell is now able to expand organically, it
is also positioned well enough to conduct highly leveraged acquisitions, whilst keeping
the cost of debt relatively low and affordable. Michael Dell himself points to the unified
management as another factor contributing to its long-term development plans: “(The
EMC deal) creates a world-leading company. The private structure gives us a
tremendous amount of flexibility”.
61
5.3 Mittel, Carlyle Group, Eurazeo Capital and Moncler
Transactions overview
Moncler was founded in 1952 in France by René Ramillon as a premium winter and
sport outerwear producer. Throughout its history it managed to become renowned as
a quality clothing manufacturer, supplying Olympic teams and mountaineering
expeditions. Yet until 2000s, the company focused on domestic and Italian markets,
with little to none presence worldwide. While limiting the prospects to grow, the pre-
2000 period allowed them to build a reputation as a famed premium brand, iconic in
some client groups. This indicated a solid base for worldwide expansion opportunities,
piggy-backing the omnipresent globalization of European premium brands which
preserve their coveted uniqueness.
In 2003, Moncler was bought out by Remo Ruffini, an experienced Italian
entrepreneur, for a supposed sum of ca. €500 million. Ruffini has served as a President
and Creative Director ever since and successfully led the brand to other European, and
later international markets. http://www.iodonna.it/personaggi/interviste/2013/remo-
ruffini-moncler-storia-borsa-401817085001.shtml?refresh_ce-cp
Shortly after the takeover, Ruffini searched for external funding which would allow
him to support the expansion plans. In 2005, the private equity fund Mittel SpA,
managed by an Italian merchant bank, entered an agreement with Ruffini which would
result in a 38/62 division of ownership between them. Among others, the funds injection
allowed Moncler to open its first boutiques in urban locations, starting with Paris.
Nevertheless, Mittel's financing did not exhaust the firm's rapid growth and Ruffini's
ambition. Becoming listed on Borsa Italiana was considered as a natural step forward,
yet disadvantageous public market conditions in 2008 and 2011 did not allow for a
satisfactory valuation.
In the next 6 years, the company changed hands multiple times, while maintaining
strong operational excellence and strategic growth. The following sub-chapters focus on
value creation strategies implemented by subsequent Moncler's private major owners, as
well as the gains they realized.
62
Chart 5.4 Moncler ownership structure 2008-2013
Source: own development basing on Carlyle Group filings
2008 - 2011: Carlyle Europe Partners
In October 2008 Carlyle Europe Partners III, LP ("Carlyle") an European private
equity fund managed by Carlyle group, acquired 48% stake in Moncler; Ruffini himself
retained 38% share, while the rest remained in Mittel's hands.
Carlyle's goals on value addition were set clearly: the Moncler brand was to be
introduced to consumers on all continents, each geography with a separate management
team and tailored distribution channels.
The top line growth was facilitated with expansion of own retail network. In 2008-
2011, 51 new retail stores were opened, increasing their total number to 56. As the
management picked global capital cities as locations for the flagship shops, the
internalization of distribution channels allowed for a much needed geographical
diversification of revenue streams - in 2008, the Italian market accounted for nearly
60% of total sales, a number which was reduced to below 50% in 2011. Thanks to this
38% 38% 32% 32%
62%
14%
5% 1%
48%
18%
7%
45%
23%
37%
0%
25%
50%
75%
100%
Pre 2008 deal Post 2008 deal Post 2011 deal Post 2013 IPO
Remo Ruffini Mittel SpA Carlyle Eurazeo Free float
63
measures, the sales for the first time exceeded €500 million, despite keeping profit
margins at high levels of +10%.
To sustain the growth and ensure proper coverage of responsibilities, dedicated
management teams were established in China, Japan, Russia and United States. A
former Gucci executive was hired as a new retail director. Carlyle's global presence
allowed Moncler to obtain access to crucial knowledge and strategy solutions, as well as
global platform and network. The company also underwent a reorganization
administered by Carlyle, splitting into 2 divisions, all to facilitate flexibility and
efficiency in decision-making. Carlyle's consultants assisted standardization of
administration and management reporting systems, greatly enhancing the firm's
operation and accounting.
From cost-reduction side, Moncler terminated majority of its outsourcing activities,
attempting to switch back to in-house production and distribution. This had the most
significant impact on the Japan market and children wear line. Aside from better
manufacturing and cost management, it enhanced firm's control over production and
retailing; direct retail sales increased from 13% in 2008 to nearly 38% in 2011. Further
cost cuts included closure of the historical plant in Grenoble, France to concentrate
operations in Italy, as well as improvements in logistics and supply base management.
