Private Equity and Some Other Topics February 16, 2009

Private Equity Defined  Basically an investment in a private company or taking a company private.  Private equity funds pool capital from individuals and institutional investors to buy businesses.

Types of Private Equity  Leveraged Buyouts – describes buying a company using a large amount of leverage, or debt. The goal is to improve the company and re-sell it.  Venture Capital – investments in early-stage companies to facilitate the expansion of the business. Often associated with start-ups and technology companies.  Growth Capital – investments in private companies designed to provide money (capital) to finance growth. Done in a way that keeps management and control of the company private.

How do private equity firms profit?  IPOs  Mergers and Acquisitions  Recapitalization – paying out the company’s cash flows or taking on debt to pay out money to investors.

Recent Private Equity Boom  Result of more stringent regulations on companies.  Sarbanes-Oxley  Also more scrutiny of public companies.  Companies have many more administrative activities and expenses.  Low interest rates made LBOs and debt inexpensive.

Some Big Private Companies and 2007 Revenues  Cargill ($88 billion)  Chrysler ($48 billion)  GMAC ($32 billion)  Mars ($25 billion)  Publix ($23 billion)  Fidelity Investments ($15 billion)  Toys ‘R’ Us ($14 billion)

Examples of Private Equity Firms  Cerberus – Chrysler, GMAC (51%), ANC Rental (Alamo and National car rentals), Albertson’s  Kohlberg, Kravis, Roberts & Co. (KKR) – RJR Nabisco (largest PE buyout to that time, 1988), Toys ‘R’ Us, Dollar General, First Data, TXU (largest PE buyout ever)  Carlyle Group – Dunkin’ Donuts, Baskin-Robbins, Hertz (now public)  Blackstone Group – Six Flags (early ‘90s), Equity Office Properties, Michael’s (craft stores), Hilton Hotels

A Few More…  Other Notable Private Equity Participants:  Goldman Sachs  TPG  Bain Capital  Compass Diversified Holdings – Publicly Traded, CCIG Portfolio.  PowerShares Listed Private Equity (PSP) – Exchange- traded fund tracking publicly traded private equity firms. CODI is in top 10 holdings…

Massoud on Bloomberg…

RS/Cashout Arbitrages  Avoid expense of being a public company, cash out small shareholders to get below a certain threshold of shareholders to be considered “private.”  Some new RS arbitrages recently.  Both of these intend to treat shareholders holding shares in street name the same as shareholders of record.  Relatively small payouts (but good % returns).

ENTX  Cashing out shareholders with less than 500 shares at $0.35 (currently around $0.16).  Tried in December, but more proactive this time. They need about 3.8 million votes (and they had 2.8 million last time).  Date of shareholder vote set for April 15.  Cost savings seem low, but may be underestimated.

ASUR  Cashing out shareholders with less than 750 shares at $0.36 (currently around $0.17).  Large savings (~$1m annually) vs. an estimated cost of ~$800k.  Faces potential delisting from NASDAQ anyway.  Financed by cash on hand.  Directors and management only own 6%.

Some Insurance Background Courtesy of Wikipedia

Business Model  Profit = earned premium + investment income - incurred loss - underwriting expenses  Profit from:  Underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks.  Investing the premiums they collect from insured parties.

Underwriting  Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly.  Insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them.  Data is analyzed to fairly accurately project the rate of future claims based on a given risk.

Investing  Insurance companies also earn investment profits on “float”. “Float” or available reserve is the amount of money, at hand at any given moment, that an insurer has collected in insurance premiums but has not been paid out in claims.  Insurers start investing insurance premiums as soon as they are collected and continue to earn interest on them until claims are paid out.

Types of Insurance  Property  Casualty  Life  Home  Liability  Credit  Auto  Health  Disability  Reinsurance  Etc.

Insurance Ratings – A.M. Best  Best's Financial Strength Ratings (FSR) represent the company's assessment of an insurer's ability to meet its obligations to policyholders.  Six “Secure” Ratings:  A++, A+ (Superior)  A, A- (Excellent)  B++, B+ (Good)  Also Lower “Vulernable” Ratings, B and below

Company Presentations Baldwin & Lyons (BWINA, B)

Michigan Stock Pitch Competition March (over spring break)

ccig.osu.edu