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The Private Equity Play

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Title: The Private Equity Play


1
The Private Equity Play
  • Mike Lorelli

2
EBITDA
  • Earnings Before
  • Interest
  • Taxes
  • Depreciation
  • Amortization

3
Stages
4
Agenda
  • History
  • Returns
  • Where is the money coming from?
  • Terminology
  • Where they are where their companies are
  • The p.e. model
  • Some names
  • p.e. compensation
  • Results and Performance Measures
  • The Funnel
  • Management Compensation
  • The Return Drivers
  • The p.e.s Plan
  • In The News
  • Importance of a good LinkedIn profile, and
    resume

5
Worse than real estate brokers in Darien, CT
  • 1977 Kohlberg, Kravis, and Roberts leave
    Bear Stearns, forming KKR
  • 1978 80 Leveraged Buyout Groups in US
  • 2012 Estimated 2,800 around the world
  • 1,800 U.S.

6
Value Creation
7
WSJ Buyouts Leave Simmons Little Rest
8
Terminology
  • The providers of capital Limited Partners, or
    LPs
  • - who are they?
  • The fund manager General Partner, or GP, or
    p.e.

9
Returns Well Out-Performed SP
10
Returns Comparisons
11
Percentage of Capital by LP type LBO Funds
12
(No Transcript)
13
The Vintage Year
14
Add-Ons now fully half of Deals
15
LPs pushing for Exits (i.e. distributions)
16
1/4th of Exits are now to another p.e. firm
16
17
Geography
18
Many ways to categorize the 1,800
  • By size
  • Large 1 billion revenues
  • Mid-market gt 150 million
  • Small lt 150 million
  • By sector specialty
  • Health care
  • Consumer
  • IT
  • Financial services
  • etc.
  • Net-net, sector first and mid-market not lower
    or upper

19
Excellent
20
Dont unnecessarily limit where you can play
20
21
Top Fund Managers
Rank Firm City Capital (Millions)
1 TPG Capital Fort Worth (Texas) 50,553
2 Goldman Sachs Principal Investment Area New York 47,224
3 The Carlyle Group Washington DC 40,540
4 Kohlberg Kravis Roberts Co. New York 40,215
5 The Blackstone Group New York 33,418
6 Apollo Global Management New York 33,813
7 Bain Capital Boston 29,402
8 CVC Capital Partners London 25,068
9 Hellman Friedman San Francisco 17,200
10 Apax Partners London 16,637
11 Warburg Pincus New York 15,000
12 Cerberus Capital Management New York 14,900
13 Advent International Boston 14,519
14 Permia London 13,572
15 Oaktree Capital Management Los Angeles 13,045
16 Tera Firma Capital Partners London 12,249
17 Providence Equity Partners Providence (RI) 12,100
18 Clayton Dubilier Rice New York 11,404
19 Charterhouse Capital Partners London 11,268
20 Teachers Private Captial Toronto 10,758
22
Top 12 p.e. Investors in 2012
22
23
The LBO model
  • Purchase
  • 7.0 X 9m 63
  • Cash 27
  • Debt 36
  • Sale
  • 8.0 X 14.1m 113
  • Debt 32
  • Proceeds 81

24
The LBO model
  • Purchase
  • 7.0 X 9m 63
  • Cash 27
  • Debt 36
  • Sale
  • 8.0 X 14.1m 113
  • Debt 32
  • Proceeds 81
  • 3.0 X cash-on-cash

25
The p.e. / L.P Model Pelosi
2008 Fund
Sale
D
A
F
C
E
B
F
J
C
I
D
A
G
Purchase
H
B
E
26
The p.e. / L.P Model Pelosi
2008 Fund
Sale
D
A
F
E
C
B
F
J
C
A
D
G
I
H
B
E
Purchase
Invest
Harvest
27
(No Transcript)
28
A lot of fish vs. Fortune 1,000 and Russell 2,000
28
29
p.e. Compensation
  • 2 of managed capital
  • pays salaries, rent, and nominal bonuses
  • 20 carried interest from profits on
    distributions
  • pre-Obama

30
Performance Measures
  • Good Great Awesome
  • IRR 20 28 33
  • Cash-on-cash return 2X 3X
    5X
  • Hold period 8 years 6 years
    3- years