2011 - 2014: Eurazeo Capital
In beginning of 2011, Moncler Group announced once another launch of IPO
process, for the second time within 3 years. Carlyle was approached by Eurazeo Capital
("Eurazeo"), a Paris-based private equity firm formed by an acquisition of Azeo by
Eurafrance with over €5 billion in assets6, with a proposal of a joint-control position,
sharing governance rights. As Carlyle recognized further growth prospects in Moncler,
the two investment companies reached an agreement giving Eurazeo 45% of ownership;
Carlyle sold 63% of its own stake to Eurazeo, while keeping 18% of all shares. Ruffini
still retained close to 1/3, down from 38%. Once again, the initial public offering was
postponed.
For Carlyle, this transaction served as a first "partial" divestment. The MOIC
(Multiple On Invested Capital) was reported as 3.56x, of which 2.43x was realized with
6 www.eurazeo.com
64
the transaction. The economics of the deal point to a total Enterprise Value of Moncler
Group as €1.2bn, which in turn implies a 12.0x EBITDA trailing multiple (2010). These
results should be understood as excellent, especially taking into account the short
investment span (less than 3 years). http://www.carlyle.com/news-room/news-release-
archive/eurazeo-acquire-45-moncler
Contrary to Carlyle, the Eurazeo buyout was not largely leveraged. The fund
proceeded with business development to "establish Moncler as the global leader in the
luxury clothing sector, while seizing the full potential of international growth
opportunities." The actions implemented by new owners were far from an overhaul; the
development, taking form of shop network expansion, was to be continued in a familiar
manner and financed internally, thanks to capitalization of Moncler’s renown allowing
for high profit margins and efficient cash generation.
Moncler began commercial online retailing in 2011 with US and Europe markets.
Sales from e-commerce alone exceeded €6 million in 2012, when the offer was
extended to Asia Pacific and Japan. The brick-and-mortar network of monobrand shops
was expanded to 135 stores, with over 70 new locations - again, with a focus on Asia.
As such, these moves should be understood as an attempt to benefit from the raising of
middle-class societies in the region, which are still growing rapidly in the region,
displaying growing demand for premium Western products. To allow the company to
focus on its core business, the sportswear lines were separated from the Moncler brand.
2013: The IPO
In 2013, the "Other Brands" division was carved out the Moncler Group to foster
concentration on the key brands and prepare the company for its long-awaited initial
public offering on Milan stock exchange. This time, the apparent demand from the
public markets exceeded the one from trade buyers in Eurazeo and Carlyle perception.
On December 16, 2013, Moncler stock had its first day of public trading as MONC.
The premium winter outerwear producer’s first listing was ranked as the best IPO
debut in 2013, topping Royal Mail.7 The market closed at a price per share of €14.97,
resulting in an astonishing daily growth of 47% – a proof of investors’ trust, perhaps
7 http://www.bloomberg.com/news/articles/2013-12-16/moncler-shares-soar-on-luxury-skiwear-maker-s-
trading-debut
65
largely discounted while the IPO price was decided on. The listing prove to be a biggest
IPO in Italy since 2010 and the largest by an Italy-based brand since Prada in 2011.8 As
a response to the investors’ demand, a “greenshoe” over-allotment option scenario was
exercised, allowing Moncler to raise even additional capital.
However, the initial free float represented only 37% of the company. Notably, only
stakes of Eurazeo, Carlyle and Mittel were offered as the free float, and not to their
entirety. Each company retained some shares, whereas Ruffini kept both his CEO
position and his 32% ownership.
Carlyle had its final exit half a year later: on June 19, 2014, the remaining 7% was
sold via an ABB (Accelerated Bookbuilding) process. This resulted with an eventual
5.69x MOIC for Carlyle's investment, or 57% IRR. For Eurazeo, the partially-realized
MOIC amounted to ~3.45x.
Evaluation
Among the most crucial value creation tools, Carlyle points out fueling the
acceleration of growth of Moncler brand products in foreign locations. Table 5.3
presents the selected financials sourced from Moncler SpA Group consolidated income
statements, supported by calculated profitability measures.
