1. 1HC. TBS. 2014-2015 2. 2 Investment strategy that involves
the purchase of equity or equity linked securities in a company
Investment is made through a negotiated process By sophisticated
investors with financial and operating expertise The goal is to
acquire undervalued or promising assets and realize profits in 3-5
years after the acquisition Information asymmetry and
inefficiencies are important factors 2 HC. TBS. 2014-2015 3. 3
Alternative Investments Private Equity Hedge Funds Real Estate
Commodities Venture Capital Long / Short Office Currencies Buyout
Global Macro Retail Interest Rates Mezzanine Capital Event Driven
Residential Natural Ressources Special Situation Market Neutral
REITs Arbitrage Emerging markets 3 HC. TBS. 2014-2015 4. 4
Leveraged Buyouts Venture Capital (early vs. late stage) Special
Situations (i.e. distressed) Mezzanine Secondary Purchases Fund of
Funds 4 HC. TBS. 2014-2015 5. 5 Established firms with track
records, stable cash flows and stable growth rates Annual revenues
of $25 - $500 million Typically in basic retail, transportation and
manufacturing industries Typically have assets to borrow against
and access to bank loans Seek private equity to effect a change in
ownership, finance an expansion or restructure 5 HC. TBS. 2014-2015
6. 6 Firms with substantial risk of failure - business models and
marketing approach are yet to be proved Small and illiquid
investments with size of $500k - $2 million The smallest type is
the entrepreneur who needs the financing to conduct initial
research and development The most mature type are those firms that
are starting to turn profits but need capital for expansion Angel
capital is an important source of funding 6 HC. TBS. 2014-2015 7. 7
Firms with more certain business models Proven technology and
market Profitable and need expansion capital General size of $2 -
$15 million IPO or Sale expected/feasible in near term Original
investors may achieve some liquidity Because the risk is generally
lower and the liquidity higher, later-stage investments require
lower returns than early-stage investments 7 HC. TBS. 2014-2015 8.
8 Buyouts focus on mature companies with stable or sustainable
growth profile Buyouts rely heavily on debt financing to finance
most of the purchase price Venture Capital focus on high growth
industries with riskier investment profile than buyouts Venture
Capital relies heavily on equity financing and has higher return
targets than buyouts 8 HC. TBS. 2014-2015 9. 9 Investment is
supplied by specialized Turnaround Funds (TF) for target firms that
have defaulted on their outstanding loans TFs receive controlling
interests, with former owners making up the minority interest TFs
renegotiates terms with existing lenders, offering to restructure
or pay off loans at a discount TFs also deliver expertise to find
new markets or partners for the firms products, cut costs, change
or improve the current management 9 HC. TBS. 2014-2015 10. 10
Investing directly in PE funds can be difficult for individual
investors and small institutions Relatively high investment
minimums may disqualify some of the small investors Information on
PE managers is difficult to locate Gaining access to top PE funds
can be difficult due to high investor demand Fund of Funds
co-mingles the investments of small investors into a single pool
and then assembles a portfolio of PE funds 10 HC. TBS. 2014-2015
11. 11 Private limited partnerships Individual managers are the
General Partner (GP) Providers of capital (pensions, insurance
companies, wealthy people) are Limited Partners (LPs) Partnerships
have 10-year life with +1+1 extension 4-6 year investment period
1-2% annual management fee Profits split 80-20, after reaching
hurdle return level for LPs LPs need to fund within 2-3 weeks of
capital call Penalties for failure to fund by LPs IRRs depend on
when money is transferred by LPs 11 HC. TBS. 2014-2015 12. 12
Selecting investments Obtaining access to high quality deal flow
Sorting and evaluating large amount of information Structuring
investments Designing transactions Monitoring investments Providing
strategic, operational and financial assistance to portfolio
companies Exiting investments IPO, Sale or Recapitalization 12 HC.
