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Center for the Study of Innovation and Productivity Federal Reserve Bank of San Francisco October 19, 2007
Colin C. Blaydon Professor of Management and Dean Emeritus Center for Private Equity and Entrepreneurship Tuck School of Business at Dartmouth
Center For Private Equity and Entrepreneurship 2007 1
Presentation objectives
Provide an overview of the role of Private Equity in the economy Explain the structure and history of the industry Describe the key participants and players Highlight forces that are shaping the industry
Broad Definition: includes Private Investment in Pubic Equities (PIPEs), Mezzanine, Distress, Hedge
Center For Private Equity and Entrepreneurship 2007 3
Limited Partners
Pensions Endowments Foundations Wealthy individuals Other institutions
Venture capital
Portfolio Companies
Funds of Funds
Corporate Investors
Angel Investor s
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M&A IPO
Limited Partners
Pensions Endowments Foundations Wealthy individuals
80% Profits Capital Invested
Cash / Shares
100+%
re-borrowed as needed
Term debt (senior and subordinated) w/ floating rates
innovation
and modification
Multiple expansion
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11
Multiple expansion
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Covenant-lite loans
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5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Asian Contagion (Oct 97) Russian Default/ LTCM (Oct 98) Nasdaq Meltdown (Mar 00) Sept 11 (Oct 01) Adephia GM/Ford Liquidity Default Downgrades Squeeze (Oct 02) (May 05) (Sep 06) Subprime Contagion (July 07)
Source: Standard & Poors Leveraged Commentary & Data. As of August 2007.
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Rise of LBOs
Early returns (leveraged recaps for equity dividends) Expanding deal volume and size LBO fundraising expansion Club deals and mega deals PE industry institutionalization
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18
19
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Source: Dealogic. *Acquisitions by private equity firms & add on transactions by portfolio companies. As of April 2007.
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Apollo. Credit Lyonnais Blackstone. Peoples Bank Of China The Carlyle Group Abu Dhabi Government Thomas H. Lee Partners. Putnam Investments/ Marsh & McLennan Fortress Investments......... Nomura Holdings Inc.
Center For Private Equity and Entrepreneurship 2007 26
NASDAQ
2004
Close-end debt fund Feeder to U.S.-based fund Sale of Management Company Sale of Management Company Feeder to U.S.-based fund Feeder to U.S.-based fund
$2.2BN $1.6BN
Euronext NYSE
2006
$7.3BN
$2.2BN
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Public Capital
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Confidence crisis
New mega deals hung up or on hold CLOs terminated or restructured
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Source: JP Morgan
$ 36,98 7
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Loan
Bond
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
Correction
PIK toggle debt disappears Covenants reappear Debt and enterprise value multiples decline Bank senior debt reappears Debt interest rates rise
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Source: JP
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Goldman Sachs - Market Dislocation Fund Lehman Brothers - Special Situation Fund Oak Tree Capital - Special Situation Fund TCW - Special Mortgage Credit Fund Ellington Management - Vulture Fund Marathon Asset Management - Vulture Fund
Center For Private Equity and Entrepreneurship 2007 34
Some 29 buyout-backed companies with an estimated $17.3 billion in publicly-traded debt are at high risk of defaulting on those obligations, according to a new report from ratings agency Standard & Poor's.
Buyouts Magazine Sept. 2007
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Restructuring of CLO market terms Minority private investments Private investments in public equities (PIPEs) Defaults and distressed investing cycle (S&P)?
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