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Sepin Sinanlıoğlu İnceerDirector

Invest for the Future ConferenceIstanbul, January 25, 2011

PRIVATE EQUITY MODEL

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AGENDA

▪ Introduction

▪ What is PE?

– Financing your business

– PE business model

– What to expect in a “base-case” PE deal

▪ Q&A

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AGENDA

▪ Introduction

▪ What is PE?

– Financing your business

– PE business model

– What to expect in a “base-case” PE deal

▪ Q&A

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• Senior term debt• Secured debt

• Preferred stock• Common stock

• Unsecured/ Subordinated debt

• Convertible debt• PIK notes

Capital structure

Equity

Typical instruments to finance your business can be grouped underthree categories

Mezzanine

Senior Credit

Typical examples

More Senior

More Junior

Lower risk/return

Higher risk/return

Details

• Debt that takes priority over other unsecured or otherwise more "junior" debt owed by the issuer

• In the event of a bankruptcy, senior debt must be fully repaid before other creditors receive any payment

• Expected Returns: 7-12%

• A debt-like instrument which is senior only to common shares. Can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.

• Along with the interest payment, mezzanine capital will often include an equity stake in the form of attached warrants or a conversion feature, similar to that of a convertible bond.

• Expected Returns: 10-20%

• The residual claim or interest of the most junior class of investors in assets of a business, after all liabilities are paid.

• Preferred stock is sometimes considered a hybrid instrument, as it can have properties similar to a debt instrument, such as a fixed predetermined dividend payment. It is senior to common equity.

• Expected Returns: >30%

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AGENDA

▪ Introduction

▪ What is PE?

– Financing your business

– PE business model

– What to expect in a “base-case” PE deal

▪ Q&A

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Private Equity (LBOs, MBOs, expansion capital deals, etc.)

“Private Equity” is generally used to refer to firms that acquire businesses which are relatively mature and already generating cash flow

Business idea What they do

• Raise capital from investors (e.g., insurance companies, individuals)

• Create funds to use for investments in new businesses

• Hold investments for 5-7 years

• Sell investments or put on the stock exchange

• Help entrepreneurs form a company out of a business plan

• Incubate (e.g., support with infrastructure, resources) embryonic companies

Definition

• Early-stage (seed) financing of companies, generally to bring a new product or service to the market

Focus of discussion

Venture capital (VC)

• Raise capital from investors (e.g., institutional investors)

• Create funds to use for investments in mature businesses, spin-offs, etc.

• Hold investments for 3-5 years

• Sell stake to strategic investors or put on the stock exchange

• Be active owner with focus on improving growth and/or profitability (may include turnarounds, restructuring, consolidation)

• Support management via board representation

• Acquiring companies using equity and generally debt (borrowed from banks for each deal) where debt is paid off during holding period (e.g., leverage)

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Flirt period

Discussing the upside, business plan

Term sheet, discussing the down side

Due diligence

Documentation and closing

Building value with Private Equity

Private equity firms raise money from institutional investors and try to find fast growing companies to invest in

CommentsProcess Step

Year 1 of value creation

Year 2 of value creation

Year 3 of value creation

Year 4 of value creation

Everybody gets rich: EXIT

Agreements will specify: Deal structure Downside protection Performance targets Governance Exit process

There are 3 important things in private equity:

EXIT + EXIT + EXIT

48 months

9 months

There are strongparallels with raising a child

from birth to graduation!

Detailed on the next page

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Private equity is not just about doing deals. It is about creating and realizing value through portfolio management.

Portfolio Management

DEAL EXIT1st Year 5th Year

Governance Value Creation Realization

• Shareholder Decisions

• Active BoD Involvement

• NED Appointment

• GM Selection

• CFO Recruitment

• Budgeting Culture

• Organizational

Changes

• Remuneration

• …

• Reporting / MIS

• Bank Lines / Liquidity

• Cash Flow Controls

• Capex Management

• Competitive Strategy

• Growing Management

Team

• PR / Brand Investments

• Follow-on Acquisitions

• …

• Running Tender

Process

• Aligning Shareholders

• Optimizing Valuation

• Management Incentives

• …

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AGENDA

▪ Introduction

▪ What is PE?

– Financing your business

– PE business model

– What to expect in a “base-case” PE deal

▪ Q&A

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There are several topics founders should expect to encounter in a private equity financing

Special Board Approvals

Exit Incentives

Management

Other

Transfer and Issue of Shares

Due Diligence

GovernanceRepresenta-

tions and Warranties

PRIVATE EQUITY

FINANCING

Conditions to be fulfilled bef.

