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TRANSCRIPT
The Private Equity Play
Mike Lorelli
2
Agenda
History
Returns
Terminology
Where is the money coming from?
The p.e. model
p.e. Board seats
p.e. compensation
Results and Performance Measures
The p.e. vs Traditional styles
‘The Funnel’
Management Compensation
The Return Drivers
The p.e.’s Plan
Importance of a good LinkedIn profile. . . you want to hear about good searches
Tips to drive p.e. ‘stickiness’ and your personal ‘hits’
Board roles
3
EBITDA
Earnings Before:
• Interest
• Taxes
• Depreciation
• Amortization
4
Stages
Idea Up & Running Mature
VC PE
• Trailing EBITDA
5
Worse than real estate brokers in Darien, CT
1977: Kohlberg, Kravis, and Roberts leave
Bear Stearns, forming KKR
1978: 80 ‘Leveraged Buyout Groups’ in US
2014: Estimated 2,700 around the world
1,700 U.S.
6
Value Creation
100% Value Creation
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
18%
31%
51%
22%
36%
46%
39%
32% 25%
Leverage era (1980s) Multiple Expansion
era (1990s)
Earnings growth
era (2000s)
Operational improvement
era (2010s)
Operational improvement Multiple arbitrage Leverage
Valu
e C
reati
on
7
WSJ: “Buyouts Leave Simmons Little Rest”
8
Terminology
The providers of capital: Limited Partners, or LP’s - who are they?
The fund manager: General Partner, or GP, or p.e.
9
Returns Well Out-Performed S&P
10
Percentage of Capital by LP type LBO Funds
11
12
The “Vintage Year”
13
Buyouts: Add-Ons now over half the deals
14
Many ways to categorize the 1,700
By size • Large $1 billion+ revenues
• Mid-market > $150 million
• Small < $150 million
By sector specialty • Health care
• Consumer
• QSR
• IT
• Financial services
• etc.
Net-net, sector first; and mid-market; not lower or upper
15
Excellent
16
Board Seats: Don’t limit where you can play
17
Top Fund Managers
Rank Firm City Capital ($Millions)
1 TPG Capital Fort Worth (Texas) $50,553
2 Goldman Sachs Principal Investment Area New York $47,224
3 The Carlyle Group Washington DC $40,540
4 Kohlberg Kravis Roberts & Co. New York $40,215
5 The Blackstone Group New York $33,418
6 Apollo Global Management New York $33,813
7 Bain Capital Boston $29,402
8 CVC Capital Partners London $25,068
9 Hellman & Friedman San Francisco $17,200
10 Apax Partners London $16,637
11 Warburg Pincus New York $15,000
12 Cerberus Capital Management New York $14,900
13 Advent International Boston $14,519
14 Permia London $13,572
15 Oaktree Capital Management Los Angeles $13,045
16 Tera Firma Capital Partners London $12,249
17 Providence Equity Partners Providence (RI) $12,100
18 Clayton Dubilier & Rice New York $11,404
19 Charterhouse Capital Partners London $11,268
20 Teacher’s Private Captial Toronto $10,758
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Top 12 p.e. Investors in 2014
19
The LBO model
Purchase
• 7.0 X $9m = $63
• Cash 27
• Debt 36
Sale • 8.0 X $14.1m = $113
• Debt 32
• Proceeds 81
20
The LBO model
Purchase
• 7.0 X $9m = $63
• Cash 27
• Debt 36
Sale • 8.0 X $14.1m = $113
• Debt 32
• Proceeds 81
= 3.0 X cash-on-cash
The p.e. / L.P Model Pelosi 2008 Fund
2008 2009 2010 2011 2012 2013 2014 2015 2016
A
B
C D
E
F
G H
I J
F
E
D A
B
C
Sale
Purchase
22
The p.e. / L.P Model Pelosi 2008 Fund
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
A
B
C D
E
F
G H I
J
F
E
D A
B C
Sale
Purchase
Invest Harvest
24
A lot of (Board) fish vs. Fortune 1,000 and Russell 2,000
25
Many Private Equity Board Seats
5,000 public companies X 7 = 35,000 outside directors
7,500 reported p.e. companies X 2 = 15,000 outside directors
Plus another 7,500 x 1 = 7,500
subtotal p.e. 22,500
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p.e. Compensation
2% of managed capital
• pays salaries, rent, and nominal bonuses
20% carried interest from profits on distributions*
* pre-Obama
27
Performance Measures
Good Great Awesome
IRR 20% 28% 33+%
Cash-on-cash return 2X 3X 5+X
Hold period 8+ years 6 years 3- years
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Buyout Fund Sample
Partnership/Year
Capital
Committed (M)
Capital
Cont. (M)
Dist. As of
(M)
Net IRR
As of (%)
Oregon State Treasury 12/31/13 12/31/13
2000 Riverside Capital Appreciation Fund/2000 $50.0 $46.3 $73.1 22.1
2003 Riverside Capital Appreciation Fund/2003 $75.0 $77.4 $47.1 15.3
Apollo Investment Fund VI LP/2006 $200.0 $223.1 $57.5 3.1
Aurora Equity Partners III LP/2004 $50.0 $53.0 $20.8 17.7
BCI Growth V LP/1999 $75.0 $72.9 $27.2 -8.7
Castle Harlan Partners IV LP/2002 $100.0 $102.3 $109.8 17.3
