1. Growing Trend of Private Equity in F&I
P&A Leadership Summit
September 8th 2014
Confidential

2. Growing Trend of Private Equity in F&I
Discussion Agenda
Introduction to Houlihan Lokey
Private equity interest in F&I
Reasons to pursue a transaction
Preparing for a sale
Valuations and structure
Due diligence
What to expect with a private equity partner
Key takeaways

3. Growing Trend of Private Equity in F&I
Houlihan Lokey
Houlihan Lokey is an international, advisory-focused investment bank with expertise in mergers and acquisitions, capital markets, financial restructuring, and valuation. The firm serves corporations, institutions, and governments worldwide with offices throughout the United States, Europe and Asia.
Corporate Finance
Financial Advisory
Financial Restructuring

4. Growing Trend of Private Equity in F&I
Craig Tessimond Bio
Director in Houlihan Lokey’s Washington D.C. office, focused on leading the Financial Institutions Group coverage of the insurance industry
Nearly fifteen years of experience providing corporate finance advisory services to the insurance industry; completed many billions of dollars of M&A and capital raising transactions
Wealth of experience in both life and property casualty insurance, as well as specific expertise in the insurance services sector and F&I/warranty; advised in transactions involving Interstate, Safe-Guard, Warrantech, among others

5. Growing Trend of Private Equity in F&I
Recent F&I/Warranty M&A Activity
Number of F&I/Warranty Transactions Per Year

6. Growing Trend of Private Equity in F&I
What is private equity?
Private equity firms exist solely for the purpose of investing and acquiring equity ownership in companies
Capital is sourced from institutions (pension funds, insurance companies, etc) and high net worth individuals
Private equity partners raise funds to invest capital on behalf of these limited partners; typically with an investment horizon of three to five years although some may be longer
Some firms are focused on specific sectors, while others are generalists; some are focused on very large transaction sizes while others are focused on the lower/middle market

7. Growing Trend of Private Equity in F&I
What do PE firms look for?
Companies in growing industries
Possessing a unique competitive advantage
Favorable industry trends
Multiple avenues for growth (organic, acquisition, etc.)
Recurring cash flow models
Stable client relationships
High barriers to entry
Low capital expenditures
High quality management

8. Growing Trend of Private Equity in F&I
Why the PE interest in F&I?
High cash flow business
Stable, sticky client relationships
Strong recurring, transactional revenue model
Exposed to a broad and deep industry
Provides high-value add for clients
Favorable industry trends (F&I important to dealers)
High barriers to entry
High fragmentation and the potential for consolidation
Continued product/service evolution creating opportunity
Founder/operator transition

9. Growing Trend of Private Equity in F&I
Impact of PE firms on the F&I sector
Professionalization of the F&I industry due to the entrance of sophisticated owners
F&I administrators must now be adept at servicing the needs of more sophisticated consumers and dealers
Meaningful technological changes are impacting product pricing, delivery and administrative processing capability; the industry has become more efficient
Consistent underwriting performance and cash flow generation through the financial crisis has lent credibility to the industry

10. Growing Trend of Private Equity in F&I
Why consider a sale?
To facilitate a founder or owner transition
To provide liquidity for inactive, minority or legacy shareholders
To access capital for growth initiatives, such as capital for acquisitions or new products or services
To bring in external governance expertise
To align your organization with a growth or value focused shareholder
To help your business reach the next stage of its development

11. Growing Trend of Private Equity in F&I
Preparing your company for sale
Identify transaction objectives and priorities
Recognize organizational strengths and weaknesses; support the process with capable people
Prepare your financials; view your financials as a buyer would view them (i.e. “add backs”)
Develop financial projections supported by tangible growth plans and new opportunities
Track relevant metrics for your business in detail
Determine your timeline and resource allocation; a sale takes management focus

12. Growing Trend of Private Equity in F&I
Hiring advisors
Investment bankers; identify buyers, prepare marketing materials, negotiate and close transactions
Accountants/auditors; perform detailed financial diligence, prepare financial audits
Consultants; prepare market/industry reports, identify organizational improvements, survey clients
Attorneys; negotiate transaction documentation, identify/analyze liabilities in connection with a transaction
Tax advisors; analyze tax consequences of a transaction for the company and the shareholders

13. Growing Trend of Private Equity in F&I
What drives F&I valuations?
Company growth prospects; organic, acquisition, etc.
Profit margins; sustainability
Source of earnings; underwriting, admin, commissions
Business mix; niche or full product provider
Size; bigger is better
Client focus; retail or OEM, national or regional
F&I companies are valued on cash “EBITDA”, or earnings before interest, taxes, depreciation and amortization
Currently valuations run anywhere from 6 times to greater than 10 times for sizeable, growing platforms

14. Growing Trend of Private Equity in F&I
Transaction structure and leverage
Most PE firms employ leverage to facilitate returns
Generally require selling shareholders to maintain an equity stake to align interests; PE firms are not managers
Transaction Example (selling shareholders' post transaction ownership of 25%)*
($ in millions)
Transaction Details
Post Transaction Capital Structure
XYZ Warranty Co
Third Party Debt
$40.0
EBITDA
$10.0
Funds from PE Firm
$30.0
Purchase Multiple
8.0 x
Shareholder Equity Roll
Total Enterprise Value (no debt)
$80.0
Total Enterprise Value (levered)
Cash Proceeds to Shareholders
Proceeds from Debt
Proceeds from PE Firm
Cash Proceeds to Sellers
$70.0
*ignores transaction expenses

15. Growing Trend of Private Equity in F&I
Due diligence
PE firms will undertake a substantive and detailed diligence review before making an investment
Necessary for both their own investment committee and for lenders
Focus on your business, operations, management, markets, customers, financials, technology and more
PE firms will hire outside consultants and advisors to prepare diligence reports (quality of earnings, etc.) and attorneys to document the transaction
Potential negative findings in diligence will have an impact on pricing or potentially kill a transaction

16. Growing Trend of Private Equity in F&I
Timeline
Transaction timelines are highly variable depending on a number of factors; however minimum timelines are several months up to 9 to 12 months to complete a transaction
The most critical impediment to a timely transaction can be the ability of an organization to pull information for the buyer
Financing markets and the broader economic environment are also risks to a transaction

17. Growing Trend of Private Equity in F&I
What to expect after a sale
PE firms are not operators; management will run the business
Monthly reporting
Forecasting and budgeting
Growth plans
Board meetings
Debt service
Another ultimate PE exit

18. Growing Trend of Private Equity in F&I
Key takeaways
PE firms are very active in F&I; they are knowledgeable buyers
Can provide a means to affect organizational change (transition, growth, etc.)
Are primarily driven to create value for shareholders
Utilize leverage to generate returns
Can create more efficient companies
Are ultimately transaction driven; don’t realize a final return until a sale of the business