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PRIVATE EQUITY

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Title: PRIVATE EQUITY


1
PRIVATE EQUITY
  • Jay Jodway, Morgan Truscott
  • March 20, 2006

2
What is Private Equity?
  • Large pool of capital
  • Buy down-but-not-out companies
  • Fix those companies
  • Lower their cost of capital
  • Improve operations

3
Whos investing?
  • Wealthy Individuals
  • Pension Funds
  • Provide 40 of the 600-800b in PE funds
  • Corporate pensions with big stake in PE
  • Eastman Kodak - 20
  • Delta - 13
  • GM - 10

4
Big Business
  • Industry controls 600b-800b in capital
  • The big three employ 907,000 people
  • Carlyle
  • KKR
  • Blackstone Group
  • Annual returns for PE 20
  • SP 500 averages about 5

5
PE Big Acquisitions
  • Dunkin Brands Inc.
  • Neiman Marcus
  • MGM
  • Toy R Us
  • AMC Entertainment
  • Linen N Things
  • Fairmont Hotels
  • MEMC Electronic Materials
  • Seagate Technology
  • TRW Automotive
  • Burger King

6
Barbarians at the Gate
  • RJR Nabisco (1989) - 31b
  • Hertz (2005) - 15b
  • TDC (2005) - 12b
  • Sungard Data Systems (2005) - 11.4b
  • Browning-Ferris Industries (1999) - 9.6b
  • Qwestdex (2003) - 7.1b
  • Toys R Us (2005) - 6.6b
  • Neiman Marcus Group (2005) - 5.1b
  • Metro-Goldwyn-Mayer (2005) - 4.9b

7
Investment Bank Payday
  • How I-bankers benefit
  • Collect fees for
  • Brokering or advising on tender offers
  • Underwriting Bonds
  • Arranging bank debt to pay acquisition costs
  • Selling off assets to pay back debt
  • Taking target firms public again
  • Fees collected in 2005 11.8b
  • 35b raised from Reverse LBOs
  • Blackstone paid out 358m to I-banks in 2005

8
IPO Outlook
  • Reverse LBO
  • Bought out company taken public again
  • 40 of all IPOs in 2003 and 2004
  • IPOs returning 18 in 2005, 10 so far in 2006
  • Profitless IPOs are 40 vs. 80 during tech
    bubble
  • Avg. age of IPOs up to 15 in 2002, vs. 4 in 1999

9
MONEY AND FREEDOMThe benefits of private equity
10
MONEY
Its like Moses brought down a third tablet from
the Mount and it said 2 and 20
11
Money
  • Partners typically receive
  • 2 of assets as management fee
  • 20 of returns
  • Tax benefit 15 capital gains vs. 35
  • Executive compensation
  • Allowed to purchase stake in company, sometime as
    much as 20
  • Tied to turnaround success
  • Long term success, not quarterly results

12
FREEDOM
Its the difference between driving a speedboat
and driving an ocean liner. When you want to
turn a speedboat, you turn the wheel. For an
ocean liner, you have to plan two days ahead.
13
Freedom
  • Less annoyance from SOX
  • Public CEOs may have to reveal compensation
  • Less costs
  • Fundamental nature of PE is different
  • CEOs have a freer hand
  • Dont have to answer to shareholders
  • Can make tough but necessary decisions
  • Focus on long-term success, not quarterly
  • No activist hedge funds

14
Lou Gerstner, former IBM CEO and chairman of the
Carlyle Group, onWhy Private Equity
  • Restructuring
  • Impact if information and networking
  • Excess Capacity
  • Eliminate dysfunctional short-term focus
  • Longer time frame - build value over time
  • Direct alignment of shareholders and management

15
Careers
Managers now understand that involvement in the
private-equity world is potentially more
interesting, more lucrative, and less of a
hassle,
  • PE firms dont recruit on campus
  • PE seen as the new fast track to owning your own
    shop
  • Private Equity is hot for B-schoolers
  • In the 1980s it was I-Banking
  • In the 1990s it was tech-related venture capital
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