Process of Fund Raising in Private Equity

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Process of Fund Raising in Private Equity Powered By Docstoc
					A Review of Private Equity Firms
April 2010




Topics to Cover
Private Equity Fund Landscape and Fund Raising
LBO Model Review
THE PLAYERS AND THE PROCESS
Fund’s Constituents

                                                                                         Portfolio
  Organization                    Investors                     PE Firms
                                                                                        Companies

                                                             Raise funds, identify,
                                                                                        Sellers receive capital
                                                             screen and purchase
                                                                                      from private equity firm
       Role                       Provide Capital             companies, provide
                                                                                       and from debt PE firm
                                                            additional “value add”,
                                                                                                 raises
                                                           sell portfolio companies


                              Limited Partners             General Partners
                              • Insurance Cos,             • Management fee of           Entrepreneurs,
      Parties                   Pensions, Foreign            approx. 2% and 20% of    managers of corporate
                                Gov’ts, Companies,           capital gains                  divisions
                                Individuals




Fund’s Timeline
                                     Acquire and Operate         Divest Portfolio
              Raise Capital
                                     Portfolio Companies           Companies

      • 6 to 18 months               • Years 1 to 5          • Years 3 to 12
PRIVATE EQUITY FUNDRAISING

$350                                   211                                                    235                                         250
$300                                                          192
                                                                                                                 187                      200
$250
$200                   124                                                                                                                150
                                                                                                                               88
$150                                                                                                                                      100
$100
                                                                                                                                          50
 $50                   $94             $150                   $208                     $296              $311                $140
 $-                                                                                                                                       0
                      2004             2005                  2006                      2007              2008                2009

       Source: Pitch Book                    Capital Raised (in billions)             Number of Funds Raised



 $120                62                                                                                                                        70
                               48
 $100                                                                                                                                          60
                                              48
  $80                                                                                                                                          50
                                                                              35                                                               40
  $60                                                        29                               27
                                                                                                                                    20         30
  $40                                                                                                    12            14                      20
  $20                                                                                                                                          10
                    $84       $101            $87            $39              $60             $45        $17           $18          $17
  $-                                                                                                                                           0
                 1Q 2008     2Q 2008     3Q 2008          4Q 2008           1Q 2009       2Q 2009      3Q 2009     4Q 2009      1Q 2010

                                              Capital Raised (in billions)             Number of Funds Raised
       Source: Pitch Book
RECORD LEVELS OF CAPITAL TO BE INVESTED

$450


$400
                            Assuming 40% equity and 60% debt,
                            private equity firms have $1 trillion
$350                        of purchasing power.

$300


$250


$200


$150


$100


$50


 $0
              1998           1999    2000      2001          2002      2003        2004        2005    2006       2007   2008   2009

                                    Total Captal Available          Capital Raised (in billions)      Equity Invested

       Source: Pitch Book
US PRIVATE EQUITY DEAL ACTIVITY
$200                                                                                                                                 800


$180
                                                                                                                                     700

$160
                                                                                                                                     600
$140

                                                                                                                                     500
$120


$100                                                                                                                                 400


 $80
                                                                                                                                     300

 $60
                                                                                                                                     200
 $40

                                                                                                                                     100
 $20


  $0                                                                                                                                 0
       1Q   2Q   3Q   4Q   1Q   2Q   3Q     4Q      1Q      2Q        3Q   4Q   1Q     2Q    3Q      4Q   1Q   2Q   3Q   4Q   1Q

             2005                2006                         2007                       2008                   2009          2010

                                        Capital Invested (billions)         Number of Transactions
 EXAMPLE PRIVATE EQUITY FUNDS BY SIZE                                                 (MOST RECENT FUND SIZE)


