1. Veritas Financial Group Introduction to the Financial Universe Week 3 – Venture Capital & Private Equity

2. Today’s Agenda – Private Equity What is Private Equity? How do PE firms make money? What is leverage? How are PE firms structured? Who are the big players in PE? What is an ideal target for a PE firm?

3. The Private Equity Market Global Assets > $2.0 trillion $949 billion of funds available for investment Global market Industry agnostic

4. What is Private Equity? Private equity investments can be made by: A private equity firm A venture capital firm An angel investor Common private equity investment strategies: Leveraged buyouts (and management buyouts) Distressed investments Recapitalizations, PIPEs Venture capital Growth capital

5. What is Private Equity? Private Equity is an investment strategy consisting of owning equity that is not traded on an exchange Private Equity funds are pools of money that are used to: Take Privates: Buy all outstanding shares of a public company Private Buyout: Purchase the equity of a private company (family business, from another PE firm, etc.) Rollup: Acquire multiple companies and combine them Corporate Spinout: Acquire a division of another company

6. How do PE firms make profitable investments? Increase Profits (Operational Improvement) “Top Line” (Revenue) Acquire other business Introduce new products Sell more to existing customers Expand geographically Improve pricing Increase Profit Margin Reduce Costs (Manufacturing location, headcount) Capital Structure/ Fees Valuation (Multiple Arbitrage)

7. What is leverage? Leverage is the ratio of debt to equity A company has $100 in assets $20 belongs to investors $80 belongs to creditors How levered is the company? Assets$100 Investors (Equity)$20 Creditors (Debt)$80 Debt to Equity Ratio

8. What is leverage? Leverage is the ratio of debt to equity A company has $100 in assets $20 belongs to investors $80 belongs to creditors How levered is the company? Assets$100 Investors (Equity)$20 Creditors (Debt)$80 Debt to Equity Ratio4

9. Why would a company use leverage? Will starts a company and invests $100. It makes $10 in the first year. What is the return on equity? Bobby starts a company and invests $10. He then borrows $90. The company makes $10 in the first year. What’s his return on equity? Investment Borrow Amount Total Investment Return Return on Equity "ROE" Will$100$0$100$10 Bobby$10$90$100$10

10. Why would a company use leverage? Will starts a company and invests $100. It makes $10 in the first year. What is the return on equity? Bobby starts a company and invests $10. He then borrows $90. The company makes $10 in the first year. What’s his return on equity? Investment Borrow Amount Total Investment Return Return on Equity "ROE" Will$100$0$100$1010% Bobby$10$90$100$10100%

11. Downside of leverage It’s about risk/reward Leverage increases return on equity However, taking on debt can be expensive (have to pay interest) A drawdown can cause serious problems Investment Borrow Amount Total Investment Loss Return on Equity "ROE" Will$100$0$100($10) Bobby$10$90$100($10)

12. Downside of leverage It’s about risk/reward Leverage increases return on equity However, taking on debt can be expensive (have to pay interest) A drawdown can cause serious problems Investment Borrow Amount Total Investment Loss Return on Equity "ROE" Will$100$0$100($10)-10% Bobby$10$90$100($10)-100%

13. How are PE firms structured? Limited Partners – provide capital to the private equity fund (firms run many funds) Receive a “limited” share of the profits (i.e. what is left after general partners are paid) General Partners – make investment decisions and collect fees Receive payment “off the top” (usually 2% of total investment + 20% of profits) Sometimes get to keep interest in the target company instead of cash (carried interest)

14. What is the ideal target for a PE firm? Attractive valuation Stability of earnings and high cash generation Significant growth potential Significant profitability improvement potential

15. LBO Model (macabacus.com/lbo-model/basic-inputs)macabacus.com/lbo-model/basic-inputs