CVC Capital Partners Asia Pacific II LP/2005 $100.0 $122.4 $38.3 -6.2
Diamond Castle Partners IV LP/2005 $100.0 $71.3 $16.1 -4.5
Endeavor Capital Fund III LP/2000 $25.0 $24.5 $43.7 28.9
Fenway Partners Capital Fund III LP/2006 $50.0 $53.9 $19.6 -4.9
Hicks Muse Tate & Furst Europe Fund LP/1999 $99.3 $116.8 $196.9 21.7
KKR European Fund LP/1999 $400.0 $532.3 $778.8 19.3
KKR Millennium Fund LP/2002 $1,000.0 $1,308.8 $1,064.2 17.9
Lion Capital Fund I LP/2004 $99.8 $108.8 $117.2 26.5
Oak Hill Capital Partners II LP/2004 $100.0 $105.8 $15.7 6.8
Parthenon Investors III LP/2005 $100.0 $67.8 $8.7 1.7
Rhone Partners III LP/2006 $100.0 $65.4 $11.5 5.8
TPG Partners III LP/2000 $300.0 $284.5 $571.9 24.5
HarbourVest Partners 2004 Direct Fund/2004 $75.0 $74.1 $21.1 11.1
August Directorship
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The Private Equity vs. Traditional Styles
Greater emphasis on time (driven by Hold Period)
Tenure can be compared to ‘the half-life of uranium’
Better fits are executives who:
• Exhibit “Jack be nimble, Jack be quick” temperament
• Be a Jack-of-all-trades
• Work on scare resources
– you may be making the run to Staples for supplies today
– you write the Strategic Plan (no Corporate Staff)
• Love tight quarters
– You may be sharing a pillow some nights with the p.e’s Deal Team
31
A typical 10 company fund result
2 out-of-the-park
1 triple
2 doubles
3 singles
2 the bank took the car keys
32
Riverside Company
20% of the invested money will lost
If less, we’re not taking enough risk
Not sweat the duds, but rather the ones we missed
33
The Funnel
300 teasers
100 books
7 LOI’s
2 due diligence
1 close
20 Meetings with Mgmt
34
Options for Executives Working with Private Equity
Fund
Commit-
ment
Advisor
expenses+upside
Outside Director
retainer+options
Portfolio Company Management
salary+bonus+equity
Executive’s Income
Expert Network / Interim Executive
hourly comp
Operating Partner
salary+bonus+carry
David Teten, www.Teten.com/executive
35
Who the p.e. wants to meet
“Available”
Deal Resource
Thesis-Driven
Deal Exec
Target-
Driven Deal
Exec
Source: Andy Thompson, Notch Partners
36
Management Compensation
CEO $200K - $350K 50-75% 5.0% equity*
CFO/COO 125K - $275K 40-50% 1.5% equity
CMO 125K- $225K 25-33% 1.0% equity
* and opportunity to co-invest
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The Three Primary Return Drivers
Leverage
Value Improvement: EBITDA Growth
Exit Multiple Expansion
Courtesy: Wind Point Partners
The Deal
Project NTL Sept 1st, 2007
Offer: $55 million for 75% of the company + $34 million debt, implies $107 million
Bank Adj. +$4.0 excesses 2006 EBITDA
2007 Adjusted EBITDA 12,744 16,744 Sources Debt Multiple
EBITDA Multiple 8.4x 6.41x Debt Financing 58,000 3.46x
Offer Price 107,333 107,333 new p.e. Equity 35,000 2007 2008 2009 2010
Company Debt 34,000 34,000 Total Sources: 93,000 EBITDA 12,744 17,840 23,700 29,300
Current Equity 73,333 73,333 Interest @ 12% (6,553) (5,645) (4,450)
Uses Taxes % 40% (4,515) (7,222) (9,940)
Payment to 5 owners 55,000 Capex (2,500) (2,500) (2,500)
Current Owner Proceeds 55,000 Refinancing of Debt 34,000 Debt Pay (6,788) (8,333) (11,591)
Estimated Fees and Expenses 4,000 Cash Flow 0.0 0.0 0.0
new p.e. $ 35,000 75% Total Uses: 93,000
Equity Rollover 11,667 25% Cash 0 0.0 0.0 0.0
Total Post-Deal Equity 46,667 100.0% ? equity Debt 58,000 51,212 42,877 31,286
196,039 Year 3 Ownership Net Debt 58,000 51,212 42,877 31,286
Management: of 15.0 pts 2.5%now 2011 new p.e. 63.8%
Mike Lorelli 0.0550 672 10,782 Current Owners 21.3% Exit EV 142,720 189,600 234,400
CFO 0.0300 367 5,881 Immediate skin in game 2.5% Exit Equity 91,508 146,723 203,114
EVP 0.0200 244 3,921 3 year option program 12.5% Equity to p.e. 58,336 93,536 129,485
V.P. and GC 0.0220 269 4,313 100.0% Equity to 5 owners 19,445 31,179 50,920
R&D 0.0060 73 1,176 Total cash to 5 owners 74,445 86,179 105,920
Sub. GM 0.0060 73 1,176 p.e. cash
CMO (new hire) 0.0060 73 1,176 IRR (5 years)
VP Supply Chain (new hire) 0.0050 61 980 Exit multiple 8
Total Management 0.1500 1,833 29,406
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The Plan
Fleshed out approach for how value will be created • Strategic and operational blueprint
Rapid change principles • 80/100 rule: an 80% solution that’s ready to go now,
beats a 100% effective, theoretical solution, ready to go in 4 months
Make capital work hard • Re-deploy underperforming assets
40
Carried Interest . . .