TBS. 2014-2015 13. 13HC. TBS. 2014-2015 14. 14 Public and corporate
pension funds, endowments, foundations, wealthy families, insurance
companies, foreign investors and others Investors expect to receive
higher risk-adjusted returns on private equity than other
investments Potential benefits of diversification Advantage of
economies of scope between private equity investing and investors
other activities 14 HC. TBS. 2014-2015 15. 15 ~ 80% of PE
investments flow through specialized intermediaries, which are
limited partnerships Intermediaries provide expertise in selecting,
structuring, and managing private equity investments Intermediaries
not organized as LPs play a less significant role today in the
private equity market SBICs owned by banks and VC subsidiaries of
non-financial corporations mostly invest their corporate parents
capital 15 HC. TBS. 2014-2015 16. 16 Vary in size and their reasons
for raising capital Young firms that are developing innovative
technologies Middle market companies that are stable, profitable
and need private equity to expand or restructure Going private
transactions for public companies PIPE (Private Investment in
Public Equity) provides financing without registration costs/
disclosures associated with public offerings 16 HC. TBS. 2014-2015
17. 17 Limited Partners Investors with money Insurance companies,
pension funds, banks, and high net worth individuals Investors
commit a certain amount to the fund They have no other active role
in the fund and no liability beyond their commitments One General
Partner Managers of money Manages the investments via a management
company Receives management fee (typically 2%) on commitments
Receives carried interest in the profits 17 HC. TBS. 2014-2015 18.
18 Contractually fixed lifetime (10-12 years) Capital is invested
during the first 4-6 years Thereafter, investments are managed and
liquidated Distributions are made to the limited partners in the
forms of cash or securities General Partner typically raises a new
fund when the investment phase for the existing fund has been
completed (=> 80%) Each fund partnership is legally separate and
is managed independently of other fund partnerships (i.e KKR I vs.
KKR II) 18 HC. TBS. 2014-2015 19. 19 Target Fund Size $1 billion
Minimum Commitment $10 million Gross Target Return 25% Management
Fee 2% Carried Interest 80% - 20% Commitment Period 5 years Fund
Term 10 years +1+1 19 HC. TBS. 2014-2015 20. 20 LPs delegate
significant responsibilities to GPs Resolution of potential
conflict of interests lies in the structure of the partnership
agreement Partnerships have finite lives To remain in business, GPs
regularly raise new funds - easier for reputable firms with good
record GP compensation is closely linked to the fund returns 20 HC.
TBS. 2014-2015 21. 21 The objective is to limit excessive risk
taking by GPs Covenants usually set limits on the % of the
partnerships capital that may be invested in a single firm
Covenants may preclude investments in publicly traded and foreign
securities, derivatives and other private equity funds, etc
Covenants usually require that cash from sale of portfolio assets
be immediately distributed to LPs LPs usually limit such deal fees
or require that deal fees be offset against management fees Return
hurdle rates for LPs 21 HC. TBS. 2014-2015 22. 22 Track record,
relevancy of past experience Generation of adequate deal flow Sound
investment decision-making processes Ability to achieve successful
exits / liquidity Advantages vs. similarly focused funds
Sufficiency of resources Meaningful commitment of time Cohesiveness
and sustainability of team Succession planning 22 HC. TBS.
2014-2015 23. 23 Co-investments are direct investments in portfolio
companies by LPs alongside private equity partnerships Usually, LPs
acquire the securities on the same terms as the partnership but pay
no management fee or carried interest Co-investment opportunities
arise when GPs need additional equity financing to close a deal
Some institutional investors see co-investing as an opportunity to
acquire expertise in private equity investing For GPs, LPs that
stand ready to co-invest represent a flexible source of funds for
closing deals 23 HC. TBS. 2014-2015 24. 24HC. TBS. 2014-2015 25. 25
Deal flow, access to high quality investment opportunities, is
absolutely crucial GPs rely on relationships with third parties and
industry contacts for deal flow generation The greater the deal
flow, the higher the likelihood of identifying an attractive
opportunity Proprietary deals are more attractive than deals
brought by agents or intermediaries Less competition means lower
purchase price Lower purchase price means higher IRRs 25 HC. TBS.