Mega Funds (over $3                              Large Funds ($1 billion     Middle Market ($200        Lower Middle Market
billion)                                         to $3 billion)              million to $1 billion)     (under $200 million)
TPG, Warburg Pincus,                             Ares, Bayside, GTCR         Wind Point Partners,       Wingate Partners,
Apollo, KKR, Thomas H.                           Golder Rauner,              Lincolnshire Mgmt,         Adams Street Partners,
Lee, Avenue Capital,                             Platnium Equity, Irving     Thoma Bravo, LLR, Lake     BlackEagle Partners,
New Mountain, Colony                             Place Capital, Oak          Capital, Insight Equity,   Arbor, Catalyst, Capital
Capital, Madison                                 Investment Partners,        Chicago Growth,            Resource Partners,
Dearborn, TA                                     Francisco Partners,         Linsalata Capital,         Prospect Partners,
Associates,                                      ArcLight Capital, Yucaipa   Riverside, Blue Point,     Angelo Gordon, Glencoe
Centerbridge Partners,                           Companies, Mid Ocean,       Morgenthaler,              Capital, HIG, Prairie
Riverstone Holdings,                             Silver Lake, Roark          Wynnchurch Capital,        Capital, Prism Capital,
Golden Gate Capital,                             Capital, KPS Capital,       Swander Pace, Beecken      Baird Capital Partners,
Bain Capital, Leonard                            Quadrangle Capital,         Petty O’Keefe, Fifth       Pfingsten
Green, Kelso, Clayton                            Diamond Castle,             Street, Monomoy,
Dublier & Rice,                                  Genstar Capital,            Clearview, Linden, HKW
MatlinPatterson, Sun                             Olympus Partners,
Capital, Oak Hill                                Kohlberg & Company
5% of identified firms                           10% of identified firms     30% of identified firms    55% of identified firms



    Source: Capital IQ, Fort Dearborn Research
FUND COUNT BY FUND SIZE

100%                 3%           2%                                                                                              0%
                                                      5%               6%                 8%                  8%
                     8%           13%
90%                                                                                                                              20%
                                                      18%
                    10%                                                20%
80%                                                                                       21%                23%
                                  14%

70%                 21%                               16%                                                                        16%
                                                                       18%
60%                               20%                                                     21%
                                                                                                             23%
50%                                                   23%
                    23%
                                                                       25%
40%                               23%                                                                                            34%
                                                                                          24%                19%
30%
                                                      20%

20%                                                                    20%                                                        4%
                    35%                                                                   18%                18%
                                  28%
10%                                                   18%                                                                        16%
                                                                       11%                8%                  9%
 0%
                    2004         2005                 2006             2007              2008                2009              1Q 2010

          Under $100 million   $100 to $250 million    $250 to $500 million   $500 to $1 billion   $1billion to $5 billion   >$5 billion

       Source: Pitch Book
PERCENTAGE OF CAPITAL RAISED BY FUNDS BY FUND SIZE

100%
                                      14%
90%                    18%
                                                           30%
                                                                                 34%
80%                                                                                                                           42%
                                                                                                       47%
70%
                       37%            43%
60%

50%                                                        41%
                                                                                 42%
40%                                                                                                                           36%
                       16%                                                                             33%
                                      18%
30%
                                                           12%
20%                    17%
                                      14%                                        11%
                                                                                                       10%                    13%
10%                                                        11%
                        8%                                                       8%
                                       8%                                                               7%                     5%
                                                            4%                   4%                                            3%
 0%                     4%             3%                   2%                   1%                     2%
                                                                                                        1%                     1%
                      2004            2005                 2006                 2007                   2008                   2009

          Under $100 million   $100 to $250 million   $250 to $500 million   $500 to $1 billion   $1billion to $5 billion   >$5 billion

       Source: Pitch Book
PERCENTAGE OF TRANSACTIONS BY SIZE (COUNT)
100%


90%


80%


70%


60%


50%


40%


30%


20%


10%


 0%
              1Q            2Q          3Q         4Q          1Q           2Q             3Q         4Q             1Q          2Q            3Q            4Q    1Q

                                 2007                                            2008                                                  2009                        2010

                       <$50 million      $50 to $250 million        $250 to $500 million        $500 to $1 billion        $1 to $2.5 billion        >2.5 billion


       Source: Pitch Book
KKR                                                                                 MADISON DEARBORN
30,000                                                                              8,000
25,000                                                                              7,000
20,000                                                                              6,000
15,000                                                                              5,000
10,000                                                                              4,000
 5,000                                                                              3,000
                                                                                    2,000
    -
                                                                                    1,000
                                                                                       -
                                                                                            Fund I Fund II Fund III Fund IV Fund V Fund VI
                                                                                            (1993) (1996) (1999) (2000) (2006) (2007) *

                     Size        Target (millions)                                                   Size      Target (millions)

