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Today’s Topics Investment Industry Overview Investment Industry Overview –Types of Investing –Career Paths –Sample Investments Basics of Investing Basics of Investing

Industry Overview Venture Capital Venture Capital –Oak, Sequoia, Kleiner Perkins Equity/Debt (stocks/bonds) Equity/Debt (stocks/bonds) –Citadel, Cerberus (hedge funds); Fidelity, Vanguard (mutual funds) Private Equity Private Equity –KKR, Blackstone, TPG

Investment Types and Company Lifecycle Venture Capital Equity/ Debt Private Equity LaunchesGoes Public Growth slows Start-up Public CompanyMature Company Stage in Company Life Cycle Typical Investment Type

Venture Capital

Typical Entry strategy Typical Entry strategy –Acquire stake in young, start-up firm Value added Value added –VCs provide funding, networking, and advice to the companies they invest in Typical Exit strategy Typical Exit strategy –Take portfolio companies public or sell them to other companies Example Example –Bessemer Venture Partners invested $1-2 million in Skype, and when Skype was acquired by eBay, Bessemer made a 100-fold return on its investment

Top Venture Capital Firms Sand Hill Road, Menlo Park, CA Accel Partners Accel Partners Crosspoint Crosspoint Kleiner Perkins Caulfield & Byers Kleiner Perkins Caulfield & Byers Oak Investment Partners Oak Investment Partners Sequoia Sequoia Softbank Softbank

Debt/Equity Investing

Typical Entry strategy Typical Entry strategy –Acquire position in stock or bonds of company Value added Value added –Investors can lobby companies to take measures to raise stock prices, such as share repurchases or divestitures Typical Exit strategy Typical Exit strategy –Unwind position in stock or bonds of company Example Example –After doing comprehensive research on AutoZone, ESL, a hedge fund, concludes AutoZone is undervalued and buys shares in the company. In time the market comes to realize that the company is indeed undervalued and ESL sells its AutoZone shares after earning a 30% return.

Top Debt/Equity Investors Hedge Funds Cerberus Cerberus Citadel Citadel ESL ESL SAC Capital SAC Capital Silverpoint (debt investing) Silverpoint (debt investing) Mutual Funds Fidelity Fidelity Vanguard Vanguard

Debt/Equity Investing

Private Equity Typical Entry strategy Typical Entry strategy –Borrow money to buy of a public company’s shares and take it private again, in a Leveraged Buyout (LBO) Value added Value added –Improve company’s operations through restructuring, divestitures, or refinancing Typical Exit strategy Typical Exit strategy –Take company public again or sell to other firm Example Example –Nelson Peltz buys Snapple from Quaker Oats for $300 million, turns company around within a few years, and sells it for $1.5 billion

Top Private Equity Firms Bain Capital Bain Capital Carlyle Group Carlyle Group Kohlberg, Kravis, & Roberts (KKR) Kohlberg, Kravis, & Roberts (KKR) Texas Pacific Group (TPG) Texas Pacific Group (TPG) Thomas H Lee Partners Thomas H Lee Partners Warburg Pincus Warburg Pincus

Investing Basics Sponsored By Bank of America Presented by WIC & WUFC

What’s the Investment Universe? Stocks Stocks Bonds Bonds Derivatives Derivatives Real Estate Real Estate Commodities Commodities Currency Currency

Types of Analysis Fundamental Fundamental –A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. –A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. –Value of a firm = Discounted value of future cash flows Technical Technical –A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Where to Begin? Develop a differentiated view Develop a differentiated view Top Down Top Down –View on the economy or a sector –Drill down into individual stocks, or trade a basket of companies Bottom Up Bottom Up –Start with a company specific story –Investigate the firm’s prospects based upon micro factors

How to Evaluate a Business Sustainable competitive advantages Sustainable competitive advantages –Barriers to entry, Substitutes –Buyer and Supplier Leverage –Technology, Infrastructure, Human Capital Cost structure Cost structure –Fixed vs. variable –Margin Analysis Management Management Opportunities for growth Opportunities for growth

Valuation Methodolgy Discounted Cash Flows Discounted Cash Flows –Determine cost of firm’s capital –Estimate the firm’s future cash flows –Add back value of non-operational assets Multiples Multiples –P/E = (EPS/(r-g)) –EBITDA/EV –(EBITDA-Capex)/EV –ROA, ROIC –Net Debt/EBITDA

Derivatives Contract that “Derives” its value from another security Contract that “Derives” its value from another security Future - Obligation to exchange cash at some specified date for the underlying Future - Obligation to exchange cash at some specified date for the underlying Option - Right but not the obligation to buy/sell (call/put) underlying at specified price Option - Right but not the obligation to buy/sell (call/put) underlying at specified price Derivatives often allow for enhanced leverage Derivatives often allow for enhanced leverage

Options Continued A multitude of strategies A multitude of strategies Understand Greeks (Delta, Gamma, Theta, Rho, Vega) Understand Greeks (Delta, Gamma, Theta, Rho, Vega) Basic idea is that payoff is asymmetric Basic idea is that payoff is asymmetric