8 http://www.businessinsider.com/incredible-demand-for-moncler-ipo-2013-12
66
Year ended Dec 2010 2011 2012 2013* 2014
Income statement
Revenue 428,733 513,364 489,183 580,577 694,189 % change YoY n/a +19.7% -4.7% +18.7% +19.6%
Gross Profit 235,488 300,090 340,923 414,057 501,665 % change YoY n/a +27.4% +13.6% +21.5% +21.2%
Operating Income 88,762 102,549 145,761 166,761 201,550 % change YoY n/a +15.5% +42.1% +14.4% +20.9%
Net Income, cons. 52,166 57,749 84,690 94,430 130,109 % change YoY n/a +10.7% +46.7% +11.5% +37.8%
Profitability margins
Gross margin 54.9% 58.5% 69.7% 71.3% 72.3% % change YoY n/a 3.5 p.p. 11.2 p.p. 1.6 p.p. 0.9 p.p.
Operating margin 20.7% 20.0% 29.8% 28.7% 29.0% % change YoY n/a -0.7 p.p. 9.8 p.p. -1.1 p.p. 0.3 p.p.
Profit margin 12.2% 11.2% 17.3% 16.3% 18.7% % change YoY n/a -0.9 p.p. 6.1 p.p. -1 p.p. 2.5 p.p.
Debt vs CAPEX
Net Financial Debt 200.8 277.8 230.1 171.1 111.2
Capital Expenditure 24.1 30.0 26.4 34.3 50.2
Table 5.6 Selected Moncler SpA Group financials (consolidated) (€ mn)
Source: own calculations basing on Moncler SpA Group filings
* includes discontinued business (“Other” brands)
Without doubt, the persona of Remo Ruffini, who has served as the President and
Creative Director throughout the ownership changes and to this day, had its share in
conservation of Moncler’s reputation and valuable identity. Careful selection of new
managers, including regional heads, allowed for the structural changes to be
implemented fluently and strengthen the corporate governance, as well as accelerate the
decision-making processes on operational level. What is more, Carlyle successfully
restructured the brand presence in Japan – the old distribution contracts with third-party
Eurazeo buyout IPO
67
retailers were consolidated into joint ventures, giving full control to Moncler/Carlyle.
Between 2008 and 2012, Moncler SpA Group revenues grew by 206%, while the
EBITDA increased by as much as 311%.9
Under Eurazeo management
From the perspective, the IPO price might have been undervalued, despite substantial
investors’ appetite (the institutional offer was oversubscribed over 31 times). The
market price advancement on the first day of trading of +47% suggested total enterprise
value exceeding €3 billion. Fortunately, Mittel, Carlyle and Eurazeo have all retained
partial ownership, which later allowed them to benefit from favorable public market
valuations during subsequent exits
Chart 5.5 Moncler SpA public stock price per share 2013-2015 (closing prices,
adjusted) as listed on Borsa Italiana stock exchange market
Source: own development basing on Thomson Reuters
9 Carlyle Group, Moncler Group Case Study, p. 2
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5.4 Mid Europa Partners, KKR and Serbia Broadband
Transactions overview
Serbia Broadband ("SBB" throughout), founded in 2000 and headquartered in
Belgrade, Serbia, quickly raised in ranks to a leading paid television services provider in
the country with an estimated 550,000 users in 2007. In that time, the market for paid
television in the former Yugoslavia states was still largely fragmented; symptoms of
consolidation opportunities were prevalent, yet the power of market participants prove
insufficient for it to commence.
Mid Europa Partners ("MEP"), a private equity firm focused on buyouts in CEE
region, recognized investment in SBB as an opportunity to acquire a "platform
company" - an aforementioned tactic to consolidate a specific market beginning with an
acquisition of a leader. Additionally, the alleged quality of service offered by SBB was
behind its Western Europe counterparts, as a result of insufficient capital expenditures
in innovative technology solutions. The transaction was completed within MEP
Emerging Europe Convergence Fund II in June 2007 at undisclosed financial terms, yet
the sources suggest its value to range between €170 and 200 m with €81 m financed by
UniCredit.
As an addition to its investment in SBB, MEP made a total of 18 auxiliary
acquisitions of other media providers outside from Serbia, extending the group's reach
to 6 countries (aside from Serbia, to Slovenia, Bosnia, Croatia, Montenegro and
Macedonia), most notably Telemach, and eventually comprised them under a newly-
formed entity referred to as "SBB/Telemach" or "United Group" – a strategy known as
“buy and build”
These transactions effectively established the group's presence as the leader in the
entire region. The customer base increased three-fold from 0.5 to 1.9 million. The range
of products offered was expanded to include high definition and digital television, as
well as a high speed internet access infrastructure.