2014-2015 26. 26 Investment banks, consultants, lawyers and
industry contacts introduce potential opportunities Preliminary
opportunity analysis will be performed relatively quickly Initial
decision is quickly made whether a PE firm would be interested in
the opportunity PE firms have different investment strategies and
views of the world If interested, PE firms would sign
Confidentiality Agreement to begin evaluating the opportunity 26
HC. TBS. 2014-2015 27. 27 Deal screening is art and science PE
firms receive many investment proposals in a year Proposals are
first screened to eliminate those that are clearly fail to meet
investment criteria Specialization on a specific industry or
geography reduces the number of investment opportunities considered
Initial review takes a 1 2 days and results in the rejection of ~
90% of proposals received by a PE firm Surviving proposals then
become subject to a secondary review after the signing of a
Confidentiality Agreement Proposals that survive the preliminary
and secondary reviews become the subject of a comprehensive due
diligence process 27 HC. TBS. 2014-2015 28. 28 Commonly referred to
as 1st round bid Give sellers a perspective on the level of buyer
interest and the valuation parameters buyers are likely to assume
Indication of interest subject to: Completion of business, legal,
accounting and environmental due diligence Negotiation and
execution of documents Receipt of necessary approvals Negotiation
of employment agreements with key management 28 HC. TBS. 2014-2015
29. 29HC. TBS. 2014-2015 30. 30 Acquisition of a company where a PE
firm uses cash equity and debt to fund the purchase price PE firm
injects equity into a new shell company (NewCo), which borrows debt
and simultaneously acquires the target PE firm contributes capital,
operating and financial expertise, strategic insight, contacts and
management talent Management ownership increases, creating higher
incentives to improve operations and deliver results Debt is repaid
by the operating cash flows or by the sale of non-core assets of
the acquired business LBO is similar to buying and renting out a
house - the rent cash flows to pay down the mortgage debt 30 HC.
TBS. 2014-2015 31. 31 Ownership Purchase price Equity investment
Bonds Bank loan NewCo acquires Target Acquiror (LBO firm) Banks
Current Owners Bond Holders NewCo Target 32. 32 Varies over time
with market conditions Sources of financing 40 50% senior bank debt
(5-7 years) 20 30% subordinated debt (8-12 years) 20 40% common
equity Bank debt is secured from receivables, inventory and
PP&E 32 HC. TBS. 2014-2015 33. 33 History of consistent
profitability Predictable cash flows to service debt Availability
of excess cash Easily separable assets or businesses Strong
management team Strong brands and market position Industry with
barriers to entry Little danger from disruptive changes
(technology, regulatory, etc.) Visible/feasible exit strategy (IPO
or M&A) 33 HC. TBS. 2014-2015 34. 34 Strategic Vision, growth
initiatives, add-on acquisitions, exit Operational Sales, costs,
assets Organizational Processes, structure, systems, skills
Financial Balance sheet, tax structure, capitalization Expansion in
valuation multiples Advantages of being private 34 HC. TBS.
2014-2015 35. 35 Minimize purchase price Maximize leverage Minimize
liabilities purchased Manage transaction costs Improve business
operations Maximize tax efficiency Optimize exit 35 HC. TBS.
2014-2015 36. 36 Avoid competition Auction process vs. proprietary
deal Maintain price discipline Avoid deal fever Maximize deductions
from headline price Earn outs Liabilities pension, legal, other 36
HC. TBS. 2014-2015 37. 37 Maintain competitive process among banks
willing to fund the transaction Choose right financing structure
Balance of risk, flexibility and interest cost Seller notes and
staple financing Deeply subordinate and at attractive terms Partner
with co-investors 37 HC. TBS. 2014-2015 38. 38 Detailed due
diligence Legal Financial Accounting Environmental Tough
negotiations Reps and Warranties 38 HC. TBS. 2014-2015 39. 39
Minimize transaction costs Internal costs Aborted deal costs
Maximize tax efficiency Increase interest tax shield Increase
depreciation Increase tax deductible amortization 39 HC. TBS.
