norwest equity partners | 1 cfa society of iowa february 2008
TRANSCRIPT
Norwest Equity Partners | 1
CFA Society of IowaFebruary 2008
Norwest Equity Partners | 2
The Private Equity Market-Introduction to Norwest Equity Partners (NEP)
-The Evolution of Private Equity
-Current Middle Market Overview
-Trends in Private Equity
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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)
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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
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Agricultural Services and Products
Business Services
Consumer Services and Products
Distribution
Energy
Financial Services
Healthcare
Manufacturing
Plastics and Packaging
Proven Technology
Transportation and Logistics
Representative Investments
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National Presence
Not shown on map:
Hawaii
Brazil, Mexico, Canada
●● – current portfolio company – exited investments – add-on investments
NEP Office, Minneapolis
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POET Biorefining Jewell, IA
POET Biorefining Gowrie, IA
Paladin Brands Cedar Rapids, IA
Jacobson Companies Des Moines, IA
Becker Underwood Ames, IA
•NEP and NMP have invested over $265 million in Iowa
•Combined sales of over a billion $’s
NEP Iowa Investments
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The Evolution of Private Equity
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What is Private Equity?
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Venture CapitalBDCs SPACs
Leveraged RecapsLeveraged Buyouts
Mezzanine PIPEs Management Buyouts
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What is Private Equity?
Source: Credit Agricole
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Top Quartile Performance
Source: Bain
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“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
The Early StageEarly 1980’s - Mid 1990’s
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Return Model
The Early Stage
Debt Paydown -Debt arbitrage
-Cost cuts
-Junk bonds
Multiple Arbitrage-Fewer exit options
Earnings Growth-Don’t rock the boat
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The Early Stage
Source: Venture Economics
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Number of Funds Fundraising Totals
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“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
The Middle StageLate 1990’s - Early 2000’s
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Return Model
The Middle Stage
Debt Paydown -Asset Sales
-Cost cuts
Multiple Arbitrage-Roll-ups
Earnings Growth-Cost take-outs in roll-ups
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Institutional “Grown-up” Stage
Record fundraising and investments
Record leverage and purchase multiples
The Recent StageMid-2000’s – 6 Months Ago
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Return Model
Recent Stage
Debt Paydown-Not at these prices and
required equity %
Multiple Arbitrage-Not at these prices
Earnings Growth-Operational improvements
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2007: Record Breaking
U.S. Buyout and Mezzanine Fundraising, 1996–2007($Mil)
Source: Buyouts Magazine
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2007: Record Breaking
U.S.-Based Disclosed Deal Volume By Quarter In Billions
Source: Buyouts Magazine
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2007: The Year of the Mega DealBiggest Closed Deals Ever
Sponsor Target Name Value Sector Closing Date
1 Kohlberg Kravis Roberts & Co., TPG, Goldman Sachs TXU Corp $44.3billion
Utilities October 2007
2 The Blackstone Group Equity Office Properties Trust $37.7billion
Real Estate February 2007
3 KKR, Bain Capital, Merrill Lynch Capital HCA Inc $32.1billion
Hospitals November 2006
4 KKR RJR Nabisco Inc $30.2billion
Cigarettes April 1989
5 Goldman Sachs, Carlyle Group, Riverstone, AIG, management Kinder Morgan Inc $27.5billion
Energy May 2007
6 KKR First Data Corp $27.0billion
Data processing September 2007
7 TPG, Goldman Sachs Alltel Corp $26.9billion
Telecom November 2007
8 The Blackstone Group Hilton Hotels Corp $26.7billion
Hotels October 2007
9 KKR, management Alliance Boots PLC $19.4billion
Drug stores June 2007
10 The Blackstone Group, Permira, Carlyle Group, TPG Freescale Semiconductor Inc $17.5billion
Semiconductors December 2006
Source: Thomson Financial, Buyouts
Source: Buyouts Magazine
7 out of the 10 largest closed deals ever took place in 2007
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Current Middle Market Overview
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2007: The Year of the Credit Crunch
The market has been erratic this week.
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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 ($100 million reverse break-up fee)
The Break Up
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Top Pending US “Going Private” Transactions
Target Spread ($) Spread (%)
Myers Industries Inc -12.32 -54.76
Cumulus Media Inc -6.32 -53.79
Restoration Hardware Inc -2.84 -42.39
Mace Security Intl Inc -1.20 -40.00
Reddy Ice Holdings Inc -9.62 -30.78
Alliance Data Systems Corp -21.46 -26.25
Covad Commun Grp Inc -0.25 -24.51
3Com Corp -1.28 -24.15
Critical Path Inc -0.02 -20.00
Penn National Gaming Inc -12.98 -19.37
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PE Slowdown?
“Hoskins, try saying 'profits are up' without the finger quotes, okay?”
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PE Market Slowing?
LPs Seeing Early Signs Of An End To The Buyout Boom (Dec 07)
Source: Coller Capital
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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
Middle Market Immunity?
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Middle Market Immunity?
Source: Buyouts Magazine
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Middle Market Immunity?
Source: Buyouts Magazine
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Middle Market Immunity?
Source: Buyouts Magazine
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Middle Market Immunity?
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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
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Trends in Private Equity
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“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
Globilization of PE
Source: The Economist
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Europe moving into U.S. PE Market?
European Sponsors Grow More Active In U.S.
Source: Buyouts Magazine
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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
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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
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Going Public
BDCs, SPACs, Management Companies, etc
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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