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Private Equity Overview

Private Equity Overview. Background – Josh Ciampa •BU SMG and CAS 2005 •General Electric ( 5 years) •Financial Management Program (2), Leveraged Finance (3) •First Atlantic Capital – Associate •NY based middle market private equity firm (Packaging, Consumer, Business Services focus)

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Private Equity Overview

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  1. Private Equity Overview

  2. Background – Josh Ciampa • •BU SMG and CAS 2005 • •General Electric ( 5 years) • •Financial Management Program (2), Leveraged Finance (3) • •First Atlantic Capital – Associate • •NY based middle market private equity firm (Packaging, Consumer, Business Services focus) • •Total funds under management in excess of $700M Introduction • Background – Boris Bystrov • BU SMG and CAS 2006 • Merrill Lynch / Bank of America • Risk / Underwriting (3), Corporate Banking (1), Investment Banking (1) • LS Power Equity Advisors – Associate • NY based private equity fund focused on the energy and power industry • Part of a larger power company • Total funds under management in excess of $4Bn

  3. What is Private Equity? • •Management of assets for investors seeking alpha via participating in the purchase of stock or assets in private or public companies through a leveraged buyout • •Control investing (own > 50% of equity and control BOD) • •Minority or Co-investing alongside a Control investor or injecting equity into a business directly • •Secondaries / Fund of Funds investing (buying another investor’s equity interest at a discount) • •Investment fund is raised with Limited Partners committing capital to the fund • •Money is not sent to the fund until “called” when an equity check is ready to be written for an investment • •10 year fund lifecycle – 5 years to invest, 5 years to harvest • •Illiquid investments with long time horizon • •Fund charges 2% management fee on assets under management (AUM) and keeps a carried interest “carry” of 20% of the returns above a certain threshold • •Must hit a fund hurdle rate or subject to a “claw back” provision where investors are reimbursed Private Equity Overview

  4. LPs (Limited Partners) * Endowments, Pension Funds, Fund of Funds Flow of Funds Exits (IPO or M&A) Portfolio Companies PE Funds PE Firms / GPs (General Partners) *Manage Multiple Funds

  5. “Mega funds”: Multi-billion dollar funds that invest across all industries • •Invests in mature companies with strong cash flows via leveraged buyouts • •Examples: Blackstone, KKR, Carlyle, TPG, etc. • Middle-market: $500mm to $5bn funds that invest within specific sector or across all industries • •Typically invests in small to mid-cap companies via equity commitments ranging from $25mm to $100mm • •Examples: Advent International, Golden Gate, Avista Capital, HIG Capital, etc. • Growth equity: funds that invest in earlier-stage companies • •Typically invests in smaller targets via platform or “build-and-buy” investing • •Examples: General Atlantic, TA Associates, Summit Partners, etc. • Sector-specific: funds that invest in one or two industries • •Typically middle-market / growth equity or distressed • •Examples: Silver Lake (tech), Lone Star (financials / real estate), Cressey & Co. (Healthcare), Energy Capital Partners (Power) • Financial Institutions: private equity subsidiaries that invest across all industries • •Typically invest in mid-stage to mature companies with commitments ranging from $25mm to $1bn with more of a net income focus than other shops • •Examples: GE Capital, Goldman Sachs, Barclays, etc. Types of Private Equity Firms

  6. “Mega-funds” “Equity check” size Private Equity Landscape Growth equity Financial institution-backed Middle-market Stage of Company / Strategy Early-stage / Growth Mature / LBO

  7. Private Equity Market Overview • •2007 was peak of PE related activity • •1st half of 2011 activity impacted by volatile credit markets • •Lots of activity expected in 2nd half of 2011 and 2012