While recognizing the qualifications and abilities of existing SBB management, the
GP was forced to supplement the team of executives with additional resources and
experts. A new chief financial officer was hired to overlook the increasingly complex
financials of the group and coordinate the financing of multiple acquisitions.
69
2013: Divestment
After over 6 years of ownership of SBB/Telemach, Mid Europa Partners announced
their exit in October 2013, as a sale to another private equity firm, Kohlberg, Kravis and
Roberts (“KKR”), a US-based company and one of the largest participants in the PE
industry globally. €50 million were invested alongside by the European Bank for
Reconstruction and Development (“EBRD”).10
For KKR, the deal served as a first ever
investment in Eastern Europe.
The supposed total value of the transaction amounted to between €0.85 to 1.00 bn -
which stood as a largest transaction in former Yugoslavia countries to date. The buyout
was leveraged with a €475 million issuance of euro-denominated bonds, rated by
Moody’s as (P)B2/stable.11
The total valuation implies a 3.5x MoM (money-on-money)
return for Mid Europa Partners for their investment in SBB, and an additional 2.5x
MoM for Telemach.
KKR is reportedly planning to continue the regional expansion strategy, with
possible IPO or a trade sale. As of 2014, the total volume of revenue-generating clients
exceeded 2.1 million. In mid-2015, United Group acquired Tušmobil mobile network –
a transaction which indicates further growth plans and prospects, as well as
diversification of services portfolio.
Evaluation
Operational improvements and MEP/board oversight allowed to maintain solid profit
margins despite significant capital expenditures and excessive risky acquisition strategy.
Table 5.6 lists the publicized growth of selected United Group financials.
10
http://www.reuters.com/article/2014/03/06/kkr-idUSnBw065927a+100+BSW20140306 11
https://www.moodys.com/research/Moodys-assigns-a-PB2-CFR-to-SBBTelemach-stable-outlook--
PR_285840
70
Component Growth
Revenues 37%
EBITDA 34%
Table 5.7 Average 2007-2014 growth in selected financials of SBB/Telemach
Source: www.karanovic-nikolic.com
It should be noted that the rapid increase of SBB/Telemach top line should not be
perceived as sustainable, as it largely results from a series of aforementioned
acquisitions. However, close to 50% of the increase is sourced from organic growth –
which included introducing paid internet TV used by Yugoslavian expatriates globally
and investments in a richer content library, as well as tailoring the cable TV offer to the
regional tastes and preferences – which expanded the breadth of the appeal to viewers
and was a key driver for the customer base growth.
Fiscal year 2010 2011 2012 2013 2014
Revenue 42,000 n/a 191,000 240,000 283,700
Table 5.8 Selected SBB/Telemach Group financials
Source: Moody’s, www.the-united-group.com
Similarly to Dell, the stability of market price of SBB/Telemach bonds (from the
issuance used by KKR to leverage the buyout), together with the fact that it is now
traded at premium, can be used as a proof for value creation of Mid Europa Partners
strategies resulting in a long-term value growth exceeding their holding period.
71
Chart 5.6 SBB/Telmach corporate bond clean prices 2014-2015 (reported) on the
example of BBG005QN3LF3
Source: own development basing on Bloomberg
For Mid Europa Partners, the deal success was recognized in the industry at 2014
Real Deals Private Equity Awards, where it was selected as one of the winners.12
12
http://www.karanovic-nikolic.com/wp-content/uploads/2014/06/Mid_Europa_profile.pdf
96
98
100
102
104
10/14 01/15 04/15 07/15 10/15
72
5.5 CVC CP, CSPEL and Infastech
Transactions overview
In 2006, after a series of acquisitions, Platinum Equity fund completed the purchase
of Textron Fastening Systems and renamed Acument Global Technologies. The
company specialized in blind fastening systems and operated globally.
In August 2010, Platinum Equity announced a divestiture of two units operating to
date under Acument: Avdel and Global Electronics & Commercial ("GEC") to an Asia-
based consortium of funds lead by CVC Capital Partners Asia Pacific and Standard
Chartered Private Equity Limited.
After an uncommonly short holding period of less than 2 years, CVC CP and SCPEL
exited their investment by divesting the Singapore-based entity to Stanley Black &
Decker as a trade sale.
Diagram 5.1 summarizes the aforementioned sequence of the deals.