31
Buyout Fund Sample
Partnership/Year Capital Committed (M) Capital Cont. (M) Dist. As of (M) Net IRR As of ()
Oregon State Treasury 12/31/12 12/31/12
2000 Riverside Capital Appreciation Fund/2000 50.0 46.3 73.1 22.1
2003 Riverside Capital Appreciation Fund/2003 75.0 77.4 47.1 15.3
Apollo Investment Fund VI LP/2006 200.0 223.1 57.5 3.1
Aurora Equity Partners III LP/2004 50.0 53.0 20.8 17.7
BCI Growth V LP/1999 75.0 72.9 27.2 -8.7
Castle Harlan Partners IV LP/2002 100.0 102.3 109.8 17.3
CVC Capital Partners Asia Pacific II LP/2005 100.0 122.4 38.3 -6.2
Diamond Castle Partners IV LP/2005 100.0 71.3 16.1 -4.5
Endeavor Capital Fund III LP/2000 25.0 24.5 43.7 28.9
Fenway Partners Capital Fund III LP/2006 50.0 53.9 19.6 -4.9
Hicks Muse Tate Furst Europe Fund LP/1999 99.3 116.8 196.9 21.7
KKR European Fund LP/1999 400.0 532.3 778.8 19.3
KKR Millennium Fund LP/2002 1,000.0 1,308.8 1,064.2 17.9
Lion Capital Fund I LP/2004 99.8 108.8 117.2 26.5
Oak Hill Capital Partners II LP/2004 100.0 105.8 15.7 6.8
Parthenon Investors III LP/2005 100.0 67.8 8.7 1.7
Rhone Partners III LP/2006 100.0 65.4 11.5 5.8
TPG Partners III LP/2000 300.0 284.5 571.9 24.5
HarbourVest Partners 2004 Direct Fund/2004 75.0 74.1 21.1 11.1
32
A typical 10 company fund result
  • 2 out-of-the-park
  • 1 triple
  • 2 doubles
  • 3 singles
  • 2 the bank took the car keys

33
Riverside Company
  • 20 of the invested money will lost
  • If less, were not taking enough risk
  • Not sweat the duds, but rather the ones we missed

34
The Funnel
20 Meetings with Mgmt
35
Options for Executives Working with Private
Equity
Operating Partner salarybonuscarry
Portfolio Company Management salarybonusequity
Fund Commit- ment
Deal Executive / Executive in Residence retaineru
pside
Advisor expensesupside

Expert Network / Interim Executive hourly comp
Executives Income
David Teten, www.Teten.com/executive
36
Who the p.e. wants to meet
Target-Driven Deal Exec
Thesis-Driven Deal Exec
Deal Resource
Job Seekers
Source Andy Thompson, Notch Partners
37
Management Compensation
  • CEO 200K - 350K 50-75 5.0 equity
  • CFO/COO 125K - 275K 40-50 1.5 equity
  • VP 125K- 225K 25-33 1.0 equity
  • and opportunity to co-invest

38
The Three Primary Return Drivers
  • Leverage
  • Value Improvement EBITDA Growth
  • Exit Multiple Expansion

Courtesy Wind Point Partners
39
The Deal
40
The Plan
  • Fleshed out approach for how value will be
    created
  • Strategic and operational blueprint
  • Rapid change principles
  • 80/100 rule an 80 solution thats ready to go
    now,
  • beats a 100 effective, theoretical solution,
    ready to go in 4 months
  • Make capital work hard
  • Re-deploy underperforming assets

41
Project NTL 100 Day Plan
  • Full Court Press on Basic Revenue Projects
  • GROWING THE BASE BUSINESS- will be relatively
    easy for an organization in this space that
    focuses, prioritizes and executes. The ISI
    partners have for the last two years been focused
    and spending the majority of ISI's time and
    resources on acquisitions, strategic alliances,
    new ventures, etc and have not focused on ISI
    core brands and business. To date none of these
    ventures have been successful but have utilized
    significant management time and expense. A sharp
    focus on the core business / brands with the some
    advertising/ promotion and introduction of new
    products in these brands will result in strong
    growth. In addition, providing more products and
    new and improved products to existing
    customers and improving current service levels
    and fill rates to existing customers will
    definitely provide positive growth. New domestic
    customer opportunities will also be a focal
    point.
  • INTERNATIONAL-there is still currently a strong
    demand for ISI products, especially Twin Lab in
    the International arena. Again, during the last
    two years because of the intended Pharmaton
    acquisition, ISI basically ignored existing
    International distributors, never hired a new
    head of International sales and never entertained
    new distributors that contacted us for our
    product. ISI is now beginning to refocus on that
    area with a European head of Intl sales. More
    resources and specific plan for Int'l growth on a
    number of fronts could result in strong and quick
    Int'l growth.
  • HERBS AND TEAS- these brands have essentially
    been allowed to run themselves for the last three
    years. Despite that they have only declined
    slightly in revenues. Lack of focus and strategy
    are the primary reasons for these
    declines. Reversing these revenue declines and
    growing these brands, which are both in
    comparatively active and hot growth areas, is not
    that difficult. We need to hire a brand manager
    to work with our customers and suppliers to
    revitalize and contemporize these lines. Both
    Alvita and Nature's Herbs are well recognized and
    trusted brands that still have a loyal following.
    We need to add some new more popular flavors
    which customers have been asking for and update
    our packaging. We can also easily look to expand
    the channels of distribution for these brands.