2014-2015 40. 40 Top line growth New markets, partners Products
Margin improvement COGS SG&A 40 HC. TBS. 2014-2015 41. 41
Difficult to predict future business cycles and market conditions
Prepare an exit strategy and groom the business for that exit Trade
sale or M&A clean cash exit IPO long process, company needs to
be above a certain size, lock-up restrictions Leveraged
recapitalization allows sponsor to remove invested capital prior to
ultimate exit, increases IRR and hedges against poor exit Secondary
buyout selling to another sponsor 41 HC. TBS. 2014-2015 42. 42
SOURCES USES New Revolver (L + 275 bps) $ 25.0 Purchase Price of
Equity $ 250.0 New Term Loan A (L + 275 bps) 150.0 Refinance
Existing Debt 630.0 New Term Loan B (L + 325 bps) 200.0 Assume
Capital Leases 25.0 Assume Capital Leases 25.0 Transaction Costs
20.0 Total Senior Debt 400.0 New Senior Subordinated Notes (12%)
250.0 Total Debt 650.0 New PIK Preferred / Seller Paper (14%) 75.0
Acquirors Equity / Strategic Cash 200.0 Total Sources $925.0 Total
Uses $925.0 42 HC. TBS. 2014-2015 43. 43 Equity New equity
injection from LBO sponsor Potential equity contribution from
existing management Potential continuing equity investment by
existing shareholders (rollover) Equity from a strategic partner
Debt Bank debt (senior debt) High yield debt (subordinated debt)
Mezzanine securities Can be structured to be more debt-like or more
equity-like depending on the situation 43 HC. TBS. 2014-2015 44. 44
Senior secured (most senior debt) Flexible, interest rate is
floating Matures before other debt classes, amortizing Typically
callable/prepayable at par Quarterly interest payments Maintenance
covenants Structured at the operating company level Underwritten
via syndication Diligence, commitment, launch, syndicate, fund 44
HC. TBS. 2014-2015 45. 45 Revolving Credit Facilities vs. Term
loans Revolvers allow multiple drawings for working capital and
general corporate needs Term loans funded at closing Pro Rata
facilities Revolver and Term Loan A held by commercial banks Buy
and hold mentality, shrinking segment Institutional tranches
Consist of Term Loans B, C or D- held by insurance companies, CLOs
and CDOs, growing segment Purely transactional, liquidity in the
secondary market Minimal front-end amortization 45 HC. TBS.
2014-2015 46. 46 Usually subordinated and/or unsecured Interest
rate is fixed, maturity of 8-10 years Bullet maturity after full
bank debt amortization Usually not callable at par in early years,
typically 1-5 years Structured at the operating company level
Publicly quoted security Incurrence covenants Diligence, document,
roadshow, price and fund 46 HC. TBS. 2014-2015 47. 47 Subordinated
to bank debt and high yield bonds Flexible, typically floating
interest rate Non-amortizing, bullet maturity typically after 10
years Cash & PIK coupon payment further enhanced with equity
warrants PIK component can eat into equity Structurally
subordinated at the holding company level Incurrence covenants 47
HC. TBS. 2014-2015 48. 48HC. TBS. 2014-2015 49. 49 Objective
Validate business concept Verify market Appraise management
Validate forecasts Valuation Diligence establishes basis for
valuation, price and negotiation Diligence is expensive and time
consuming Diligence strategy Preliminary evaluation to identify
deal-breakers before spending time and money on detailed due
diligence 49 HC. TBS. 2014-2015 50. 50 Business concept,
opportunity Market Competition Customers Products Management
Financials Returns 50 HC. TBS. 2014-2015 51. 51 What is the
concept/opportunity? Is the opportunity sustainable? Potential size
of the opportunity? How can the target company capitalize on the
opportunity? Is the proposed plan/strategy realistic? How does the
target business fit to its markets and region? Why are we so smart
or lucky? 51 HC. TBS. 2014-2015 52. 52 Market characteristics,
segments, size, growth, cyclicality, key metrics, demographics?
Projected market share and sales volume? Low barriers to entry into
the market? Is targets business model sustainable? How will the
business be perceived by customers? Regulatory issues? 52 HC. TBS.
2014-2015 53. 53 Who are the direct competitors? Relative size,
scope, cost basis, brands and market share? What are the key
factors/levers of competition in the industry? How is targets
business strategy different than competitors? What are targets
competitive advantages? What are the targets competitive
disadvantages? Threat from potential new entrants? 53 HC. TBS.
2014-2015 54. 54 Who are the customers? Current and future customer
base? What specific market and customer needs does the target
business serve? How do customers make their purchase decisions? Key
criteria? Customer satisfaction and retention? Does the projected
number of customers or sales make sense? Realistic? How will the
target acquire new customers? 54 HC. TBS. 2014-2015 55. 55 Product
life cycle, penetration trends? Product pricing? Product
profitability? Productivity versus competition? Maintain or
jettison certain products? Plant consolidation? Inventory
optimization? CAPEX requirements? Development plans? 55 HC. TBS.
