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112 Cards in this Set
- Front
- Back
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Niche PE Strategies |
intellectual property, life insurance, advances materials, litigation funding, mining, mineral rights, niche distressed (steel mills) |
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Target Returns for Niche Strategies |
Multiple: >2.5x; IRR: >25% |
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Attractiveness of Niche PE strategies |
Typically attractive valuations Lower correlation with market (increased diversification) Real Experts Stronger LP/GP alignment Little to no financial leverage |
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PE Niche Strategies |
Specific and intense due diligence Modest size of funds Remain generally unknown to investors |
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PE Niche Strategies Real Assets |
Broad Area: planes, freight, infra, natural resources, containers Naturally hedged against inflation can generate cash yield Technical rigor of evaluation leads to high returns |
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PE Niche Secondary Markets |
Less competitive than regular PE secondary markets Strategies are hard to grasp Discount to NAV could reach 50-60%+ |
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PE Niche Strategies Social Impact Investing |
Double Bottom line: financial returns + social good Impact on environment, education, or diversity Close to socially responsible investing (SRI) or Environment, social justice, and Govt. (ESG) niche strategies Excludes certain industries: Tobacco, gambling, etc. |
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Examples of Social Impact Investing |
Target minority-owned businesses Target businesses targeting minority consumers Target GP's headed by minorities |
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Listed Private Equity |
Listed PE Vehicle is a listed company investing in private companies and targeting a mid-term exit An LPEV may also commit to PE funds Investment Vehicles: Ares, Apollo Mgmt Vehicles: Carlyle, Blackstone Integrated companies: (fund+team) Capital Southwester, Leucadia Integrated company managing other funds: American Capital, KKR |
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Why go Public as a PE firm? |
Managements best interest (monetize career) Access to permanent capital Reach small investors Enhance brand for fundraising or dealmaking Employee motivation tool (shares) |
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Do LP's like LPE? |
Compete with shareholders in investing in fund Diminished team motivation |
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Overview of LPEV |
Potentially best of both worlds (Pe returns with liquidity of public market) Large, diversified, inefficient market, NAV is key metric Room to create value as activist |
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Key Themes to build opinion on LPEV |
Common: Team, portfolio assets, quality of reporting Unique to LPEV's: Alignment of interest, evolution of discount, capital structure |
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Three main investing strategies for LPEV's |
Passive Awaken/Change Asset Sale/Wind-down |
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Private Debt and Distressed Investment Strategy |
Lending money to private company - equity feature: mezzanine = bond with warrant, option, preferred stock -subordinated, unsecured, debt securities= direct lending |
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Overview of Private Debt and Distressed Investment |
Strong growth with low interest environment Development of shadow banking New strategy: Unitrache (debt+equity at one stop shop) Natural targets: family-owned businesses, LBO |
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Issuer Advantage in Private Debt and Distressed Investment |
Simplicity in unitranches more reactive and flexible than banks Increased likelihood of acceptance Longer maturity Tax advantage |
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Types of Private Debt |
Hedge-funds with illiquid pockets Business development companies Small business investors Part of larger asset management |
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Advantages for family business in Private Debt |
Allows for funding growth in future Retain full ownership Very Flexible |
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Why Do LP's like Private Debt? |
Limited risk Faster distribution Attractive targets strong rise in AUM in past 10 years |
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Issues with Private Debt? |
Risk (impact of wipe out) Dilution Liquidity and Exit (5-10 year maturity) |
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Turnaround and Distressed debt overview |
Turnaround: Invest in equity of a struggling company going through bankruptcy or out-of-court Distressed Debt: buying debt of company at discount and waiting for bankruptcy (passive or active without control or active with control) |
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Bankruptcy: Ch. 11 V. Ch. 7 |
Ch. ll Nurse company back to health Ch. 7: liquidation of company |
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Negotiation dynamics in Ch. 11 cases |
Protects company by allowing it to negotiate with contracts Each class votes; though courts can force a decision Juniors want to draw out as long as possible, Seniors want immediate liquidation |
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Target companies for Turnaround |
Losing identity Lost brand value Out of favor from capital markets (cyclical) Sound company that lacks - capital -is over-leveraged -in default of covenants |
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Turnaround characteristics |
New management Strength-focused strategy Cost control Introduction of innovation |
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Value added by PE firm in Distressed Debt or Turnaround |
Helps negotiate between seller, debt holders, and bankruptcy court |
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Attractiveness of Turnaround or distressed Debt |
High Returns Double Dip Diversification due to low market correlation |