Diagram 5.1 Transactions on Avdel and GEC entities between owners, 2010-2013
Source: own development basing on company announcements
CVC Capital Partners ("CVC CP" throughout) is one of the largest private equity
firms in the world. Having started as Citicorp Venture Capital and spun out from the
mother company in 1993, it currently encompasses all geographical regions; in total, the
value of assets under CVC group management exceeds $52 billion. In 2008, the
company raised its third fund in Asia – thanks to a series of lucrative transactions and a
2009 2010 2011 2012 2013
Owner/s
Entity
name
Avdel
Platinum Equity /
Acument Global
Technologies Inc.
CVC Capital Partners;
Standard Chartered PE
Stanley Black
& Decker
GEC
Infastech
Stanley
Engineered
Fastening
73
good understanding of the specificity of the local markets, the fund provided its LP with
net returns exceeding 20%.
Bearing some resemblance, Standard Chartered Private Equity Limited (SCPEL) is
a PE arm of Standard Chartered PLC. Headquartered in Singapore, it specializes in
buyouts in mid- to late stage companies in the middle market.
For the purposes of this research, the two aforementioned transactions shall be
analyzed in relation to each other and from CVC CP/CSPEL perspective, as together
they form a solid example of a complete private equity transaction, which resulted in
gains achieved by multiple parties.
2010: Advel and GEC purchase
In 2010, Acument Global Technologies divested two components of their business:
Advel and GEC. They were purchased by a partnership formed between CVC Capital
Partners and Standard Chartered PE as of August 2010. The financial conditions of the
acquisitions were never disclosed to public, yet still surfaced in some media sources;
access to these figures allows for an approximated, yet very definitive assessment of the
feasibility of the deal.
As these sources suggest, the value of the transaction totaled between $350 and
$400m and the two companies were producing combined sales of ca. $400m per year;
this implies a TV/Revenue ratio of less than 1.0.
74
Target company Ann. date Total Value TV/EBITDA TV/Revenue
Acument Global Tech 06/20/2014 undisclosed undisclosed undisclosed
Median - 10.45 8.59 .95
Pyeong San Co Ltd 02/08/2006 64.15 14.74 2.94
HEG Ltd 07/11/2010 50.00 6.35 1.91
Nippon Chuzo KK 05/23/2012 10.82 7.26 .34
Notion VTEC Bhd 01/18/2010 10.08 4.55 1.84
PANAGENE Inc 05/30/2013 4.42 63.03 1.68
Table 5.9 Acument Global Technology deal comps
Source: own development basing on Bloomberg
Analyzing these two figures in relation with comparables sourced from similar deals
(including the parent company, Acument, which was later an object of an unrelated
transaction in 2014), the TV/Revenue ratio of Advel and GEC acquisition presents itself
as very rational, especially given the significant size of the deal.
Source Value
Term loan $175 m
Revolving credit $15 m
Cash (50/50 split) ~$190-210 m
Table 5.10 Sources of financing of the 2010 Advel/GEC LBO by CVC CP and SCPEL
Source: own development financeasia.com
For the purposes of the acquisitions, $190m was financed through debt, with
a $175m term loan and $15m of revolving credit, provided by a consortium of 7 banks.
As reported, CVC CP and SCPEL took equal stakes in the deal. It should be also noted
that the overall relation of debt to equity is close to 50/50.
75
Immediately after the acquisition, CVC and SCPEL agreed to consolidate the two
acquired companies into a new entity, naming it Infastech and basing its operations in
Singapore. Despite having encountered difficult macroeconomic conditions, the new
owners utilized the following tools to boost the value of the new holding:
investing in sales force and engineers (total employment increase from 1,800
to 2,000) (top line growth);
performing a combination of cost reductions, including a program aimed to
save $8m annually (operating and margin improvements).
2012: Infastech divestment
Measure Achieved level
Sales growth +48%
EBITDA growth +47%
IRR from exit 48%
Realized return on investment ~2.7x
Table 5.11 Growth of selected financials during Infastech holding period by CVC
Capital Partners and Standard Chartered Private Equity Limited (August
2010 – July 2012)
Source: own development basing on Private Equity International Annual
Review 2013
Shortly after its inception, in July 2012, CVC and CSPEL announced exiting from
the investment in Infastech by conducting a trade sale to US-based Stanley Black &
Decker, a strategic investor. The value of the transaction was reported to be as high as
$850m; which represented almost a tri-fold return generated in less than 2 years.
