Private Equity Primer

SMU COX Finance Club Private Equity Primer March 17, 2005 Discussion Agenda PE Background PE Sub-specialities Leveraged Buyouts Venture Capital Mezzanine Debt / Distressed Debt Fund-of-funds Secondary Purchases Typical PE Fund Structure Example PE Firm‟s Latest VC Deals Hunt Consolidated Inc. Questions SMU 17-Jan-09 COX 2 Finance Club PE Background (1) Origins of Leveraged Buyouts (LBO) ‟80s – “buy and bust” strategy prevalent Late ‟80s – name change to „Private Equity‟ Purchase of equity in a private company Strategies include:  LBO  Venture capital investment  Distressed debt investments  Mezzanine debt financings SMU 17-Jan-09 COX 3 Finance Club PE Background (2) PE investments occur across entire spectrum Bleeding-edge medical Internet start-ups Established manufacturers Service companies Retail 1991 - $8B raised 1999 - $95.5B raised KKR raised $10B for a single investment fund SMU 17-Jan-09 COX 4 Finance Club Leveraged Buyout (LBO) Operating Debt Cash Collateral Financing Flow LBO Financier Equity down payment 17-Jan-09 Investor SMU COX 5 Finance Club Leveraged Buyout (LBO) Change in LBO Companies too expensive Lenders more conservative “Buy and bust” “buy and build” That said… Toys R Us buyout  ~$5.7B – 10% premium over $5.2B current market value ▬ KKR ▬ Bain Capital ▬ Vornado Realty Trust 17-Jan-09 SMU COX 6 Finance Club Venture Capital Seed-stage investors – $100k+ Flesh out a business plan Early-stage investors – $1M+ Completed business plan, management team, working prototype Late-stage investors - $10M+ Funds company to revenue-producing stage Mezzanine-stage investors Carry company to IPO SMU 17-Jan-09 COX 7 Finance Club Mezzanine Debt Provide middle level of financing in LBOs Below senior debt layer & above equity layer Interest rate higher as compensation Borrower issues equity  Warrants, Common Stock, Preferred Stock, other Flexible investment Emphasize capital & interest payments on loan Seek significant upside on equity investment  More than compensates for risk on subordinated loan SMU 17-Jan-09 COX 8 Finance Club Distressed Debt Purchase bonds of financially distressed firms Pennies on the Dollar Highest returns from nursing firm back to health High degree of control as a major creditor  Employ experts to implement turnaround / reorganization strategy Often write-off debt obligation in return for equity  This is why DD firms are considered to be PE firms Cash out position when firm sold or taken public SMU 17-Jan-09 COX 9 Finance Club Fund-of-funds Individual / small investments problematic Difficult to get information on PE managers Access to top-performing VC/LBO funds difficult  Demand outstrips supply High investment minimums - $20M not uncommon Fund-of-Funds $250k - $500k minimum investment   Manageable + instantly diversified set of PE investments Can be targeted e.g. to a portfolio of VC funds Fund-of-fund Managers – 1% annual fee + 5%-10% profit Underlying fund Managers – 1.5%-2.5% fee + 20%-30% profit Drawback is added layer of fees   SMU 17-Jan-09 COX 10 Finance Club Secondary Purchases Small group of PE firms specialize in this Buying secondary interests in PE Invest in PE funds – just like F-of-Fs managers Fund already deployed (at least partially)  Can evaluate underlying companies – unlike F-of-F mgrs Benefit to primary holders Resize portfolio, meet cash requirements or shed poorly performing assets. Secondary market typically more active after large market or economic swings. SMU 17-Jan-09 COX 11 Finance Club Typical PE Fund Structure PE Ventures LLC CFC Fund, L.P. (2003) Institutional Investor $50M Committed Capital California Teachers Association Private Investor $20M Committed Capital Bass Family Investor 1 Fund-of-Funds Investor 2 Investor 3 Investor 4 Investor n $30M