antonie paul woodbury ceo-cf presentation march 2011
Post on 19-Oct-2014
815 views
DESCRIPTION
Debt: Private Equity Heaven or HellTRANSCRIPT
![Page 1: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/1.jpg)
DEBT:
PRIVATE EQUITY HEAVEN
OR HELL
CEO – CONSULTATIVE FORUM
IESE BARCELONA MARCH 2011
Antonie Paul Woodbury
![Page 2: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/2.jpg)
Introduction
Why is debt important to Private Equity (PE)
How does PE think about debt
What happened to PE debt in the financial crisis
Looking forward
2
![Page 3: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/3.jpg)
Debt
John Maynard Keynes
“If I owe you a pound,
I have a problem; but if
I owe you a million, the
problem is yours.”
3
![Page 4: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/4.jpg)
Debt
D = Debt - means of postponing pain recently very popular with the European Government amongst others
Debt is not bad –debt you cannot repay is very bad
4
![Page 5: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/5.jpg)
What debt does PE use
„Traditional‟ secured bank debt
Junior equity e.g. mezzanine, convertibles
Tradeable debt e.g. securatised debt instruments
Related non-recourse debt structures (cash-flow
based) e.g. “OpCo – PropCo model”
5
![Page 6: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/6.jpg)
Debt
O = Overleverage
The natural state of big PE fund portfolio companies.
Recently countries too
6
![Page 7: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/7.jpg)
An easy way of thinking about it …7
![Page 8: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/8.jpg)
And the bank‟s model changed
Traditionally banks operated under an “originate and hold model”
2002 - 2007 this changed to a an “originate and Distribute model”
Change probably directly related to the rise of securitisation markets
8
![Page 9: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/9.jpg)
Securatisation9
Changing un-rated / unlisted debt into tradable
debt by
combining the debt obligations into a portfolio
(often in tranches) and
issuing tradable debt instruments secured by the
portfolio
![Page 10: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/10.jpg)
Reasons for securatisation‟s10
Availability of
funds
Liquidity
Diversification
(reduces
unsystematic
risk)Note: US market only data
![Page 11: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/11.jpg)
EU securatisation‟s (end 2007)11
![Page 12: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/12.jpg)
And for those who “guaranteed”..
The “quality” of the
securatised debt
product was also
often enhanced
Monolines insurers
– in the US others
e.g. Lehman, AIG,
Fannie Mae
12
![Page 13: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/13.jpg)
Private Equity view
Generally debt is cheaper than equity
Debt is good –particularly if it increases the expected (or hurdle) return on equity
13
![Page 14: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/14.jpg)
Cost of Capital
Cost of Capital (CoC) = CoD + CoE
Cost of Debt (CoD)= (Rf + credit risk rate)(1-T) (i.e.
actual debt cost plus any tax advantage)
Cost of Equity (CoE) = Risk free rate of return Rf + Premium expected for risk βs (RM-Rf)
14
![Page 15: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/15.jpg)
What drives PE - targets
Hurdle – Return target
of fund net of costs
typically IRR 15-20%
Above that PE Fund
(partners) earns
carried interest
15
![Page 16: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/16.jpg)
Private Equity returns
C = Carried interest.
The percentage of the profit on a transaction that goes to the partners of the PE firm.
Sometimes known as 'carry' as in 'too much money to carry'.
16
![Page 17: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/17.jpg)
PE 2008 loan default predication
BCG prediction in 2008 half the worlds PE deals would default - actual outcome significantly better
Sources: Boston Consulting Group 2008; Barwon Investment Partners Sept 2010; Private Equity Council –The Performance of Private Equity - Backed Companies in the „Great Depression‟ 2008 - 2009
17
![Page 18: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/18.jpg)
Significant debt repayment
Clear signs
of debt
reduction in
2009.
Source: SVG Jan 2011
(from sample of large
PE owned companies)
18
![Page 19: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/19.jpg)
Reduction in debt (non weighted average year on year change)
Variable but
declined
significantly
in 2009.
Source: SVG Advisers
Jan 2011 (from sample
of PE owned
companies)
19
![Page 20: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/20.jpg)
Significant deleveraging
Key ratio of
Net Debt to
EBITDA has
changed
from 6.3 –
4.7
Sources: Preqin 4th
Qtr 2010
SVG Advisers Jan
2011
20
![Page 21: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/21.jpg)
Debt maturities extended
Clear signs of debt reduction in 2009
Source: SVG Advisers Jan 2011 (from a relatively sample of PE owned companies)
21
![Page 22: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/22.jpg)
The maturity cliff
Twin trends:
Declining bank
lending
Reduced derivative
market liquidity
22
![Page 23: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/23.jpg)
So is the ambulance still needed?23
High Yield takeouts – one answer
![Page 24: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/24.jpg)
Other reasons it wasn‟t as bad ..
Some top of the cycle debt terms were lax “Cov-Lite”
Low interest rates means locked in low debt costs –if you are lucky
Earnings stabilised / recovered (cost reduction & some top-line growth) – not a consistent experience
Equity injections, debt exchanges, high cost debt refi, IPO‟s – have helped shore up balance sheets
24
![Page 25: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/25.jpg)
Also matters because:
Valuations and fundraising require good deals
available and good exits
Deals done on today‟s 2010 - 11 terms deliver a
base case 12%+ IRR
If average leverage can be increased from c50% to
c70% the return increases to 15%+ IRR
25
![Page 26: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/26.jpg)
Summary
This cycle so far seems a little different:
Approach of Governments, Banks and PE to debt issues
different e.g. low interest costs
relatively high level of dry powder – higher valuations
Pre-downturn deals likely to surprise on the upside!
26
![Page 27: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/27.jpg)
Summary cont …
The use of Debt has
not been a poison pill
for PE
The loss of liquidity,
particularly due to the
reduced securatisation
volumes is an issue
27
![Page 28: Antonie Paul Woodbury CEO-CF Presentation March 2011](https://reader033.vdocument.in/reader033/viewer/2022051322/54447920afaf9fb0098b4805/html5/thumbnails/28.jpg)
Not as simple as Heaven or Hell
What have we learnt?
28