41
The New York Times
Kraft and Heinz to Merge in Deal Backed by Buffett
and 3G Capital
Now 3G Capital, a Brazilian private investment group that already owns a suite of America’s most prominent food and beverage brands, has struck a deal to take control of Kraft Foods, the maker of macaroni and cheese, Oscar Mayer meats, Planters nuts and Jell-O.
42
Bain: The Good News
43
Bain: The Black Eye
44
“All the inventions have been invented.”
The Trades
46
The Importance of a Killer LinkedIn Profile
35% of p.e. Board
candidates are found via
Or they will at least check you
out!
below average
slightly above average
Above average
Very Good
Excellent
Outstanding
Killer*
You and 9,999
You and 4,999
You and 1,999
You and 999
You and 499
You and 99
390 million LinkedIn members
You and 199
48
Keywords
Independent Director
Private Equity Portfolio Company
EBITDA growth
Revenue Acceleration
Margin Enhancement
Deal Origination
Topgrading
New Channels/Markets
International Expansion
CEO
Global Footprint
CXO
Lean Manufacturing
Turnarounds
Exit Strategies
49
The Prime Pieces of Real Estate
50
Must words to get into your headline:
Independent Director
Private Equity Portfolio Company
Name drop Fortune 500 if you can (or use ‘Fortune Class’)
Name your space(s), Chemicals, Mining, QSR, etc.
One or 2 other triggers for matches
51
p.s. Be thinking about your Board roles
It’s never too early
Get on one serious (well paying) Board by your late 40’s
You should be on two by your mid 50’s
There is an effort and work plan involved:
www.fasterlandings.com
LANDING BOARD SEATS
Mike Lorelli
52
Private Coaching ‘Semester’
Resources
• Private Equity Info ($85 for 1 month sub, to
$895/yr.) – www.PrivateEquityinfo.com
– Andy Jones
– (512) 771-3943
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Visit:
www.linkedin.com/in/mikelorelli
www.FasterLandings.com
Mike Lorelli
(203) 655-2444
Questions?
Michael K. Lorelli
15 Norman Lane
Darien, CT 06820
Office: 203 253-1238
FAX: 203 655-6916
Email: [email protected]
Website: www.Lorelli.net
www.LinkedIn.com/in/mikelorelli
Michael K. Lorelli
Mike Lorelli’s career spans a wide range of consumer products and services, and B2B
categories, with responsibilities for both domestic and international units. His earlier years as
a line-operating manager had been with Fortune 100 companies: PepsiCo and Bristol Myers
Squibb. Mike’s assignments at PepsiCo included CMO for PepsiCo’s beverage sector,
President of Pepsi-Cola East, a $1.5 Billion operating company, and President for Pizza
Hut’s International division where he led a “global or bust” charge, resulting in surpassing
McDonalds in country count.
For the last 16 years, as CEO and/or as Director, he has led revitalizations and turnarounds
for private equity firms. For example, Dr. John Rutledge, Chairman of Rutledge Capital, has
said: “I would invade China with Mike alone in a rubber boat.” He is presently an Operating
Partner at Falconhead Capital, and Executive Chairman of the Board, Rita’s Franchise
company, the nations leading Italian Ice and frozen custard chain.
Mike has also led CEO engagements for Riverside Company, Rutledge Capital, and
Pouschine Cook Capital.
Mike holds a Bachelor of Engineering degree in Industrial Engineering from New York
University, and an MBA in Marketing from NYU’s Stern Graduate School of Business. He has
traveled to 58 countries, is an avid runner, claims to excel at no sport, is an active private
pilot, member The CEO Trust, former member of YPO, and author of the childrens’ best-
seller “Traveling Again, Dad?” with profits donated to childrens’ charities. He has been on the
Board of two public companies, and chaired both Compensation Committees. Mike is a
Director of CPKelco, iControl, and Axxune. He holds a Masters Professional Director
Certification from The American College of Corporate Directors, and is also an NACD
Masters Governance Fellow. He is a registered speaker with Vistage International.