42
(No Transcript)
43
Buyout Example Economics
  • Investment (Example)
  • Acquire a business for 5.5x EBITDA
  • Over 5 year horizon
  • Sales grow at 7 annually
  • Margins improve from 14 to 15.5
  • Sell business in year 5 for 5.5x EBITDA
  • WPP/Co-Investors Results
  • 30 IRR
  • 3.7x cash-on-cash return
  • CEO
  • Assuming
  • CEO co-invest of 750k
  • CEO gets 7.5 of common
  • CEO receives over 10 million

Courtesy Wind Point Partners
44
Components of Equity Value Creation
  • As EBITDA grows, the value of the enterprise
    increases.
  • At the same time, free cash flow reduces debt.

millions
Courtesy Wind Point Partners
45
A word on covenants
  • Max Capital expenditure 1.5 million
  • Min LTM EBITDA 11.0 million
  • Fixed Charge Coverage 1.00x
  • Total Deb Leverage 3.75x
  • Maximum Senior Leverage 4.50x

46
(No Transcript)
47
WSJ
48
Private Equity Analyst- November 2012
49
Private Equity Analyst- November 2012
50
The Trades
51
The Importance of a Killer LinkedIn Profile
  • 50 of candidates are found via LinkedIn
  • Or they will at least check you out

52
140 million LinkedIn members
You and 99
Killer
Outstanding
You and 199
You and 499
Excellent
Very Good
You and 999
You and 1,999
Above average
You and 3,999
slightly above average
below average
You and 6,999
14,000 serious C-Level Candidates .0001
53
Keywords
  • ? EBITDA growth
  • ? Revenue Acceleration
  • ? Margin Enhancement
  • ? Multiple Expansion
  • ? Visioning/Strategic Planning
  • ? Topgrading
  • ? New Channels/Markets
  • ? International Expansion
  • ? CEO
  • ? CXO
  • ? Lean Manufacturing
  • ? Turnarounds
  • ? Exit Strategies

54
LinkedIn Profile
55
Visit www.linkedin.com/in/mikelorelli Mike
Lorelli (203) 655-2444 MKLorelli_at_gmail.com
Q A
56
Michael K. Lorelli
Michael K. Lorelli 15 Norman Lane Darien,
CT 06820 Office 203 655-2444 FAX 203
655-6916 Email miklorelli_at_gmail.com Website
www.Lorelli.net www.LinkedIn.com/in/MikeLorelli h
ttp//www.gplus.to/MikeLorelli
Mike Lorellis 30-year career spans a wide range
of consumer products and services, and B2B
categories, with responsibilities for both
domestic and international units. His years as a
line-operating manager have largely been with
Fortune 100 companies PepsiCo and Bristol Myers
Squibb. For the last decade, as CEO, he has led
revitalizations and turnarounds for private
equity firms. For example, Dr. John Rutledge,
Chairman of Rutledge Capital, will say I would
invade China with Mike alone in a rubber boat.
Most recently, he was CEO of Carlstadt, NJ based
WaterJel Technologies, the leader in burn care
products. Today he is Executive Chairman of the
Board of Ritas Italian Ices, which was acquired
by Falconhead Capital. Mike has also led CEO
engagements for Riverside Company, Rutledge
Capital, and Pouschine Cook Capital. Mikes
assignments at PepsiCo included Executive Vice
President Marketing, Sales and RD for
Pepsi-Cola North America, President of Pepsi-Cola
East, a 1.5 Billion operating company, and
President for Pizza Huts International division
where he led a global or bust charge, resulting
in expanding the Companys presence from 68 to 92
countries, surpassing McDonalds in country count.
During his PepsiCo tenure, he is given credit for
authoring the soft drink companys Big Event
Marketing strategy, which coupled the product
with leading- edge events in entertainment,
sports, consumer electronics, movies and home
video. Mike holds a Bachelor of Engineering
degree from New York University, and an MBA in
Marketing from NYUs Stern Graduate School of
Business. He has traveled to 58 countries, is an
avid runner, claims to excel at no sport, is an
active private pilot, member The CEO Trust,
former member of YPO, and author of the
childrens best-seller Traveling Again, Dad?
with profits donated to childrens charities.
Mike is a Director of CP Kelco, and iControl. He
holds a Professional Director Certification from
The American College of Corporate Directors, and
is also an NACD 2011 Governance Fellow. Mike is
also a registered speaker with Vistage
International.
Leading The World In Burn Care
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