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CFA Society of Iowa

CFA Society of Iowa. February 2008. The Private Equity Market. -Introduction to Norwest Equity Partners (NEP) -The Evolution of Private Equity -Current Middle Market Overview -Trends in Private Equity. Who We Are.

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CFA Society of Iowa

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  1. CFA Society of Iowa February 2008

  2. The Private Equity Market -Introduction to Norwest Equity Partners (NEP) -The Evolution of Private Equity -Current Middle Market Overview -Trends in Private Equity

  3. Who We Are • Norwest Equity Partners (NEP) invests in profitable and growing middle market companies • Four decades of investment experience; heritage dates back to 1961 • $3 billion in capital under management • Currently investing NEP VIII — $800 million private equity fund • Affiliated mezzanine fund: Norwest Mezzanine Partners (NMP), $650 million under management • Limited partner is Wells Fargo & Co. • NEP General Partners have autonomous decision-making • 25 investment professionals located in Minneapolis (20 NEP, 5 NMP)

  4. What We Do • Types of Transactions • Buyouts • Recapitalizations • Growth Equity • Mezzanine • Other • Investment Criteria • EBITDA greater than $10 MM for standalone investments; any size for portfolio company add-on acquisitions • Transaction size between $50 MM - $500 MM • Equity investments of $20 MM - $100 MM

  5. Representative Investments Agricultural Services and Products Business Services Consumer Services and Products Distribution Energy Financial Services Healthcare Manufacturing Plastics and Packaging Proven Technology Transportation and Logistics

  6. ●– current portfolio company – exited investments – add-on investments NEP Office, Minneapolis ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●● ● Not shown on map: Hawaii Brazil, Mexico, Canada ● National Presence ● ● ● ● ●

  7. NEP Iowa Investments POET Biorefining Jewell, IA POET Biorefining Gowrie, IA Becker Underwood Ames, IA Paladin Brands Cedar Rapids, IA Jacobson Companies Des Moines, IA • NEP and NMP have invested over $265 million in Iowa • Combined sales of over a billion $’s

  8. The Evolution of Private Equity

  9. What is Private Equity?

  10. Venture Capital • BDCs SPACs • Leveraged Recaps • Leveraged Buyouts • Mezzanine PIPEs • Management Buyouts

  11. What is Private Equity? Source: Credit Agricole

  12. Top Quartile Performance Source: Bain

  13. The Early StageEarly 1980’s - Mid 1990’s • “Cowboy Days” • <20% of capitalization in equity for LBOs • Some deals funded with 0% equity • Mega deals like RJR Nabisco • 6x leverage, emergence of cash flow loans and junk bonds

  14. The Early Stage • Return Model Debt Paydown -Debt arbitrage -Cost cuts -Junk bonds Multiple Arbitrage -Fewer exit options Earnings Growth -Don’t rock the boat

  15. The Early Stage Source: Venture Economics

  16. The Middle StageLate 1990’s - Early 2000’s • “The Proliferation Story” • More funds, more specialization, spin-out funds • Over-levered deals in trouble • Growth slows with recession • It’s all about the internet and technology

  17. The Middle Stage • Return Model Debt Paydown -Asset Sales -Cost cuts Multiple Arbitrage -Roll-ups Earnings Growth -Cost take-outs in roll-ups

  18. The Recent StageMid-2000’s – 6 Months Ago • Institutional “Grown-up” Stage • Record fundraising and investments • Record leverage and purchase multiples

  19. Recent Stage • Return Model Debt Paydown -Not at these prices and required equity % Multiple Arbitrage -Not at these prices Earnings Growth -Operational improvements

  20. 2007: Record Breaking U.S. Buyout and Mezzanine Fundraising, 1996–2007($Mil) Source: Buyouts Magazine

  21. 2007: Record Breaking U.S.-Based Disclosed Deal Volume By Quarter In Billions Source: Buyouts Magazine

  22. 2007: The Year of the Mega Deal 7 out of the 10 largest closed deals ever took place in 2007 Source: Buyouts Magazine

  23. Current Middle Market Overview

  24. 2007: The Year of the Credit Crunch The market has been erratic this week.

  25. The Break Up • Buyout firms walking away from take-private deals • KKR and GS Capital: Harman International ($8 billion) • J.C. Flowers and Cerberus: Sallie Mae ($25 billion) • Cerberus: United Rentals ($100 million reverse break-up fee)

  26. Top Pending US “Going Private” Transactions

  27. PE Slowdown? “Hoskins, try saying 'profits are up' without the finger quotes, okay?”

  28. PE Market Slowing? LPs Seeing Early Signs Of An End To The Buyout Boom(Dec 07) Source: Coller Capital

  29. Middle Market Immunity? • Liquidity shortage finally catching up with middle market • Collapse of CLO and syndication markets • Sub-prime mess, recession fears, rogue traders • Consolidation and retreat • Funding challenges for BDC’s

  30. Middle Market Immunity? Source: Buyouts Magazine

  31. Middle Market Immunity? Source: Buyouts Magazine

  32. Middle Market Immunity? Source: Buyouts Magazine

  33. Middle Market Immunity?

  34. Middle Market Woes • Harder time getting lenders to underwrite deals • Buyout Funds are seeking non-traditional lenders (Hedge Funds, etc) • Less Capacity • Lenders pushing for tougher covenants

  35. Trends in Private Equity

  36. Globilization of PE • “The private-equity industry is larger, more profitable and more global in scope than at any time in its roughly 40-year history.” • David Rubenstein, co-founder of the Carlyle Group Source: The Economist

  37. Europe moving into U.S. PE Market? European Sponsors Grow More Active In U.S. Source: Buyouts Magazine

  38. Industry/Theme Focus • Sector specialization • Energy, retail, clean technology, etc • Demographics • Baby boomers, Hispanic market, affluent market • Outsourcing • China and India strategies • PE organizational changes • Operating partners, role specialization

  39. Convergence with Hedge Funds • Synergies between two areas • Leveraging sector talent, market knowledge, deep research, deal flow, fund raising • Debt markets are largest areas of convergence • Public to Private Deals • Significant cultural differences

  40. Going Public • BDCs, SPACs, Management Companies, etc

  41. Tips for working with a private equity firm… • Start to prepare early -Get financials in order • Understand decision making process of PE groups • Do your homework -What is the firm’s track record? Reputation? -Call CEO’s of current and former portfolio companies • Think about taxes -Can single level taxation be preserved? -Changes in capital gains rates • Spend time with firm to understand personalities/good cultural fit

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