Funding

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Exit Incentives

Definition

• The sale of between 51% and 100% of the Company shares to a strategic buyer. The Founder agrees to make his shares available to enable such a sale to take place

Drag Along

• The Founder has the right to sell the up to the same amount of shares as the Investors’ Shares under the same terms and conditions

Tag Along

IPO Preference

• The Investors will have priority in selling their shares including in an IPO

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Transfer and Issue of Shares

Definition

• Each shareholder will have the right to subscribe to any capital increase of the Company in proportion to the equity ownership interest he holds at the time

Right to subscribe for new shares

• Any shares for sale by any shareholder, must be offered first to the other existing shareholders at the time and on the same terms as offered to a third party. If negative, the selling shareholder shall be free to sell shares at or above the price offered to the other shareholder. If positive, the buying shareholder will have the right to pay in a defined time period after submitting a binding offer to the seller

Right of First Offer

Lock-up• The Founder will not sell any of the Company’s issued share

capital until the Investors have sold all of their shares, except as defined in Tag Along

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Governance

Flip-over of Board control

Material Underperform.

• Material Underperformance will be linked to revenue and profitability targets in the documentation stage based on the detailed forecasts

• In the case of Material Underperformance, the Board will appoint a new CEO. The new CEO will remain in his/her position for two years after appointment unless the Board takes a consensus decision to terminate his/her employment

• In the event that the …. specified in the attached Business Plan for two consecutive years (“Material Underperformance”), then the Investors will be given the right to appoint such number of directors to the Board as will give them a majority

Definition

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Special Board Approvals

Definition

The consent of the Investors will be required to: • Change the Articles or bylaws of NewCo or the Company• Change the rights of the Investors• Create or issue any new equity-linked securities• Change the principal business of the Company• Change the members of the Board• Pay any dividends or distributions of the Company’s profits• Voluntary liquidation of the Company• Mergers or acquisitions• Public offerings and stock exchange listing of shares• Changes in Board Rules

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Conditions to be fulfilled before Funding

Definition

Before the investment is completed, the following conditions must be satisfied:• Approval by the Investors of the Business Plan developed by the Senior Management Group for the next four years • Raising of Debt, if any• The receipt of any approval necessary from any relevant authorities to allow the Investors to proceed with the purchase of shares, including the approvals of the Competition Board• The completion of commercial, legal, financial and environmental due diligence on the Company with results satisfactory to the Investors• The completion of an insurance audit with results satisfactory to the Investors• The signing of non-compete and non-enticement agreements with the Founder

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Representations and Warranties

Definition

The Investors will require such representations, warranties and indemnities as are customary in a transaction of this nature. This will include:

• Full disclosure of all financial, legal and commercial obligations of the Company and the Founder• Confirmation that all financial statements presented to the Investors or their or Company’s advisors are true and correct and that no material adverse changes have occurred since the last accounting date• Confirmation that there is no material litigation outstanding• Full disclosure of the condition and operation of the Company’s assets

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Due Diligence

Definition

• Financial

• Tax

• Legal

• Insurance

• Environmental, if needed

Exclusivity for DD is always required!

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Other

Inspection Rights

Related Party Transactions

• The Founder undertakes that all transactions undertaken by the Company with third parties shall be on an arm’s-length basis and subject to the Company’s normal terms and conditions

• Should the Company contemplate any transaction involving a Related Party, the Founder agrees he shall first obtain the written consent of the majority of the Board including one of the Investor representatives

• The auditors shall be instructed by the Company to produce a report to the Investors commenting upon all related party transactions

• Each member of the Board shall have the right to inspect the Company’s premises and financial books

• The Investors will have the right to commission the Company’s auditors or another reputable financial consulting firm to analyze and report on the causes of under-performance of the Company against the budget

• The members of the Board will be entitled to (i) copies of all audited accounts and monthly management accounts (ii) notification of any litigation, lawsuit or other legal action which could have a material effect on the value of the Company

Definition

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Management

Definition

•MANAGEMENT IS KEY!You cannot change:

− the business you are in

− growth prospects of the industry you are in

− competitive landscape, etc..

But you can change/improve the management.

It is the only thing you can really control.

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AGENDA

▪ Introduction

▪ What is PE?

– Financing your business

– PE business model

– What to expect in a “base-case” PE deal

▪ Q&A

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Q&A

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