An Introduction to Private Equity OBN SBS MBA

An Introduction to Private Equity OBN – SBS MBA Class of 2012

What is Private Equity �An asset class consisting of securities invested in operating companies with a view to generating value �Investment typically lasts between 3 -7 years depending on the investment focus of the company.

History and Development �Originated in the US in the 40 s with the founding of two Venture Capital firms American Research and Development Corporation (ARDC) and J. H. Whitney & Company. �First Leveraged Buyout in 1955. LBO boom in the 80 s with the emergence of KKR. �Purchase of RJR Nabisco for $31. 1 billion in 1989 standout LBO deal and subject of a book (Barbarians at the Gates)

Industry Structure Institutional Investors Fund of Funds Direct Investment PE Fund Operating Companies PE Fund

Industry Players � Fund of Funds (Limited Partners) ◦ Pool funds together on behalf of institutional investors to invest in PE funds � Institutional Investors (Limited Partners) ◦ Insurance companies, Pension Funds, Family Offices seeking portfolio diversification � General Partners ◦ Private Equity Fund Managers Comprehensive list of PE funds (including websites) can be found here http: //www. venturechoice. com/vcdir. htm

Forms of Private Equity �Leveraged Buyouts �Growth / Expansion Capital �Venture Capital �Others ◦ Distressed Investments ◦ Management Buyouts

Leveraged Buyouts �Companies are acquired using Financial Leverage �Leverage can account for between 50% and 90% of total transaction cost �Target companies usually mature with strong cash flows �Cash flows generated by company used to pay down debt. �Value generated when debt portion is paid down

Growth/Expansion Capital �Company seeking expansion �Typically profitable and able to generate cash, but not enough to finance expansion �PE company approach is typically more hands on. �Value is generated via ◦ Good entry price ◦ Operational/Margin improvements ◦ Growth due to expansion

Venture Capital �Funds buy partial stake in an early stage company �Early stage companies go through various rounds of funding – Stage A, B, C, D, E, etc. �Funds typically exit their investment with IPO or buyout from subsequent funding rounds �Funds usually go public after scaling �Riskier than typical PE investment due to business failure �High return potentials e. g Google, Microsoft, Facebook

Others � Management Buyouts ◦ PE fund supports existing management to take over company ◦ Reliance on management to derive value ◦ Inherent alignment of interest is invaluable � Distressed Investments ◦ Investment in equity or debt securities of financially stressed companies. ◦ Value is generated by turning around the business in addition to the typically undervalued entry price ◦ PE funds typically have relevant industry experience

Sources of Value Creation in PE Financial Engineering Earnings Enhancement External Factors • Cheap Debt • Varied sources of funding • Change in management • Disposal of unprofitable businesses • Cost cutting • New products • Rising stock markets • Mergers & Acquisitions

Exit Routes in PE �Sale via equity markets �Self liquidating instruments (redeemable preference shares, convertible debt) �Put option (Sale of shares to management) �Leveraged refinancing �Secondary sale (To other PE firms)

Fund Economics � Two major models ◦ GP/LP Model ◦ Bank Subsidiary Model � Limited Partnerships usually last for 10 years* � Successful PE firms (with GP/LP model) stay in business by raising a fund every 3 to 5 years* � Management Fees and Carried Interest are primary sources of revenue * (Metrick Yasuda 2010)

Fund Economics Family Office/HNI 3% Financial Institution 5% Endownment/ Foundation 5% Insurance 8% Fund of Funds 14% *Official KKR Data KKR - Investor Base By Type* Corporate Pension 3% Public Pension/Sove reign Wealth Funds 62%

Roles within PE firms* Job Title Yrs of Post MBA exp Compensation Partner Track? Associate 0 -1 Salary, Bonus, (Carry)** Sometimes Senior Associate 2+ Salary, Bonus, (Carry)** Yes VP 3+ Salary, Bonus, Carry Yes CFO/COO 5+ Salary, Bonus, Carry Yes Partner 5+ Salary, Bonus, Carry - General Partner 7+ Salary, Bonus, Carry - * Note on Private Equity Careers – Tuck (2003) ** Carried interest – Share of profits Comments Often have a CPA Receive significant carried interest

What roles do Associates play within the Investment Cycle? Fund Raising Deal Sourcing • Liaise with fundraising consultants • Participate in road shows • Help define Investment Strategy • Review submitted business plans • Work on Pitch books for prospective deals Deal Execution • Work with Due Diligence Consultants (Financial, Legal, Commercial, Technical) • Work on Transaction Documents (Investment Proposal, Financial Model, Offer Letters, Term Sheets, Legal Agreements) • Make presentations to Investment Committee • Manage disbursement process Deal Monitoring • Review weekly/monthly/quarterly performance reports • Work with management to redefine business and corporate strategy • Act as consultant where necessary. E. g 2 month on-site placement to help resolve working capital management issues • Work with investment bankers to handle IPOs/Trade Sales/Rights Issues etc

Company Profiles – General Partners Name Website AUM* TPG http: //tpg. com $48 billion KKR www. kkr. com $40 billion The Carlyle Group http: //www. carlyle. com $40 billion Blackstone http: //www. blackstone. c om $36 billion Apollo Management www. agm. com $33 billion Bain Capital www. baincapital. com $29 billion * Assets under management - Wikipedia

Company Profiles – Bank Funds Name Website Investment Focus Standard Chartered http: //www. standardchart Emerging Markets ered. com/careers/associa tes/mba/oxford_said_busi ness_school/roles. html Barclays Capital http: //www. bpe. com/ Europe Citibank https: //www. citicapitaladvi sors. com/metalmark. Over view. do Europe/North America/Asia HSBC http: //www. hsbcnet. com/p North America / Middle i East

Additional Resources � A note on Private Equity Careers http: //mba. tuck. dartmouth. edu/pages/clubs/peclub/pdfs/Private_Equity_Care ers. pdf � Private Equity as an Asset Class (The Wiley Finance Series) by Guy Fraser. Sampson http: //www. amazon. co. uk/Private-Equity-Asset-Class. Finance/dp/0470661380/ref=sr_1_1? s=books&ie=UTF 8&qid=1317551407&s r=1 -1 � Getting a Job in Private Equity: Behind the Scenes Insight into How Private Equity Funds Hire http: //www. amazon. co. uk/Getting-Job-Private-Equity. Insight/dp/0470292628/ref=sr_1_6? s=books&ie=UTF 8&qid=1317551407&sr =1 -6 � King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone http: //www. amazon. co. uk/King-Capital. Remarkable-Schwarzman. Blackstone/dp/0307452999/ref=sr_1_13? s=books&ie=UTF 8&qid=131755169 6&sr=1 -13 � The British Private Equity and Venture Capital Association (BVCA) http: //www. bvca. co. uk/PEVCExplained � Emerging Markets Private Equity Association http: //www. empea. net/

Additional Resources � Barbarians At The Gate: The Fall of RJR Nabisco http: //www. amazon. co. uk/Barbarians-At-Gate-Fall. Nabisco/dp/0099469154/ref=sr_1_2? s=books&ie=UTF 8&qid=1317551848&s r=1 -2 � National Venture Capital Association http: //www. nvca. org/ � European Venture Capital Association http: //www. evca. eu/default. aspx � Guide to Private Equity Fund of Fund Managers http: //www. privateequityonline. com/books/productimages/Media/000/165/752 /Sample-3. pdf

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