WYNNCHURCH CAPITAL                                                                  PFINGSTEN PARTNERS
700                                                                                 600
600                                                                                 500
500                                                                                 400
400                                                                                 300
300                                                                                 200
200                                                                                 100
100                                                                                  -
 -                                                                                          Fund I   Fund II     Fund III    Fund IV Sangamon
         Fund I (1999)       Fund II (2005)                 Fund III *                      (1992)   (1998)      (2002)      (2007)   (2008)*

                     Size        Target (millions)                                                   Size      Target (millions)

  * Indicates first close only         Source: Capital IQ, Fort Dearborn Research
IMPACT OF PRIVATE EQUITY FIRMS

• Overall, about 15% of companies acquired in the United States and Canada are acquired by
  private equity firms in the past year.
• For the 12 months ended August 2008, about 12% of companies acquired in the United
  States and Canada were acquired by private equity firms
• There are large deviations from the average when looked at by size of the transaction




                                                    % of Transactions Bought by Private Equity Firms
40.0%                                                32.1%       31.6%                                                                  29.0%
30.0%                              22.8%                                      23.2%   17.4%
                                                                                                          18.8%     20.3% 20.1%
                                                                         16.5%
20.0%         12.3% 8.9%                                     15.8%                       15.9% 15.0%13.1%
                                                 11.1%                                                          9.5%                         10.0%
10.0%     5.7%
 0.0%
           $1 to $25         $25 to $50 $50 to $75 $75 to $100             $100 to    $200 to     $300 to      $400 to      $500 to    Over $1,000
                                                                            $200       $300        $400         $500        $1,000

                       % of Private Equity Acquirers (LTM August 2008)                % of Private Equity Acquirers (LTM April 2010)

    Source: Capital IQ, Fort Dearborn Research
 LBO MODEL OVERVIEW

The purpose of an LBO model is to determine:
• What returns can a particular investment generate
• If the investment fits within the then-current financial parameters in the market
• Other potential return scenarios under different assumptions (i.e., a sensitivity analysis)

Base case assumptions in this LBO model:
• Year 0 revenue $50 million, 10% EBITDA margins (i.e. $5 million EBITDA)
• Revenue growth 3% per year, margins unchanged from base year
• Purchase price of 5x EBITDA for 100% of seller’s equity
• Capital structure:
          • Senior Debt: $7 million (1.4x EBITDA), LIBOR floor of 2% + 500 bps, 5 year amortization
          • Revolver: $3 million (0.6x EBITDA), LIBOR floor of 2% + 300 bps
          • Sub Debt: $5 million (1.0x EBITDA), 15% current coupon, no warrants
          • Equity: $10 million (2.0x EBITDA)
• Transaction expenses not factored into the analysis
• Excess cash remains in company without interest and is paid to the PE seller at sale
• Company sold at end of year 5 for 5x then-current EBITDA
                                                           Example Company
                                                              Leveraged Buyout
                                                            (Dollars in Thousands)
                                                  Assumptions and Summary Results
                                                      Required Return Rates
Source of Funds                      Advance            Current         Total

Term A (Senior)                            1.4x            7.0%         7.0% (Libor Floor of 200bps + 500 bps)
Revolver (Senior)                          0.6x            5.0%         5.0% (Libor Floor of 200bps + 300 bps)
Sub Debt                                   1.0x           15.0%        15.0%
  Total Third Party Debt                   3.0x

Common Equity                              2.0x           22.5%
  As a multiple of EBITDA                 5.0x
  As a percentage of Capital              40%

Example Company EBITDA                            $     5,000.0



                           Sources                                                                     Uses

Term A (Senior)                                         7,000.0                 Existing Debt, net of cash                 -
Revolver (Senior)                                       3,000.0                 Purchase of Sellers' Equity          25,000.0
Sub Debt                                                5,000.0                 Management Equity Rollover                 -
Management Equity Rollover                                   -                               Purchase Price          25,000.0
New Equity                                             10,000.0                 Transaction Expense                        -
                                                  $    25,000.0                                                  $   25,000.0
                                            Profit/Loss

Years                                       0             1            2            3            4             5

