PRIVATE EQUITY 101: FROM VENTURE CAPITAL TO LBOs

The Private Equity world

Monday, April 23, 2018 1

 Private Equity Overview
Introduction Contractual Structures
▪ Private equity the investment in equity of unlisted firms
▪ 4 different types of investments
▪ LBOs: investment made using a large amount of debt
▪ Growth Capital: minority equity investments in mature
companies
▪ Mezzanine Capital: investment in subordinated debt or
preferred stocks, no voting control of the company
▪ Venture Capital: equity investments in young companies

Global PE activity Cash cycle of a PE fund

Investment Mgmt & Divestitures

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 Characteristics of PE Transactions
▪ Select the LBO target
▪ Negotiates the acquisition price
▪ Oversees the activities of the
acquired company
▪ Decides when and how to sell
▪ Provide the committed capital
Lawyers
Participants Standard measure of profitability: IRR
▪ Introduce potential acquisition
▪ Basic idea of a PE valuation: Given the estimated cash
targets flows, the amount of debt, and the estimated exit price,
▪ Help out in negotiating the price
▪ Provide loans & underwrite high- the acquisition price to pay today is set to give the PE
yield bond offerings
▪ Assist during the exit strategy investor a desired rate of return (IRR) – ca. 20-25%.
▪ Co-invest with the private equity
fund in the new equity of the
acquired company
▪ Manage the company on behalf of
the PE fund
Ideal Targets
▪ Robust and stable cash flows ▪ Room for cost cutting
▪ Leverageable Balance Sheet ▪ Good Management
▪ Low capital expenditures ▪ Mature market
Accountants Tax Experts Others … ▪ Quality & non-core assets ▪ Strong market position
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 Value Creation
Improvements
Private equity acquisitions:
▪ Introduce uncertainty
▪ Temporary owners
▪ Bring in new capital
▪ Better knowledge of management practices
▪ Reduce agency problems
▪ Limit management discretion (high debt levels)
Deleverage
The Bet: at exit debt is completely
repaid, no growth and no new
investments
Example: entry in t0 EBITDA=100;
multiple 6x; outstanding Debt = 500;
Equity = 100
Result: exit in t5 EBITDA=100;
multiple 6x; outstanding debt = 0;
equity value = 600
And stimulate:
▪ Higher productivity
▪ Innovation
▪ Organic growth
Arbitrage
The Bet: EV/EBITDA at exit is higher
than the initial value of the multiple
(debt can be refinanced)
Example: entry in t0 EBITDA=100;
multiple 6x; outstanding Debt = 500;
Equity = 100
Result: exit in t5 EBITDA=100;
multiple 8x; outstanding debt = 500;
equity value = 300
Growth
The Bet: EBITDA at exit is higher
than the initial value (debt can be
refinanced)
Example: entry in t0 EBITDA=100;
multiple 6x; outstanding Debt = 500;
Equity = 100
Result: exit in t5 EBITDA=133.3;
multiple 6x; outstanding debt = 500;
equity value = 300
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The Fundraising Process

Marketing the Term Initial Closing Subsequent

Fund Negotiation Closings

• Appointment of • Negotiation with • Acceptance of • Additional

the team prospective initial investors’ closings on new
investors commitments commitments
• Soliciting which become
investors • Finalization of legally bound • Subsequent
fund structure closing period
• Formulation of the • Launch date for subject to any
fundraising plan • Preparation of the fund limitations in fund
documents (e.g. (operations are documents
• Initial terms LPA) for the initial commenced)
discussion and closing phase • Fundraising
PPM setup • First calls are period ends at
made final closing

6 to 12 months marketing 3 to 6 months negotiating 1 year or more subsequent

period period closings period

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4 Major Trends in the 2017 Fundraising Scene (1/2)
1. COMMITMENTS AT POST-RECESSION HIGH 2. CAPITAL CONCENTRATION

During 2017, PE firms raised more capital than at any point in time If in 2006 1,576 funds raised capital for a total of $576bn, 10 years
since 2007-2008. Almost $667bn were raised through the use of later - in 2016 - 333 funds less were accounting for a $50bn more
1,091 funds. of total capital raised - $626bn.