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Issues with Turnarounds or Distressed Debt |
maintaining firm alive while paying off creditors Local bankruptcy laws Illiquidity of debt acquired |
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Venture Capital Overview |
The entrepreneurs View: Idea/Value proposition/MVP/Pivot/Execution/Partners The VC View: Identify great entrepreneurs/services/products than partner with entrepreneurs to mitigate risks and diversify |
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VC V. business angel |
Angel is post taking friends and family money and pre-VC Local and relationship driven sourcing and close informal monitoring from Angels VC: Ask for much more protection |
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GP competitors in VC |
Angels Corporations Hedge Funds Sovereign Funds Foreign Banks |
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Different Business Stages in VC |
Seed - Early Stage - Expansion stage - Late Stage Founder Tole: Everything - delegates - replaced Money: .5-2 m - 3-75m - 75 m-150m - 150m-.5B |
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Gp Investment Strategy in VC |
Growing market People skills Industry Experience |
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Deal Sourcing in VC |
Network Conferences Social Media Incubators, accelerators, super angels, crowd sourcing |
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Deal Selection Criteria in VC |
Large market Low Barriers to entry Valuation and use of proceeds Business Model Exit Candidate |
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Entrepreneurs Hat in VC |
Purpose Problem Solution why Now? Market Size Competition Product |
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Value creation by GP in VC |
Network Attract Management Expertise of Industry Exit (3-7 Years) |
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Current Themes in VC |
Staying private longer Market down valuations Employees often lose Current regulation is outdated |
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Valuation in VC |
Longer term than traditional criteria Burn rate in ST is high high level of uncertainty |
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Issues with Valuation in VC |
Huge discount rate (30-70%) typically Risk Illiquidity Overly optimistic entrepreneurs growth |
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Key Terms to negotiate for VC Term Sheet |
Valuation Option Pool for employees (large option pool could dilute ownership) Types of securities Anti-Dilution Board Representation Specific Rights |
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Types of Securities in VC Term Sheet |
Preferred Stock, Common stock, or debt |
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Preferred Stock |
Liquidation preferences Preferred dividends Convertible to common stock Distribution up to a certain multiple of investment |
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Straight Preferred |
Only liquidation preferences Ex. I million inv., 2x multiple, 30% Would convert when .3X=2m |
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Participating Preferred |
Double Dip preferred Treated like common stock after they benefit from liquidation preferences Would never convert into common stock unless mandatory |
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Capped participating preferred |
Same as participating except there's a cap on the maximum multiple of return Ex. 2x to 4x return at 30% with 1 m investment Would convert into common at .3X=4m |
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Preferred Dividends |
Paid before common dividends Non cumulative: annually if declared Cumulative: annual % per year |
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What happens when a VC investment IPOs |
All preferred are converted to common stock |
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What about subsequent VC rounds |
New preferred stock are given priority over old preferred stock |
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Anti-Dilution Clauses for VC |
Full Ratchet: Best for VC Weighted Average: partial protection -Broad Based: common, minimum protections -narrow-scope: rare, more protection Pay-to-play: only keep anti-dilution and priority in liquidation if you partake in subsequent funding rounds -pay to play could be used only for down rounds or for all rounds -if do not invest in subsequent rounds you convert to common stock |
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Board Representation for VC deal |
Valuation is temporary, control is forever Typically proportional to ownership |
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Key Rights in VC Deal |
Key decision approval - Generally whether to take a deal - Sometimes mgmt decisions and hiring/firing Preemptive rights Tag-Along Rights Drag Along Rights Regulation with SEC input |
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What is an LBO |
Technique to acquire a company with financial leverage (debt) Cash flow generated by company allows reimbursement of debt Use of debt increases returns |
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4 main parties of an LBO |
Seller PE Fund Managers Leaders |
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Important Elements of an LBO |
Interest is tax deductible Financial leverage increases risk Notion of debt capacity Lenders want to be as close to the assets as possible in an liquidation event |
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Incentives for an LBO |
Debt = discipline Managers are encouraged to perform through stock options Low level of bureaucracy Savings in reporting |
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Target Company Characteristics In LBO |
Hard Assets Steady Cash flows Low Capex investment Mature Market/ Non Cyclical |
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Returns increase in LBO when |
Growth in business Improve operating margin Manage working capital Improve Capex purchases |
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Key Metrics of an LBO |
Purchase price = Value EBITDA = Cash flows Leveraged (B/S) = D/D+E Leveraged (coverage)= D/EBITDA Return = IRR |