Example Company                   $   50,000.0 $    51,500.0 $   53,045.0 $   54,636.4 $   56,275.4 $   57,963.7
  Sales Growth                                        3.0%         3.0%         3.0%         3.0%          3.0%
Example Company EBITDA            $   5,000.0 $     5,150.0 $    5,304.5 $    5,463.6 $    5,627.5 $     5,796.4
  EBITDA Margin                        10.0%         10.0%        10.0%        10.0%        10.0%         10.0%



Cash Interest
Senior                                          $     616.8 $      444.1 $      275.3 $      147.0 $        49.0
Sub                                                   750.0        750.0        750.0        750.0         750.0
   Total Interest                                   1,366.8      1,194.1      1,025.3        897.0         799.0
Depreciation/Amortization             2,200.0       2,150.0      2,100.0      2,050.0      2,000.0       1,950.0
Pretax income                                       1,633.2      2,010.4      2,388.3      2,730.5       3,047.4
Taxes                       40%                       653.3        804.2        955.3      1,092.2       1,218.9
Net Income                                      $     979.9 $    1,206.2 $    1,433.0 $    1,638.3 $     1,828.4
                                                         Cash Flow
Years                                                   0          1                 2             3           4           5

Net Income                                                $     979.9 $     1,206.2 $        1,433.0 $   1,638.3 $   1,828.4
Depreciation/Amortization                                     2,150.0       2,100.0          2,050.0     2,000.0     1,950.0
 Operating Cash Flow                                          3,129.9       3,306.2          3,483.0     3,638.3     3,778.4

Principal Repayment Before Revolver
Term A                                                        1,400.0       1,400.0          1,400.0     1,400.0     1,400.0
Sub Debt                                                           -             -                -           -           -
                                 Total Debt Repayment         1,400.0       1,400.0          1,400.0     1,400.0     1,400.0

Working Capital increase (rate of sales %/yr)      50.0           1.5           1.5              1.6         1.6         1.7
Capex                                             750.0         750.0         750.0            750.0       750.0       750.0
Total Uses Before Revolver                                    2,151.5       2,151.5          2,151.6     2,151.6     2,151.7

Net Cash Excess/(Deficiency)                        -     $    978.4 $      1,154.7 $        1,331.4 $   1,486.7 $   1,626.7
 *add/subtract to Revolver

Cumul Cash Excess/(Deficiency)                            $        -    $        -       $    464.5 $    1,951.2 $   3,578.0
Post - Revolver Payment

Cumul Cash Excess/(Deficiency)                            $    978.4 $      2,133.1 $        3,464.5 $   4,951.2 $   6,578.0
                                       Amortization Schedule



Years                                      0              1           2           3              4             5

Term Note
Amortization (Years)             5.0
Beg. Bal                  $ 7,000.0                 7,000.0     5,600.0     4,200.0     2,800.0       1,400.0
Amortization                                       (1,400.0)   (1,400.0)   (1,400.0)   (1,400.0)     (1,400.0)
End Bal Term                                        5,600.0     4,200.0     2,800.0     1,400.0            -
Interest-Term                                         441.0       343.0       245.0       147.0          49.0

Revolver
Beg. Bal                  $ 3,000.0                3,000.0      2,021.6      866.9           -             -
Deficiency/(Excess)                                 (978.4)    (1,154.7)    (866.9)          -             -
End Bal Revolver (Cash)                            2,021.6        866.9         -            -             -
Interest-Revolver                                    175.8        101.1       30.3           -             -

Sub Debt
Advance                   $ 5,000.0
Amort Yrs
Beg. Bal                                       $   5,000.0 $   5,000.0 $   5,000.0 $   5,000.0 $     5,000.0
Amort                                                   -           -           -           -             -
End Bal                                            5,000.0     5,000.0     5,000.0     5,000.0       5,000.0
Cash Interest                                        750.0       750.0       750.0       750.0         750.0
                                                  Key Financial Covenants


Fixed Charge Coverage
                                 Actual              1.24        1.29       1.34   1.39   1.44   1.48
                                 Target              1.25        1.25       1.25   1.25   1.25   1.25
Definition: [EBITDA-Capex]/[Principal+Cash Interest+Taxes]

Total Leverage:
                                 Actual             3.00         2.45       1.90   1.43   1.14   0.86
                                 Target             3.00         3.00       3.00   3.00   3.00   3.00
Definition: [Senior Debt+Sub Debt]/EBITDA