  8. Stages of Investment Stage of Company / Control Startup Mature Private Equity is the asset class that purchases an equity stake in a company that is not publicly traded on a stock exchange The PE landscape can be broken down by the varying strategies based on the ownership/control, mix of debt & equity, stage of company, risk/reward, etc. AngelInvesting VentureCapital GrowthCapital Mid-MarketPrivate Equity Distressed LeveragedBuyout Lines are blurring as VCs are investing in earlier and later-stage companies

  9. Venture Capital is Early and Exciting

  10. Venture Capital Investment $ Billions *Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.

  11. Stages of Companies Early-Stage Seed: Deployment of a relatively small amount of capital for the entrepreneur / company to prove out a concept before qualifying for Start-up financing Product Development, Market Research, Build Management Team, Develop a Business Plan Start-up: Complete development of product & initial marketing efforts. Technology / product / market risk Growth-Stage Capital for initial expansion – sales & marketing, continued technology development, hiring, and working capital Risk migrates from technology / product risk to execution / market risk Later-Stage After companies have proven their ability to execute at a limited scale they will look to raise a larger round of capital to scale the business while continuing to fund sales & marketing Ultimately this stage of financing should enable the company to position themselves for an exit

  12. The Big 4 Drivers • •Organic EBITDA growth • •Acquisitions • •Multiple Expansion • •Cost Cutting / Deleveraging • Strategies • •Platform Investment • •Acquiring a solid distributor of fire protection equipment and adding SKUs / moving into adjacent markets / products • •Industry Roll-up or consolidation strategy • •Acquiring a security guard company for 6.0x EBITDA and acquiring mom and pop security firms for 3.0-4.0x EBITDA, consolidating a fragmented industry • •Regional to national expansion • •CompUSA: private company with 2 locations, PE investors took it national with 100 locations and > $1BN revenue • •Capex harvesting • •Satellite companies purchased post 5 yr capex investment cycle • •Capacity utilization expansion • •Helicopter transportation company purchased for a low multiple when capacity utilization is at 40% • Managing the Inflection Points (step functional growth) • •Upgrade management, sales • •Manufacturing – single plant to multiple locations • •Moving US manufacturing to China • •Rethink distribution, warehousing strategy • •Brand expansion, marketing • •Single product to diverse offering Value Creation • Comments on Lifecycles • •Venture capital investing at Introduction phase • •Growth phase receives private equity investment (growth equity) • •Revenue ramp, addition of customers, need for professional management, logistics, distribution • •Mezzanine facility • •Maturity phase supports leveraged buyout well – • •Low capex • •High free cash flow / Stable

  13. EBITDA • •Earnings before interest, taxes, depreciation & amortization • •Allows for comparability across industries (asset heavy vs. light) • •Disregards financing decisions and tax benefits • •Excludes non-cash charges against income (D&A) • Enterprise Value or Firm Value (EV) • •Value of Debt + Equity less Cash on balance sheet • •Represents Takeover Value of Company • •EV of a public company – see chart at right • •EV of a private company = EBITDA x Exit Multiple • Valuation in Practice • •Enterprise Value / EBITDA multiple or EV/EBITDA • •Quote value of a company as a multiple of LTM or TTM EBITDA • Capital Structure Comments • •Equity is the residual claim on Assets • •Liabilities have security interest on assets • •Seniority of Capital Structure • •Cost of Capital relates to relative risk of tranche • •Investors demand more return for more risk • •Cost of Capital for tranches • •Secured vs. Unsecured Private Equity Concepts Valuation

  14. Visual Summary Private Equity LBO Example • Considerations • Equity Value increased 2.4x while TEV increased 1.5x (beauty of leverage) • EBITDA increased 50% but our return was > 100% • Free Cash flow paid down debt to accelerate increase in equity value: TEV increased $120M while Equity Value increased $145M • Returns would have been higher if exit multiple was higher than entry

