An Introduction to Private Equity 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 40s with the founding of two Venture Capital firms American Research and Development Corporation (ARDC) and J.H. Whitney & Company. First Leveraged Buyout in LBO boom in the 80s 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 Operating Companies Direct Investment Fund of Funds 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

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 Cheap Debt Varied sources of funding Earnings Enhancement Change in management Disposal of unprofitable businesses Cost cutting New products External Factors 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 *Official KKR Data

Roles within PE firms* Job TitleYrs of Post MBA exp CompensationPartner Track? Comments Associate0-1Salary, Bonus, (Carry)** Sometimes Senior Associate2+Salary, Bonus, (Carry)** Yes VP3+Salary, Bonus, Carry Yes CFO/COO5+Salary, Bonus, Carry YesOften have a CPA Partner5+Salary, Bonus, Carry - General Partner7+Salary, Bonus, Carry -Receive significant carried interest * Note on Private Equity Careers – Tuck (2003) ** Carried interest – Share of profits

What roles do Associates play within the Investment Cycle? Fund Raising Liaise with fundraising consultants Participate in road shows Deal Sourcing 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 NameWebsiteAUM* TPGhttp://tpg.com$48 billion KKRwww.kkr.com$40 billion The Carlyle Grouphttp:// billion Blackstonehttp:// m $36 billion Apollo Management billion Bain Capitalwww.baincapital.com$29 billion * Assets under management - Wikipedia

Company Profiles – Bank Funds NameWebsiteInvestment Focus Standard Chartered ed.com/careers/associates/m ba/oxford_said_business_sc hool/roles.html Emerging Markets Barclays Capitalhttp:// Citibankhttps:// rs.com/metalmarkOverview. do Europe/North America/Asia HSBChttp:// America / Middle East

Additional Resources A note on Private Equity Careers Private Equity as an Asset Class (The Wiley Finance Series) by Guy Fraser-Sampson Finance/dp/ /ref=sr_1_1?s=books&ie=UTF8&qid= &sr=1-1 Finance/dp/ /ref=sr_1_1?s=books&ie=UTF8&qid= &sr=1-1 Getting a Job in Private Equity: Behind the Scenes Insight into How Private Equity Funds Hire Insight/dp/ /ref=sr_1_6?s=books&ie=UTF8&qid= &sr=1-6http:// Insight/dp/ /ref=sr_1_6?s=books&ie=UTF8&qid= &sr=1-6 King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone Blackstone/dp/ /ref=sr_1_13?s=books&ie=UTF8&qid= &sr=1 -13http:// Blackstone/dp/ /ref=sr_1_13?s=books&ie=UTF8&qid= &sr=1 -13 The British Private Equity and Venture Capital Association (BVCA) Emerging Markets Private Equity Association

Additional Resources Barbarians At The Gate: The Fall of RJR Nabisco Nabisco/dp/ /ref=sr_1_2?s=books&ie=UTF8&qid= &sr=1-2 Nabisco/dp/ /ref=sr_1_2?s=books&ie=UTF8&qid= &sr=1-2 National Venture Capital Association European Venture Capital Association Guide to Private Equity Fund of Fund Managers e-3.pdf e-3.pdf

Thank You…..