Committed Capital 25+ Investors: $250k - $5M per investor SMU 17-Jan-09 COX 12 Finance Club PE * Firms Large Cap LBO KKR: the godfather (NYC) TPG (Ft. Worth) Hicks, Muse, Tate & Furst (Dallas) The Carlyle Group (DC) Bain Capital (Boston) Madison Dearborn (Chicago) Yucaipa (LA) Insight Equity (Dallas) Centre Partners (NYC) Brookside Pecks (Greenwich, CT) Gryphon Investors (San Francisco) Thoma Cressey (Chicago) 17-Jan-09 Speciality PE  SKM Growth Investors Private growth equity Distressed debt DDJ (Boston)  Audax Group (Boston, NYC)  VC, buyout, mezzanine and public debt VC, PE, distressed debt Hunt Consolidated, Inc.  Middle Market LBO *Adapted from Buyside Club presentation, “Private Equity Primer”, Sept 27, 2004, slides #15-17 SMU COX 13 Finance Club Latest VC * Deals *Copied from www.vcdeal.com SMU 17-Jan-09 COX 14 Finance Club The Hunt Family of Companies Wholly owned by Hunt Consolidated, Inc. Concentrated in four areas:  Energy ▬ ▬ Hunt Resources Investment Group Others   Real estate Private equity investments ▬ ▬ ▬ Hunt Private Equity Group, Inc. Hunt Special Situations Group, LP Hunt Ventures, LP  Ranching SMU 17-Jan-09 COX 15 Finance Club Hunt Private Equity Group, Inc. Acquires & invests in middle market companies Manufacturing, distribution and service segments of the consumer products industry. The general partner of The Lafayette Investment Fund, a PE fund SMU 17-Jan-09 COX 16 Finance Club Hunt Special Situations Group, LP A private investment company Focus on the distressed and turnaround investment field. The group seeks to proactively identify and make opportunistic later-stage growth and management buyout investments between $15 and $50 million of invested capital in U.S.-based companies. SMU 17-Jan-09 COX 17 Finance Club Hunt Ventures, LP Formally established in 1998, but has been investing over several decades Focused on technology and life science companies Mission Statement: “To be an opportunistic investment company successfully investing in startup and early-stage new-economy companies, as well as in regional and country-specific private equity funds and high-risk, high-return technology funds.” Also has interests in several leading venture capital partnerships Offices in Dallas and Austin. SMU 17-Jan-09 COX 18 Finance Club Hunt Ventures‟ Investments Technology Communications and Networking Semiconductors Software SMU 17-Jan-09 COX 19 Finance Club Hunt Ventures‟ Investments Life Sciences Biotechnology Medical Devices SMU 17-Jan-09 COX 20 Finance Club * Questions Great Private Equity resources: www.privateequitycentral.net www.thedeal.com www.vcdeal.com Private Equity Week Buyouts NYT Dealbook (free) http://marriottschool.byu.edu/clubs/vcs/Resources/Pri vate+Equity+Primer.pdf *Adapted from Buyside Club presentation, “Private Equity Primer”, Sept 27, 2004, slide #21 SMU COX 21 17-Jan-09 Finance Club Chris Kleinert President, Hunt Investment Corporation Which oversees and directs investments made by Hunt Investment Group, Hunt Special Situations Group, and Hunt Ventures. Prior to joining Hunt, Kleinert was employed by Texas Commerce Bank (now JPMorgan Chase), where he worked in both the corporate and commercial banking groups, and General Mills in a sales and marketing capacity. Kleinert graduated from Southern Methodist University in 1988 with a BBA in marketing, and received his MBA from Texas Christian University. He currently serves on the Board of Directors of the Greater Dallas Chamber, the Board of Trustees of The Parish Episcopal School of Dallas where he is Chairman of the Executive Committee, SMU's Tate Lecture Series Board of Directors, and the Board of Trustees of Lovers Lane United Methodist Church. Kleinert is also a member of the Young Presidents‟ Organization. 17-Jan-09 SMU COX 22 Finance Club