$900B 2000
$800B
$700B 1500
$600B
$500B
1000
$400B
$300B
$200B 500

$100B
$0M 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018YTD
Total Capital Raised Fund Count Source: PitchBook Data, Inc.

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4 Major Trends in the 2017 Fundraising Scene (2/2)
3. PREVALENCE OF BUYOUT MEGA-FUNDS 4. SHRINKING IN FUNDS’ CLOSING TIME
During 2017, 54% of the total committed capital was In 2017 funds took on average 13.2 months to be
raised by buyout funds. closed, almost 17% less than the 16.8 months in 2016.

Real Estate 100%

Mezzanine
5% 1% 16%
Secondaries 90% 22%
25% 24% 25%
5% 29%
80%
Infrastructure 17%
6%
70% 20% 18% 15%
19%
Growth/Expansion
60% 15%
6% 26% More than 24
14% 15% Months
50% 16%
21% 19-24
Fund of Funds 40% 23% Months
10% Buyout 17% 19% 15% 21% 13-18
54%
30% Months
19%
Venture Capital 20% 14% 7-12 Months
13%
25% 26% 25% 29%
10% Less than 6
15% 14%
Months
0%
2012 2013 2014 2015 2016 2017 YTD
Source: PitchBook Data, Inc. Source: Preqin Data

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Investing Over Company’s Life Cycle

Sales
Extremely
specialised
investors, deep
technical
expertise
required
It usually
exploits
complex legal
procedures to
obtain returns

Time
Venture Growth Buyout Distressed
Capital Equity

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How the Buy-Out Works
OpCo SPV
1 DEBT
2 DEBT Pre-Existing
Debt
SPV
ASSETS ASSETS
DEBT DEBT New Debt
EQUITY CASH

EQUITY EQUITY

3 NewCo
4 NewCo Debt has been
paid out fully
Debt has been
DEBT completely
ASSETS refinanced
ASSETS EQUITY

EQUITY

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Case Study: KKR Purchase of Safeway Stores
DEAL HIGHLIGHTS
Target: Safeway Stores Inc.
• Target company was already very
Buyer: Kohlberg, Kravis, Roberts & Company much in debt at the time of the
acquisition
Year: 1986 • The US supermarket store
business is extremely crowded
Sector: Supermarket Chain and competitive
• KKR paid $6bn in cash and
Country: USA securities
• Stores were closed, employees
Rationale: Unprofitable supermarket chain stores, with too laid off and unions’ issues settled
much leverage, lots of money-losing stores and frequent
union problems • KKR turned around the
company, making it profitable
Strategy: Sell off unprofitable stores to repay debt quickly, again after years of losses
restructure the company’s business model and re-sell it

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Case Study: Blackstone Purchase of Celanese
DEAL HIGHLIGHTS
Target: Celanese AG
• German takeover laws are very
Buyer: The Blackstone Group restrictive, giving much power to
employees’ representatives
Year: 2003 • The purchase of shares had to
reach at least 95% to be able to
Sector: Chemical relocate it in the US (key)
• Blackstone paid €3.1bn and also
Country: Germany assumed around €1.5bn of debt
• Relocation, sale of non-core
Rationale: Extremely cyclical business, company relatively assets and relisting in US took
undervalued on the German Stock Exchange (the same kind place in less than 18 months
of companies trade at 1x multiple more in the US)
• Eventually, Blackstone realised
Strategy: Take the company private, move it to the US, 5 times the cash invested in
trim out unnecessary operations, list it on NYSE under 2 years → stellar IRR

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Exit Strategies
SALE OF BUSINESS

IPO

SECONDARY
M&A
BUYOUT

BELOW-PAR DEBT
DIVIDEND RECAPITALIZATION
REPURCHASE

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Exit Trends

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Case Study: JLL Partners LLC sells Patheon NV to Thermo Fisher Scientific
2007 2014 2017

$462 MILLION $7.2 BILLION

51% STAKE ADDITIONAL 100% STAKE (including $2.2
INVESTMENT billion of debt)

$150 MILLION +
RESTUCTURING ‘S ‘S
INVESTMENT PHARMACEUTICAL DIVISION PHARMACEUTICAL DIVISION

49% STAKE BOTTOM LINE: JJL Partners earns

$2.2 billion out of its $462 million
investment, implying a 4.8x
multiple in three years

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Thank you for your attention!

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