  15. Private Equity Time Allocation • Researching industry trends & opportunities; building domain expertise • Prospecting: Identifying companies of interest to proactively contact • Sourcing • Reaching out to companies proactively or tapping the network to make first contact with CEOs/Companies • Networking with other investors, bankers, CEOs 30% Research / Prospecting / Sourcing 25% • Process to determine if the firm should bid (and at what price) on a company/deal: • Relationship building, diligence, deal structuring & returns analysis, firm buy-in, term sheet construction, negotiations • Summary Diligence: Management, Market, Company / Product, Technology, Barriers to Entry, Financials Pre Term Sheet Diligence 10% • The company has selected our firm and we enter into a period of exclusivity where the firm spends a significant amount of time conducting diligence on every aspect of the business before completing the transaction • Full model; transaction memo; legal documents; continued negotiations Post Term Sheet Diligence 15% • Attend board meetings • Support companies with strategy, hiring, future financing, and exits • Ad hoc projects Portfolio Company Support 15% • Fundraising • Reporting on company, deal, and fund performance • Ad hoc projects Internal Projects / Reporting

  16. New Deal Evaluation • •Origination • •Investment Bank auctions • •Proprietary relationships with PE Funds, Companies • •1st Round Deal Evaluation • •Receive CIM (Confidential Info Memo) from a bank • •Evaluate investment opportunity • •LBO Model • •Bid • •Management Meetings • •Evaluate quality of management • •Plant / facility tours • •Data room access • •2nd Round Bids • Portfolio Management • •Strategy sessions • •Organic Growth • •Acquisitions • •Help management build budget • •Market sizing analysis • •Market growth analysis • •Customer analysis • •Attend Board of Director meetings • •Set short term and long term goals for company • •Discuss long term exit strategy for company • •2nd Round / Formal Diligence • •Data Room access • •Investment thesis • •Access to management for questions • •Refine investment case – build full operating model • •Quality of Earnings, Environmental, Legal, Insurance review, Third party industry study • •Review of major contracts, financials, audits, other • •Financing Sources • •Negotiate purchase agreement • •Negotiate lender credit agreements Private Equity Deal Process and Responsibilities • •Weekly sales reviews with CFO or CEO • •Monthly analysis of financials • •Assist with C-level hiring • •Interview candidates • •Acquisitions • •Meet with CEO and management of potential targets • •Research targets and make offers • •Engage bankers for strategic alternatives • •Build M&A models for tuck acquisitions

  17. PE associate program overview • •Typically two-year commitment for pre-MBAs • •Some firms (mostly middle market) offer ability to stay without MBA or return post-MBA • •Ability to co-invest available at certain firms Career in private equity • What do private equity firms look for? • •Most firms typically require background experience in investment banking and less frequently consulting for pre-MBAs • •Strong analytical / modeling skills (excel modeling test) • •Excellent communication skills • Life after private equity • •Top-tier business school • •Lateral to other PE shops, hedge funds, etc.

  18. Career in PE Market • PE values transaction and business experience • 2-5 yrs experience is the sweet spot for entry • Larger funds - MBA, smaller funds more flexible • Highest recruits from banking; Also consulting, corporate training programs, and industry • Life after PE • BD, Consulting, Start-up • Move funds (large cap, middle market, VC, value, public equities, fixed income, high yield, mezz) • Supply of money on sidelines driving purchase multiples • Financing markets remain conservative • Very difficult to be a value investor in this market • Shrinking number of funds, consolidation • Operational value vs financial engineering Closing Thoughts Suggested Reading Recommended Classes at BU • FT, WSJ, Barron’s, Economist, IBD, Seeking Alpha, Wired • One up on Wall Street, Beating the Street (Peter Lynch) • The Shareholder Letters of Marty Whitman, Warren Buffet • Barbarians at the Gate, Against the Gods • AC346, AC347 (Intermediate Accounting) • AC414 Financial Statement Analysis • Finance, economics • Have a tangible skill set • Differentiate yourself • Take upper level 300 and 500 liberal arts classes • Directed Study • Excel modeling

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