Introduction To Private Equity Version 2

Introduction To Private Equity Version 2

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  Introduction to Private Equity Errol Danziger Danziger Capital Partners LLP October 2011 Version 2 1
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  This Presentation covers Three Topics… • What is private equity? • How does private equity differ from other investment models? • How does private equity boost corporate performance and enhance investor returns? 2
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  Wealth Creation through Private Equity • Wealth creation through the private equity investment model can be impressive, and sometimes even spectacular • Although average private equity returns have been shown to track but not exceed the S&P 500, some private equity investments have greatly outperformed other types of investment 3
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  KKR’s Acquisition ofDuracell 8 7.8 7 6 Acquisition 5 price $ billions 4 Bank deposit 3 2.4 at 5% 2 1.8 Selling price 1 0 Investor value Source: McKinsey 4
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  Desai Capital’s Acquisitionof Sunglass Hut 100% 90% 80% Operating improvements 70% Leverage 60% 50% Industry gain 40% Market gain 30% 20% Cost 10% 0% Source: McKinsey Value 5
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  Scale of PrivateEquity Investment Globally Source: TheCityJK 6
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  Scale of PrivateEquity Investment in the United Kingdom Source: TheCityJK 7
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  Scale of PrivateEquity Investment - Key statistics Global • Total funds under management - $2.4 trillion (of which cash is $1 trillion • New Investments in 2010 - $180 billion • Exits in 2010 - $232 billion • New funds raised in 2010 - $150 billion United Kingdom New investments in 2010 - £20.5 billion Number of companies receiving private equity investment in 2010 – 1,073 New funds raised in 2010 - £6.6 billion Source: TheCityJK 8
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  Scale of PrivateEquity Investment Global Fundraising 700 600 500 400 Capital raised ($ 300 billions) 200 100 0 2001 2003 2005 2007 2009 2011 Source: Financial Times 9 28 September 2011
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  Scale of PrivateEquity Investment Number of Funds 1400 1200 1000 800 Number of 600 funds 400 200 0 2001 2003 2005 2007 2009 2011 Source: Financial Times 10 28 September 2011
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  Scale of PrivateEquity Investment Value of Global LBOs 700 600 500 400 Value of LBOs 300 ($ billions) 200 100 0 2001 2003 2005 2007 2009 2011 Source: Financial Times 11 28 September 2011
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  Scale of PrivateEquity Investment Number of Global LBOs 2000 1800 1600 1400 1200 1000 Number of 800 deals 600 400 200 0 2001 2003 2005 2007 2009 2011 Source: Financial Times 12 28 September 2011
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  Objectives of Private Equity Investment • Improvements in operating efficiency • Increases in manufacturing and service productivity • Increases in shareholder value 13
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  The Private Equity Investment Model • Resolves public company conflicts of interest • Helps overcome the failure of public company controls • Conflicts of interest in the public company have not been controlled by – 1. Internal controls, including boards of directors 2. Product markets • but have been controlled to some extent by capital markets • Activist investors have intervened and the result has been the development of private equity 14
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  The Strategy ofPrivate Equity Fund founded by specialist investors Raises debt and equity capital Buys out listed and unlisted Takes the listed targets targets private Restructures the targets Exits through sale or IPO 15
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  The Structure ofPrivate Equity The legal and economic structure is made up of these factors and elements 1. Funds 6. Management 2. Debt incentives 7. Decentralisation 3. Partnership 8. No cross- 4. Manager-held equity subsidisation 5. Institutional 9. Limited lifespan investors 10. Targets taken private 16
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  Public Company Structure Diagram Director pay: performance sensitivity is small Board of Directors CEO pay:performance CEO sensitivity is small Corporate Headquarters Headquarters staff in the 1,000s Division Division Division Division 1 2 3 4 Divisional head pay:performance sensitivity is tiny 17
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  Private Equity Structure Diagram CEO pay:performance Partnership Limited sensitivity is big Headquarters Partnership Buyout Fund Headquarters staff in the 10s LBO target LBO target LBO target LBO target 1 2 3 4 LBO target CEO pay:performance sensitivity is big 18
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  Private Equity InvestmentTargets Private Equity pursues corporate targets that are underperforming or are undervalued, and that have these features: 1. Poor management 2. Under-investment 3. Over-investment 4. Strategic neglect 5. Inadequate debt financing 6. Excessive debt financing 7. Incorrect financing mix 8. Excessive cash holdings 9. Excessive conglomeration 19
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  How Private EquityBoosts Corporate Performance By focusing on the following factors - 1. Assets in place 9. Period of high growth 2. Redeployment 10. Cost of financing 3. Operating efficiency 11. Less discretionary 4. Tax burden 12. Operating leverage 13. Financing mix 5. Capital maintenance, working capital 14. Matching 15. Non-operating assets 6. Expected growth 16. Acquisitions 7. New investments 8. Existing assets 20
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  Features of Private EquityTarget Performance 1. Target shareholders gain from leveraged buyouts of target companies 2. Private equity gains are not at made at the expense of other constituencies 3. Leveraged buyouts boost target operating efficiency 4. Private Equity gains are not subsidised by tax system through interest deductibility 5. Private Equity targets taken private are seldom taken public again 21
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  How Private EquityAchieves Outperformance 1. Cash retention is minimised and excess cash is distributed promptly to investors 2. Capital structure is optimised to minimise cost of capital 3. An operating plan is developed and followed rigorously 4. Target company management is heavily incentivised to perform 5. Target company directors play an active and ongoing role in operational management 22
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  Thank you! 23