2014-2015 56. 56 Competent? Experienced? Cohesive? Strategic?
Flexible? Incentivized? Proactive? Realistic? 56 HC. TBS. 2014-2015
57. 57 What is the optimal capital structure? Are revenue and cost
projections comprehensive, realistic, reasonable? What are the
underlying business assumptions of the projections? Impact of
various business case scenarios? How does cash flow in this
business? How much capital investment needed? When? Correct
accounting treatment? What are the key sensitivities? 57 HC. TBS.
2014-2015 58. 58 Financial and accounting diligence is primarily
focused on drilling into the basic components of valuation
Recurring EBITDA (adjust for extraordinary items) CAPEX Working
Capital Cash Flow Multiple 58 HC. TBS. 2014-2015 59. 59 General
issues exclusions, accounting changes, pro forma adjustments
Revenue components, method of recognition, customers, customer
arrangements, pricing/volume Margins components of cost of sales,
gross margin trends Reserves under/over statement of profits
Compensation benefits, headcount needs, transition issues, bonus
SG&A components, trends, discretionary costs, fixed vs.
variable, cost savings Other restructurings, acquisitions,
contingencies 59 HC. TBS. 2014-2015 60. 60 Determine normalized
annual CAPEX Maintenance or mandatory CAPEX Determine expansion
CAPEX Discretionary CAPEX CAPEX between signing and closing of
transaction reduce net cash position Important to have correct
CAPEX assumptions in calculating exit value 60 HC. TBS. 2014-2015
61. 61 Analyze working capital cycle Components of B/S accounts
Needs and trends Savings opportunities Potential closing balance
sheet issues Important to have correct working capital assumptions
in calculating exit value 61 HC. TBS. 2014-2015 62. 62 Conducted in
tandem with business, financial and accounting due diligence
Structure the transaction in the most tax efficient manner
Understand the legal aspects of targets business and assets being
acquired Identify and evaluate liabilities Materials are typically
made available for review in a data room 62 HC. TBS. 2014-2015 63.
63 No real competitive advantage of PE firm Long list of things
that have to go right to make the deal work Build it and they will
come is not a good business strategy Aggressive estimates of future
growth Employing the wrong management team True downside case is
not adequately evaluated 63 HC. TBS. 2014-2015 64. 64HC. TBS.
2014-2015 65. 65 Preliminary documents designed to provide a
framework for negotiations between investors and the target company
Provides collective understanding of the proposed transaction,
basic terms and conditions Generally focuses on the targets
valuation and the conditions under which investors agree to provide
financing Term sheet eventually transforms into a formal agreement
known as the Purchase Agreement, which is a legal document that
details who is buying what from whom at what price when 65 HC. TBS.
2014-2015 66. 66 Acquirer Target Valuation Structure of acquisition
Management compensation Debt financing Board of directors Rights
Transaction fees Management fees 66 HC. TBS. 2014-2015 67. 67
Transaction terms and structure Description of asset sold
Calculation of purchase price Closing date Reps and Warranties
buyer and seller Conditions to closing seller Conditions to closing
buyer Conditions for termination 67 HC. TBS. 2014-2015 68. 68
Clarity regarding key financial and deal terms Business/assets
being acquired and the liabilities being assumed Arrangements for
asset sharing going forward Protecting the acquirer from contingent
or undisclosed liabilities Locking up the target, no shopping of
the deal Representations and Warranties verification of factual
matters covered during the due diligence Pre-closing operations
Closing conditions fiduciary outs, break up fee Purchase price
adjustments post closing adjustment 68 HC. TBS. 2014-2015 69. 69
Statement of fact at a particular point in time Purpose Provides
basis for refusal to close the transaction if untrue (pre- close)
Provides basis for post-closing indemnification for damages if
untrue (post-close) Mainly refers to areas covered in due diligence
Financial statements, liabilities, contracts, real estate,
litigation, taxes Both buyer and seller gives Reps & Warranties
Buyers objective understand what I am buying Sellers objective
increase certainty of closing 69 HC. TBS. 2014-2015 70. 70
Agreements to act or refrain from acting in the future Positive vs.