Under combined management of CVC and CSPEL, Infastech experienced a rapid
growth as a company. The relative short time span of the deal and relatively low
leverage discourages from accounting for incurred interest expenses. On the other hand,
inline sales and EBITDA growth of almost 50% suggests fulfilment of planned
expansion. As reported by Stanley Black & Decker in publicized acquisition
76
presentation, Infastech EBITDA was $90m in 2011 from $500m in sales; this implies a
trailing TV/EBITDA equal to 9.44 and TV/Revenues of 1.7, a huge mark-up to the
original ~1.0. With sales and income increase, the value created by the new holders was
also sourced from top line growth and maintaining solid operational efficiency.
Target company Announcement date Total Value TV/EBITDA
Infastech 07/23/2012 850.00 9.44
Median - 13.29 10.55
Pyeong San Co Ltd 02/08/2006 64.15 14.74
HEG Ltd 07/11/2010 50.00 6.35
Cosmosteel Holdings Ltd 11/30/2014 11.73 15.78
KFC Ltd 02/09/2010 4.24 3.27
Table 5.12 Infastech deal comps
Source: own development basing on Bloomberg
Stanley Black & Decker, as a strategic investor, planned to incorporate Infastech
operation to its own business under Stanley Engineered Fastening; this transaction
served as an element of its planned exposure gain to Asian markets. In addition, the
company expects to utilize synergies to achieve an approximated $25m cost reductions
by 2015. The acquisition also had an immediate beneficial effect on Stanley Black &
Decker earnings per share (up by $0.20), which in itself is a good indication of multiple
arbitrage effect usage.
The CVC CP/CSPEL investment in Infastech was ranked as one of the most
successful Asian private equity transactions in 2012.
77
Conclusions
As announced in the introduction, the dissertation provided a comprehensive
overview of the private equity deal mechanics, taking multiple of perspectives
throughout.
By describing the factors and phenomena specific to each of its stages, it successfully
defended the initial hypothesis of presence of positive value creation in private equity
investments. Positive alpha generated by PE investments in all analyzed geographies
sustained the hypothesis in macro level.
As presented by the case studies, the decision-making power concentration and
managers’ expertise are capable to result in value generation in strategic management.
The selected case studies tested utilization of all value creation tools introduced in
chapter 4 – and proved that their skillful utilization can indeed result in positive worth
added. As appointed in chapter 3, a long-lasting prevalence of positive value creation in
all analyzed target companies extends beyond the fund’s holding period, as they
continue to prosper after the holding period and divestment.
As such, the positive value creation opportunities were confirmed on multiple
degrees of research: macroeconomic, strategic and operational. Moreover, the research
identified difference in value creation approaches and sources in distinct regions and
market.
The results shall not be generalized and extrapolated to the entire universe of private
equity. It goes without question that the value creation is not present in all PE deals. In
fact, many of such transactions tend to fail before the acquisition is agreed on and
completed. Others do not deliver profits to the investors, despite managers' efforts,
resulting in negative returns. Due to these reasons, the result of the research performed
for the purposes of this thesis should not be understood as a confirmation of 100%
success rate of analyzed value creation strategies.
