1. Private Equity

2. History of PE American Research and Development Corporation (1946)
Investment in Digital Equipment
Annualized return on capital of 101%
$70,000 > $355 Million
The first private equity company (Documented) was the American Research and Development Corporation which was founded in 1946
They began their portfolio with an early investment in Digital Equipment.
This was their best investment and they turned 70,000$ initial investment into a 355Million dollar value.
This related to an annualized return on capital of 101%

3. Panic of 1893 US relied heavily on high commodity prices
Argentina – failure of wheat (1890)
Run on gold
Railroad overextension
The story of PE starts with the panic of 1893
This was at a time when the US relied heavily on commodities and railroads (Shipping of commodities) for the economy
The first kingpin to fall to spark the panic of 1893 was Argentina. Argentina relied heavily on the wheat crop for their economy, and the crop failed in Argentina. This brought all North and South American commodities into question and European investors began exiting these positions
In addition to commodities going south, the railroads were all overextended, many times having no crates on them to ship..
As these started to have trouble in conjunction with commodities, European investors started to flee from US denominated assets. Given that the gold standard had already been created, this was eventually a run on gold

4. Union Pacific Badly run railroad Cheaply built with corrupt officials
E.H. Harriman (with the help of Kuhn Loeb)
Converted to cash cow
Union Pacific was one of the railroads responsible for the panic of 1893.
This was just “one of” the many cheaply built, poorly run, and corrupt railroads that existed during this time
E.H. Harriman (with the help of Kuhn Loeb) a then prominent financial conglomerate helped to restructure this railroad and make it into a cash cow for the coming decades (This was one of the first examples of a PE-type deal)

5. First Leveraged Buyout
1901 JP Morgan & Co.
Bought out Carnegie Steel for $480 Million (This would be equivalent to $15 Billion in today’s dollars)
New company Capital = $1.4 Billion
US Government Spending = $524 Million
Fun Fact: Carnegie + Rockefeller + Vanderbilt = > $1Trillion in net worth
The first example of a Leveraged Buyout was right after the panic of 93. In 1901, a prominent banker of the time JP Morgan bought out Carnegie Steel for a whopping 480 Million. This is equivalent to modern day 15 Billion dollars. This was one mans enterprise. Carnegie received most of these funds. He would be worth about 340 Billion today
New company capital amounted to a whopping 1.4 Billion dollars while government spending for that same year was only around 524 Million

6. Glass Steagall Act
1933 – In the wake of Great Depression and bank failure
Separated Investment and Commercial Banking
Kept large banks out of PE space
Only smaller deals

7. Kohlberg Kravis Roberts
Known today as KKR
Created in 1978
Partners from Bear Sterns
Smaller/family deals

8. Gibson Greeting Producer of greeting cards
$80 Million of which $1 Million was cash
One investor (William E. Simmon) made $66 Million
Caught attention of others

9. RJR Nabisco Culmination of 80’s boom
KKR acquired RJR for $31.1 Billion
Deal eventually went bust
Trend arose of failed LBOs
PE industry went quiet

10. Second Boom 1993-2003 New degree of respectability and legitimacy
Companies focused on attractive deals

11. What is Private Equity? Equity capital not quoted on public exchange
Two paths
Directly into private companies
Buyout of public company (delisting)

12. Raising Funds Retail and institutional investors Four uses for cash
R&D in existing company
Expand working capital
Making acquisitions
Strengthening balance sheet

13. Layout

14. Types of Funds LBO Venture Capital Growth Equity Fund of Funds
Mezzanine Capital
Distressed PE
Secondaries

15. LBO – Leveraged Buyout Fund
Investor + Borrowed
Financial Leverage
Majority Position
Controls firm’s strategy

16. LBO Usually 90% debt to 10% equity Collateral Component
Hostile Takeover
Risk – who goes bankrupt?

17. Venture Capital Money provided to startup firms
Significant long-term growth potential
High risk
Above average returns
When does the money come?

19. Growth Equity Mature companies No future capital requirements
Minority stake
Company with little debt
Invest at inflection point

20. Fund of Funds Fund doesn’t invest in companies directly
Buys into portfolio of other PE firms
Allows for greater diversification
Fee charged (Professional portfolio management)

21. Mezzanine Capital Halfway between debt and equity Subordinated notes
Preferred stock
Hybrid financing
Higher returns than debt, lower risk than equity

22. Mezzanine Financing

23. Distressed PE Serious financial difficulty
Funds can buy shares cheaply
Restructuring

24. Breakdown of Distressed PE

25. Secondaries Buy commitments from PE Turn a profit on positions
Sometimes buy companies or assets from PE firms

26. Industry Analysis PE firms boom and bust (Cyclical) Debt
Why?
Debt
Marco-economic trends
Short on capital
Fully Saturated Industry

27. Relative Size of PE

28. Deal Value & CAGR

29. Capital Raised by PE

30. Buyout-Backed Exits

31. Last year’s data

32. Exits by Investment Length

33. PE Life Cycle

34. Next Week Come in with an investment idea
You will be pitching your stock to the group
You can use a PPT to present
We will be tracking these over the next quarter

35. Thank you!