Negative covenants Necessary because signing and closing are not
simultaneous Pre-closing covenants Largely to the benefit of buyer
Objective is to preserve the asset to be purchased and ensure
closing occurs Post-closing covenants To the benefit of seller
Objective is to protect certain interests once seller no longer
owns the business 70 HC. TBS. 2014-2015 71. 71 Pre-closing
Operations in the ordinary course of business No solicitation of
proposals from competing buyers No dividends and distributions No
issuance of equity or incurrence of debt No acquisitions and
divestitures No execution of significant contracts No change in
accounting practices Post-closing No changes to compensation No
hiring or firing of key management employees 71 HC. TBS. 2014-2015
72. 72 Transaction will not close until all conditions are
satisfied Representations and warranties are true Absence of
material adverse change in the business Excludes general economic
or industry conditions, stock price movements, failure to meet
forecasts, matters known to buyer Receipt of required government
approvals and major third party consents Debt financing available
on terms and conditions set forth in commitment letters Termination
is cessation of both parties obligations Drop dead date financing
and regulatory Breaches - break up fee ~5% Fiduciary out Buyers
objective to be able to walk away if anything major is wrong
Sellers objective to have some certainty that transaction will
close if things are in reasonable order 72 HC. TBS. 2014-2015 73.
73 Initial screening of deals Heads up memorandum Non-binding
indications / term sheets Detailed due diligence and evaluation
Formal and detailed presentation to the investment committee Final
approval and funding 73 HC. TBS. 2014-2015 74. 74 Why is the
company being sold? What is the investment thesis? How does the
opportunity fit with the PE firms investment strategy and skill
base? What are the size, structure and timing of the investment?
What is the PE firms edge in the process? What is the due diligence
road map? How will the PE firm exit the investment? What are the
expected returns and key assumptions driving the projections? 74
HC. TBS. 2014-2015 75. 75 Analysis of the deal opportunity, the
business, the transaction, the process, industry trends, due
diligence results Detailed discussion of risks and opportunities
Detailed analysis of operating and financial projections Detailed
scenario analysis and projected returns Key questions to answer:
Why do we want to do this deal? What is our edge? What value do we
bring to this deal? Who is the competition? How and when will we
exit? Impact of this deal on the rest of the portfolio? 75 HC. TBS.
2014-2015 76. 76HC. TBS. 2014-2015 77. 77 Year 1 Figure out what
you just bought Fix problems, focus on 2-3 key areas to improve
Assess and change out management Years 2-3 Strategic Plan and
Execution Develop strategic business plan Make investments, pursue
acquisitions Execute plan Pay down debt Year 4-5 Prepare for Exit
Windows dressing, clean up Sell on good performance 77 HC. TBS.
2014-2015 78. 78 Takes place at least quarterly Candid and open
discussion on the status of each investment Progress of investment
thesis Value already created Problems experienced Changes needed to
the game plan Basis for valuation Exit planning and timing 78 HC.
TBS. 2014-2015 79. 79 Information gathering is crucial Board seats
provide meaningful access Monthly financial and operational
statistics are provided to PE investors Regular interaction
(weekly/monthly conference calls) with management Weekly PE
firmwide meetings Quarterly MD&A write-ups from portfolio
companies Annual audit reports 79 HC. TBS. 2014-2015 80. 80
Strategic and operational advice Financial engineering expertise
Recruitment of top management and board members Leveraging industry
contacts for identifying future partners, markets Revenue growth
Gross margin improvement Operating expense reduction Cash flow
improvement Crisis management Corporate governance Exit preparation
Degree of involvement varies with type of investment 80 HC. TBS.
2014-2015 81. 81 Board Representation GPs are extremely influential
and effective outside directors GPs have the resources and staff to
monitor portfolio companies Allocation of Voting Rights GP
investment is large enough to achieve majority ownership In some
situations, GPs may obtain voting control even if they are not
majority shareholders In general, a GPs voting rights do not depend
on the type of stock issued. For example, holders of convertible
preferred stock may be allowed to vote their shares on an as
converted basis Control of Access to Additional Financing Venture
Capital is provided in several rounds Influence of original
investor is high on new GPs willingness to participate in
subsequent rounds 81 HC. TBS. 2014-2015 82. 82 Interact regularly
with the management and gather timely information Focus on top 2-3
priorities and deliver strategic and operational assistance
Evaluate progress made vs. plan Identify problems early Adjust game
plan as needed Value portfolio companies conservatively Prepare for
exit at least one year in advance 82 HC. TBS. 2014-2015 83. 83HC.