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Valuation of an LBO |
Public comparables M&A Comparables DCF Based on feasibility and affordability |
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Building Blocks of LBO Finc. Model : Operating Assumptions |
Sales growth (# units, $ per Unit) Cost of goods sold margin Selling, general, and admin, expenses *base assumptions off: history, competitors, new products, raw materials cost growth |
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Building Blocks of LBO Finc. Model : Net Working Capital |
Inventory (% of COGS) A/P (% of COGS) A/R (% of Sales) Current Assets/Liabilities (% of Sales) |
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Building Blocks of LBO Finc. Model : CAPEX |
Maintenance Replacement Growth Depreciation |
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Building Blocks of LBO Finc. Model : FCF |
1. Operating and investing activities 2. financing activities FCF from op.& inv = Net income +DA - change WC - Capex |
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Building Blocks of LBO Finc. Model : Uses of Funds |
Equity Purchase Price and transaction expenses Excess cash for WC Refinancing of existing debt (prepayment penalties) |
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Building Blocks of LBO Finc. Model : Sources of Funds |
Excess cash Equity Debt Mezzanine |
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Building Blocks of LBO Finc. Model : B/S adj. |
Refinancing of Debt Goodwill * all variations of b/s are taken into account on the I/S or FCF statement |
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Building Blocks of LBO Finc. Model : Returns |
Based on fully diluted ownership Show different exit multiples Terminal Equity Value at 5 years |
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The Whole Finc. Modeling LBO model |
1. Summary 2. Operating and Financing Assumptions 3. B/S Adjustment 4. FCF - I/S - B/S 5. Debt Schedules 6. Returns |
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Building Blocks of LBO Finc. Model : Ratios |
Total Debt/EBITDA: 5x EBITDA/ Interest: 2x EBITDA - Capex / Interest: 1.5X Equity/ Total Capital: greater than 35% |
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LBO Investment Process |
Sourcing - Deal qualification - Due Dilligence - Structuring - Deal |
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Sourcing: what to look for? |
Family business Corporate spin-off Growth companies Management buyout Vehicle to consolidate from and roll-up Recapitalization |
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LBO sourcing |
1. Rely on auctions 2. Rely on intermediaries to access targets 3. Direct approach *The goal of the last two approaches is to generateproprietary deal flow |
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LBO Sourcing Intermediary |
Advisor network (bankers, accountants, lawyers, etc.) Acquisition search firms Club deals |
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Signals when sourcing LBO deals |
A PE fund which is at the end of its term A PE fund under restructuring A company in need of cash Succession issues Family brawls A private company hiring an outside manager |
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LBO Deal Quualification |
Relatively mature industry with healthy margins Stable and predictable cash flows -Reputation / intellectual property / specific expertise -Limited investments required -Good past financial performance -Ability to resist in case of crisis A good management team (in place or identified) A motivated seller Favorable competitive environment for the deal (reasonable anticipated deal multiple) Exit strategy |
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Due Diligence in LBO |
Market Financial -Growth -Returns (on assets, on equity) -Profitability -Liquidity: margin of safety vs. ST obligations Environmental Accounting, Legal, HR, and Tax -Sales, gross margins and SG&A -Inventories, receivables, payables -Property and depreciation -Capex needed -Loans (summary of terms) and loan constraints |
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Term sheet to the seller in LBO |
Purchase price (and adjustment) Sources and uses of funds Conditioned on: Favorable outcome of ongoing audit Approval of financing Agreement by management MAC (Material Adverse Change) clause Guarantees required: scope, length, ceiling, security Exclusivity requested (if not already granted during the DD phase) |
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Value Creation in Exit of LBO |
Timing Sale to corporate Sale to a PE fund IPO Leveraged recapitalization |
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Value Creation in Build Up |
synergies When purchase price multiples are high: smaller firms can usually bebought at lesser multiples; then exit at a higher multiple |
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Value Creation in Operational Involvement |
Finds new customers Reduce costs Makes investment decisions Advises on the financing of the operations Marketing (including social media) and communication Recruiting of key managers Coaching of senior management |
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Value Creation in Strategic Input |
Make sure the top management in place is the right one Strategy Focus on competitive strengths One partner (at least) is often an expert of the sector and sits on the board withexperts he/she knows The PE team has a great deal of experience analyzing industries and elaborating strategies or preparing a company to be an attractive target |
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Private Equity: Role of Participants |
LPs provide capital (accredited investors) Private companies or entrepreneurs ask for capital (small businesses/start-ups) PE firms: intermediary who makes the investment decision |
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Private equity Investment Strategies |
Venture capital Growth capital LBO Mezzanine and lending Distressed / turnaround / special situations Fund of funds |
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Private Equity Main Investment Strategies: |
Sector Geography
Control or non-control |
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Main Terms of PE Fund |