In order to ensure the positive and long-lasting value creation, the private equity fund
managers shall use a careful, diligent approach to avoid accusations of short-term focus
and extortion. Aside from traditional due diligence, proprietary insight from insiders
and subject matter experts should be taken into account in all stages of investment. The
choice of management in target company increases in importance, as well as the
78
utilization of synergies between firms in fund’s portfolio and interaction are
determinants of contemporary private equity strategies. Furthermore, development and
implementation of own, proprietary business plan is vital for an actual value creation
coming from PE ownership to be established – as opposed to straightforward following
of the existing management prospects.13
13
“Why some private equity firms do better than others”, McKinsey Quarterly, February 2005
79
Bibliography
Literature
Demaria C., Introduction to Private Equity: Venture, Growth and Turn-
Around Capital, 2nd
Edition, John Wiley & Sons, 2013
Gravagna N., Adams Peter K., Venture Capital for Dummies, For Dummies,
2013
Kaplan Steven N., Stroemberg P., Leveraged Buyouts and Private Equity,
Journal of Economic Perspectives Volume 22, 2008
Megally E., van Swaay H., Leleux B., Private Equity 4.0: Reinventing Value
Creation, John Wiley & Sons, 2015
Talmor E., Vasvari F., International Private Equity, John Wiley & Sons,
2011
Industry reports
Bain and Company, Asia Pacific Private Equity Report, 2015,
www.bain.com, accessed 10/10/2015
Bain and Company, Global Private Equity Report, 2015, www.bain.com,
accessed 10/10/2015
Boston Consulting Group, Private Equity Engaging for Growth, 2012,
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Cambridge Associates, U.S. Private Equity Index and Selected Benchmark
Statistics, 2014, www.cambridgeassociates.com, accessed 10/10/2015
Capital Dynamics, Value creation in Private Equity study, 2014,
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Capital Dynamics, Private Equity Review H1 2015, 2015, www.capdyn.com,
accessed 10/10/2015
EVCA, European Private Equity Activity, 2014, www.seca.ch, accessed
10/10/2015
EY, Global Private Equity Watch, 2014, www.ey.com, accessed 10/10/2015
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accessed 10/10/2015
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EY, Private Equity Roundup – China, 2015, www.ey.com, accessed
10/10/2015
Grant Thornton, Global Private Equity Report, 2014-2015,
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ICAEW, Private equity funds, funders and other market participants, 2015,
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10/10/2015
Preqin, 2014 Private Equity-Backed Buyout Deals press release, 2015,
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Preqin, Global Private Equity Report, 2014, www.preqin.com, accessed
10/10/2015
RRI, Responsible Investment in Private Equity, 2009,
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PwC, Private Equity Trend Report, 2014, www.pwc.com, accessed
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Academic research papers
Diller C., Kaserer C., What Drives Cash Flow Based European Private
Equity Returns?, London School of Economics and Political Science, 2005
Hammer B., Loos R., Schwetzler B., Exit Through Exitus in Private Equity
Buyouts, 2015
Kim J., The Rise of Private Equity in China: A Case Study of Successful and
Failed Foreign Private Equity Investments, Claremont McKenna College,
2014
Lilimatainen J., A Survey into Private Equity: With a Case Study of Private
Equity Allocation in Stanford Endowment, Aalto Univ. School of Business,
2012
Povaly S., Private Equity Exits: An Analysis of Divestment Process
Management in Relation to Leveraged Buyouts, University of St. Gallen,
2006
81
Deal presentations and decks
Dell Computer Corporation
o Boston Consulting Group, Project Denali, 2013, www.sec.gov,
accessed 10/10/2015
o Evercore, Project Denali. Presentation to the Board of Directors,
2013, www.sec.gov, accessed 10/10/2015
o Goldman Sachs, Preliminary Summary Discussion Materials
prepared for the Special Committee of the Opal Board of Directors,
2012, www.sec.gov, accessed 10/10/2015
o JP Morgan, Presentation to the Denali Board of Directors, 2013,
www.sec.gov, accessed 10/10/2015
Moncler SpA
o Carlyle, Moncler Case Study (at) UBS AIFI Event, 2014, www.aifi.it,
accessed 10/12/2015
o Carlyle, Moncler at a glance Case Study, 2014, www.carlyle.com,
accessed 10/12/2015
Serbia Broadband/Telemach
o Invest Europe, SBB/Telemach, 2014, www.investeurope.eu, accessed
10/13/2015
o SBB Solutions, SBB/Telemach Group Absolut OK Data Center, 2012,
www.ieee-hpsr.org, accessed 10/13/2015
Infastech
o Infastech, Hi-level Overview Corporate Presentation, 2011,
www.infastech.com, accessed 10/11/2015
o Stanley Black & Decker, Acquisition of Infastech, 2012, www.