TBS. 2014-2015 84. 84 Limited partnerships must be dissolved within
a certain time as they need to return capital to LPs Exit =
Monetization and realization of paper profits Exit requires
advanced planning and preparation Sale IPO Recapitalization 84 HC.
TBS. 2014-2015 85. 85 Need to forecast the evolution of the
business Closely follow macro trends in the industry Who are the
likely buyers? Strategics vs. financial buyers Foreigners vs. local
buyers Exit preparation takes time Execute strategy and hit the
budget forecasts Develop and prepare the management team Establish
a clean track record (audits) Establish a reputable and competent
board 85 HC. TBS. 2014-2015 86. 86 Advantages Buyers usually pay a
premium Clean exit with greater certainty Cheaper than IPO Faster
and simpler than IPO Convince one buyer vs. the whole market
Disadvantages May not be welcomed by the management sale or merger
imply reduced independence Buyer appetite can be unpredictable 86
HC. TBS. 2014-2015 87. 87 Investment bank (target advisor) due
diligence Investment bank (target advisor) writes selling memo
Narrow the universe of potential buyers and place initial calls
into buyers Send and negotiate confidentiality agreements Send
preliminary bid letters Analyze preliminary bids Create management
presentations Assemble data room Buyer due diligence Send final bid
letter Analyze final bids Negotiate key terms Contract negotiations
and documentation Transaction announcement 87 HC. TBS. 2014-2015
88. 88 Advantages Prestige of becoming a publicly traded company
Currency for future M&A activity Increased visibility for the
company Preservers a companys independence and provides continued
access to capital Disadvantages Not an immediate, clean liquidity
event for investors Long and time-consuming Distraction for
management Expensive process Information disclosure requirements
Lock ups 88 HC. TBS. 2014-2015 89. 89 1. Due Diligence and Drafting
Meetings with senior management, iterative drafting of registration
statement (Business Overview, Risk Factors, Financials, MD&A)
2. Initial Filing with SEC Generally accessible to the public and
does not include the expected share price range for the offering 3.
Structuring and Valuation Selecting co-managers, setting the
initial filing range that serves as a valuation guideline for
investors during the marketing process 4. Prospectus Distribution
SEC gives comments on each draft of registration statement, the
preliminary Prospectus is mailed broadly to potential investors 5.
Salesforce Education On the companys story before marketing to
potential investing clients, management dry runs 6. Targeting
Investors Identification of best potential buyers, determine anchor
buyers based on their current holdings of stock, one-on-one
meetings 89 HC. TBS. 2014-2015 90. 90 7. Syndication The lead
underwriter takes the primary responsibility for this, syndicate
members underwrite a fixed amount of stock and may be given
additional allotments 8. Roadshow and Bookbuilding Schedule of
meetings with investors in key cities around the world, lasts 2-3
weeks, roadshow team makes formal presentations to investors at
these meetings, key investors are met in a one-on-one format,
smaller investors are accommodated in a group In tandem with the
marketing effort, the bookbuilding process begins, investors submit
indications of interest for shares in the IPO, the lead managers
collect these orders and build a book of demand over the course of
the marketing period, a critical component is the collection of
qualitative feedback on the orders in the book 9. Pricing and
Allocation The quality of the book and aftermarket intentions of
investors are critical, share performance in the aftermarket is
important, allocations to institutional and retail investors 10.
Aftermarket Balance supply and demand in the aftermarket,
over-allotment option, on-going research coverage (after 25 days)
and trading support 90 HC. TBS. 2014-2015 91. 91 Usually, the
acquired company is highly levered at the beginning Over time, the
company pays off debt with cash flows from its operations This
creates additional capacity to add more debt 1-3 years after the
acquisition When additional debt is issued, excess cash is
dividended out to the equity investors Investors achieve partial
monetization Refinancing a mortgage is effectively a
recapitalization 91 HC. TBS. 2014-2015 92. 92 Once an investment is
monetized, the profits will be divided between LPs and GPs
according to the partnership agreement 80% / 20% is usually the
norm 80% to the LPs 20% to the GPs A minimum return hurdle % for
LPs may have to be cleared before GPs can claim their share of
profits (I.e. 8%) Clawback provision High returns make a strong
track record which in turn makes future fundraising easier 92 HC.