Term (also called maturity): 10-12 years Investment period: 5 years Harvesting period (disinvesting): 5 years Management fees: 2% of committed capital Carried interest: 20% of gains Hurdle rate (not usually for VC funds) |
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Net Asset Value |
Fair Value of a company (costs for the first year and then comparables) |
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AUM |
Assets under management |
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Vintage Year |
First year private equity fund draws down capital |
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Committed Capital |
How much LP's committed than GP's can draw down |
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Management Fees |
2% annual for managing fund |
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Capital Call or Drawdown |
When GP calls LPs committed Capital for investment |
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Contributed Capital |
All Capital drawn for investments and fees |
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Invested Capital |
Only Capital drawn down and invested |
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Distribution |
When the GP distributes returns to the LPs |
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Private Equity Equations |
Every year: Cum. Mgmt Fees + Cum. (gross) IC = Cum. Contrib. Cap Last year of fund: Contrib. Cap. = Commitment Capital At the end of the fund:Total Mgmt Fees + total (gross) IC = Commitment Capital Any time: Contrib. Cap = Sum of calls Net IC = Gross IC – cost basis of realized investments (= 0 at theend of the fund) AUM = Uncalled Commit. Cap. + NAV of unrealized investments |
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Carried Interest |
Generally 20% of gains over a hurdle rate of 6-10% “American” style: deal by deal, potentially each time there is anexit “European” style: once the LPs’ contributed capital has beenreturned to the LPs (and hurdle has been reached) |
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Waterfall and Catch-Up |
Waterfall: defines in whose pockets each dollar goes when there isa distribution to be made Catch-up: when there is a hurdle, addresses specifically whathappens to each dollar to be distributed once the contributedcapital and hurdle have been reached |
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Why do Multiples and IRR contradict one another? |
The IRR depends on the discount rate and the multiples does not take into account the present value of money |
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Gross or Net Performance of Funds |
Gross performance = Performance of the fund including fees Net performance = Performance from the LP’s angle excluding fees |
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Attractiveness of the PE Asset Class |
Over performance due to higher risk Diversification Good matching profiles for long term investors Allow financial institutions to benefit from non-recourse leverage |
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Fund of Funds |
Larger than PE funds Longer maturity (less liquid) Shorter investment period Fee structure: 1-10% (Higher than 2% fee) Team: accent on quantitative skills Increasingly specialized |
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PE Investor Thesis |
An investment thesis consistent with their approach A committed and cohesive team A long track record A maximum fund size Co-investment opportunities Good sourcing of deals, rigorous due diligence and post-acquisitionvalue creation % fees Quality of reporting Fit with their PE funds portfolio Currency exposure |
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Improving Reputation of PE Funds |
Fees reduction Increased alignment of interests (skin in the game,offset of ancillary fees, governance rights…) Quality of reporting (industry norms, externalaudits) Coinvestments rights Large LPs started to compete with PE firms hiringteams to do direct investments Some large LPs bought stakes in GPs |
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New approaches by GPs in PE |
Debt strategies Buy and build Teaming up with strategic investors Acquiring LPEV Different structures |
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Creation of a PE Fund |
A well defined investment strategy A track record An experienced and credible team A circle of potential investors The financial ability to operate until you are able to generate enough revenues |
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Role of a placement agent |
Helps you raise money from new investors Helps you diversify your existing base of investors Strategic positioning / premarketing Preparation of marketing materials Identify and initial contact with investors Arrange meetings (and logistics) Follow up with investors and access to data room |
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Documentation for Starting a PE Firm |
Pitchbook (Presentation) Offering memorandum (PPM, COM, Prospectus) LP agreement Subscription booklet Executive Summary Summary of Investment Performance Investment Team Investment Strategy Investment Process Risk Factors ERISA, Tax & Legal Matters |
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Private Equity Secondary Market Characteristics |
You buy or sell a fund position or a portfolio of funds positionsplus the remaining commitments (if any) Global Fairly opaque inefficient (as everybody has their opinion on any fund) |
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Why is the secondary Market interesting to sellers? |
To get cash in times ofeconomic crisis To get rid of their commitments To rebalance / rationalize their portfolio, save in monitoring costsand reduce exposure to a geography, strategy, sector or manager To lock-in performance To show exits or IRRs to raise more money To comply with rules (denominator effect, regulatory reasons) |
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Why is the Secondary market interesting for buyers? |
To avoid the blind pool syndrome; less risky To get their money back as well as future distributions faster To avoid the J-curve To diversify / fine-tune their portfolio easily & rapidly To try to benefit from significant discounts when buying from forcedsellers |