phx.corporate-ir.net, accessed 10/11/2015
82
List of charts and diagrams
Charts
Chart 1.1, Private equity investments in company lifecycle stages, source:
own development
Chart 1.2, End-to-end pooled IRR of US buyout funds and S&P 500 mPME
index (as of July 2014), source: own development basing on Cambridge
Associates
Chart 1.3, End-to-end pooled IRR of US buyout funds and MSCI Europe
mPME index (as of July 2014), source: own development basing on
Cambridge Associates
Chart 1.4, End-to-end pooled IRR of Asia Pacfic buyout funds and MSCI All
Country Asia mPME index (as of July 2014), source: own development
basing on Cambridge Associates
Chart 1.5, Unleveraged private equity alpha by region (annual return in %),
2012, , source: Capital Dynamics, Value Creation in Private Equity
Chart 2.1, Number of LP by investor type as of 31 December 2013, source:
own development basing on Preqin
Chart 2.2, Breakdown of aggregate capital in PE by investor type as of 31
December 2013 excluding funds of funds and asset managers, source: own
development basing on Preqin
Chart 3.1, Global buyout capital raised (2005-2014) ($ bn), source: own
development basing on Dealogic and Preqin
Chart 3.2, Global buyout deal value (2005-2014) ($ bn), source: own
development basing on Dealogic and Preqin
Chart 3.3, Private equity buyout funds “dry powder” by fund type (2005-
2015E) ($ bn), source: own development basing on Preqin 2Q2015 Buyout
Deals Update
Chart 3.4, Global buyout exit value (2005-2014) ($ bn), source: own
development basing on Dealogic and Preqin
Chart 3.5, Global number of private equity-backed exits by type with average
value, source: own development basing on Preqin 2Q2015 Private Equity
Update
83
Chart 4.1, Impact of value creation drivers in private equity transactions by
region, source: Capital Dynamics, Value Creation in Private Equity 2014
Chart 4.2, Value creation drivers (“times money” basis breakdown ) in global
private equity transactions in 2013, source: own development basing on
Capital Dynamics
Chart 5.1, Dell Computer Corporation public stock price per share 1998-2013
(closing prices) as listed on NASDAQ stock exchange market, source: own
development basing on NASDAQ
Chart 5.2, Dell Computer Corporation ownership structure pre- and post-2013
LBO, source: own development basing on Dell Computer Corporation filings
Chart 5.3, Dell Computer Corporation corporate bond clean prices 2013-2015
(reported) on the example of USU2386GAA95/ 5 5/8 10/15/20, source: own
development basing on Bloomberg/TRAC
Chart 5.4, Moncler ownership structure 2008-2013, source: own development
basing on Carlyle Group filings
Chart 5.5, Moncler SpA public stock price per share 2013-2015 (closing
prices, adjusted) as listed on Borsa Italiana stock exchange market, source:
own development basing on Thomson Reuters
Chart 5.6, SBB/Telmach corporate bond clean prices 2014-2015 (reported) on
the example of BBG005QN3LF3, source: own development basing on
Bloomberg
Diagrams
Diagram 2.1, Structure of a typical private equity fund, source: own
development
Diagram 2.2, Multiple funds management by a single General Partner,
source: own development
Diagram 3.1, Private equity fund investment stages, source: own
development
Diagram 5.1, Transactions on Avdel and GEC entities between owners, 2010-
2013, source: own development basing on company announcements
84
List of tables
Table 1.1, Venture capital and buyout investment strategies comparison,
source: own development
Table 1.2, Buyout market statistics globally, 2013-2014 ($ bn), source: own
development basing on Thomson ONE, S&P Capital IQ, Asian Venture
Capital Journal database
Table 4.1, Risk and return profiles of asset classes in the US, 1980-2000,
source: CalSTRS, Venture Economics, Ibbotson & Associates
Table 5.1, Dell stock trading comps ($ bn), source: own development basing
on Bloomberg
Table 5.2, Dell deal comps ($ bn), source: own development basing on
Bloomberg
Table 5.3, Dell Computer Corporation balance sheep structure pre- and post-
2013 LBO ($ bn), source: own development basing on Dell Computer
Corporation filings
Table 5.4, Selected Dell Computer Corporation financials pre- and post-LBO
(GAAP), source: own development basing on Dell CC filings and Bloomberg
Table 5.5, Changes to Dell Computer Corporation corporate bonds agency
ratings on the example of USU2386GAA95/ 5 5/8 10/15/20, source: own
development basing on Bloomberg
Table 5.6, Selected Moncler SpA Group financials (consolidated), source:
own calculations basing on Moncler SpA Group filings
Table 5.7, Average 2007-2014 growth in selected financials of
SBB/Telemach, source: www.karanovic-nikolic.com
Table 5.8, Selected SBB/Telemach Group financials, source: Moody’s,
www.the-united-group.com
Table 5.9, Acument Global Technology deal comps, source: own
development basing on Bloomberg
Table 5.10, Sources of financing of the 2010 Advel/GEC LBO by CVC CP
and SCPEL, source: own development financeasia.com
Table 5.11, Growth of selected financials during Infastech holding period by
CVC Capital Partners and Standard Chartered Private Equity Limited
85
(August 2010 – July 2012), source: own development basing on Private
Equity International Annual Review 2013
Table 5.12, Infastech deal comps, source: own development basing on
Bloomberg
86
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