TBS. 2014-2015 93. 93HC. TBS. 2014-2015 94. 94 Identify a business
need or niche and demonstrate its feasibility Analyze a product
within the context of market and customer Evaluate the viability of
a technology Describe major goals, objectives, and vision for 1
year, 3 years and 5 years Assess ability of management to execute
Provide detailed financial projections 94 HC. TBS. 2014-2015 95. 95
Concept/Opportunity Strategy Operations Markets Customers Products
Competition Risks Implementation 95 HC. TBS. 2014-2015 96. 96
Always stated within the context of an existing or projected market
Translate concept into terms that investors can understand Clearly
highlight which market needs will be filled or issues will be
addressed Have comprehensive knowledge of the competitive
environment and the potential reactions from competitors Analyze
the current and future customer base in detail 96 HC. TBS.
2014-2015 97. 97 The process of raising money may have significant
costs Time Opportunity cost of distraction Significant amount of
questions and information requests Impact on the organization (I.e.
uncertainty) Direct expenses travel, legal and accounting May be
beneficial to hire reputable advisors with relevant past
fundraising experience and track record 97 HC. TBS. 2014-2015 98.
98 Identify relevant PE firms May make sense to use advisors Most
effective if someone credible refers you to the PE firm Do your
research in advance At the initial meeting, impress them and
capture their interest PE firms time is the biggest asset 98 HC.
TBS. 2014-2015 99. 99 Who are these people? Do they fit the way we
do business? What is the value and appeal of this business? Will
there be enough customer demand for its products? What can go wrong
with this company? What needs to be accomplished to justify this
valuation? What are the key trends in the industry and sector? How
dependent is the value of this company on the overall performance
of the sector or industry? What is the likely response from
competition? Do they have the right experience and skills to
deliver? Do they have a realistic, relevant and flexible strategy?
What are the exit implications? IPO and M&A market trends? Can
we/they win? 99 HC. TBS. 2014-2015 100. 100 Capital Strategic
vision Growth Credibility Global best practices Investor contacts
Management talent 10 0 HC. TBS. 2014-2015 101. 101 Access to
long-term financing GPs and LPs with significant investing
experience around the globe Valuable strategic insights and
operational expertise Significant financial discipline Substantial
credibility and visibility to target company and the country Best
practices to pursue profitable growth 10 1 HC. TBS. 2014-2015 102.
102 A long-term support to those companies with the potential of
success and sustainability Builds and grows business faster than
they otherwise would Encourages entrepreneurial spirit,
technological advancement and job creation Crucial to the
existence, feasibility and success of businesses in the
seed/start-up and expansion stages Teaches discipline of the
buyside 10 2 HC. TBS. 2014-2015 103. 103 Promote entrepreneurial
environment and increase incentives for entrepreneurial investments
Facilitate private equity fund formation Develop long-term capital
sources Incorporate private equity needs and perspectives into
policy-making 10 3 HC. TBS. 2014-2015 104. 104 Minimum regulation
and bureaucracy Simplified requirements of company formation
Support for private equity and entrepreneurial education Favorable
tax regime capital gains Equity and options ownership Awareness of
private equity as engine of growth and value creation 10 4 HC. TBS.
2014-2015 105. 105 Access to long-term funding is essential for PE
firms Development of pension funds and relevant regulatory regime
is a critical step U.S. example Pension funds should be allowed to
invest in private equity Unrestricted movement of capital is a
must-have for private equity industry 10 5 HC. TBS. 2014-2015 106.
106 1. Develop your own idea of what a business is worth 2. Avoid
auctions 3. Pick your spots 4. Approach each potential transaction
with overwhelming force 5. Follow the cash 6. Get timely help from
experts, advisors 7. Keep your emotions in check (deal fever) 8.
Develop trust with your team and managers 9. Make sure acquired
company managers concentrate on the few vital objectives 10. When
management team is not working, change them as soon as possible 10
6 HC. TBS. 2014-2015 107. 107 10 7 HC. TBS. 2014-2015