Senior Leverage:
                                 Actual             2.00         1.48       0.96   0.51   0.25    -
                                 Target             2.00         2.00       2.00   2.00   2.00   2.00
Definition: Senior Debt/EBITDA
                                                Returns
Year                                       0                  1          2          3          4          5

Sub Debt
Principal                      $    (5,000.0) $          - $         - $        - $        - $      5,000.0
Cash interest                                         750.0       750.0      750.0      750.0         750.0
Warrant value                                                                                            -
Total Return                        (5,000.0)         750.0       750.0      750.0      750.0       5,750.0
 IRR                  15.0%
Warrant Percent        0.0%

Common Equity                      (10,000.0)             -          -          -          -       27,559.8
 IRR                  22.5%

Diluted Ownership
Common Equity       27,559.8         100.0%
Sub Debt Warrants         -            0.0%
Total               27,559.8         100.0%
                               Exit Values
Year                           0           1                     2          3              4              5


EBITDA                           $    5,150.0 $         5,304.5 $     5,463.6 $      5,627.5 $      5,796.4
Multiple                                  5.0x              5.0x          5.0x           5.0x           5.0x
Cash Position                              -                 -          464.5        1,951.2        3,578.0
Net Enterprise Value                 25,750.0          26,522.5      27,782.7       30,088.9       32,559.8

Less Principal:
  Term                                5,600.0           4,200.0       2,800.0        1,400.0             -
  Revolver                            2,021.6             866.9            -              -              -
  Sub Debt                            5,000.0           5,000.0       5,000.0        5,000.0        5,000.0
Total Principal                      12,621.6          10,066.9       7,800.0        6,400.0        5,000.0

Total Equity Value                   13,128.4          16,455.6      19,982.7       23,688.9       27,559.8

Less Participation
  Sub Debt warrants                                                                                      -
Residual common equity value                                                                   $   27,559.8



                                                                                Enterprise Value Exit Multiple
                                                         22.5%         4.00x         4.50x      5.00x       5.50x    6.00x
                                                   $   5,296.4        14.6%         17.5%      20.2%       22.6%    24.9%
                                          EBITDA




                                                   $   5,546.4        15.7%         18.7%      21.3%       23.8%    26.1%
                                                   $   5,796.4        16.8%         19.8%      22.5%       25.0%    27.2%
                                                   $   6,046.4        17.9%         20.9%      23.6%       26.1%    28.4%
                                                   $   6,296.4        18.9%         21.9%      24.6%       27.1%    29.5%
LBO MODEL RESULTS WITH VARIOUS CAPITAL STRUCTURES
70%
         64%
                                Performance assumptions:
60%                             Revenue growth 3%/year                        IRR at $25m EV (5x EBITDA)
                                EBITDA margins flat at 10%

                                                                              IRR at $30m EV (6x EBITDA)
50%
                      46%
         48%
                                                                              IRR at $20m EV (4x EBITDA)
40%

                                            31%
30%                   34%
         32%                                                    25%
                                                                             21%
20%                                                                                             18%
                      22%                   23%

                                                                18%
                                            15%                            15%                13%
10%                                                             12%
                                                                             10%
                                                                                                 9%

0%
      10% Equity   20% Equity        Base - 40% Equity       60% Equity   80% Equity        100% Equity
LBO MODEL RESULTS WITH VARIOUS FINANCIAL PERFORMANCE

                                                       IRR to Common Equity
60%

                           Capital Structure assumptions:                                                              48%
50%
                           2x Equity (40% of total capital)
                           1.4x Term debt                                                           39%
40%                        0.6x Revolver
                           1.0x Sub debt                                       31%
30%
                                                              23%
20%                                  17%

                                                                        Fast growth scenario with 10% equity
10%
                                                                        (from previous page) results in 90%
 0%
                                                                        IRR.
             -9%                                                        Conclusion: Buy cheap, with lots of
-10%                                                                    debt and increase profit quickly.

-20%
       Sales Growth -3%,      Sales Growth 0%,       Sales Growth 3%,   Sales Growth 4%,      Sales Growth 5%,   Sales Growth 8%,
          Margins 7%            Margins 10%            Margins 10%        Margins 12%           Margins 14%        Margins 16%

         Fast Decline         Flat Performance       Base Peformance    Slightly Above Base     Above Base         Fast Growth
M&A TRANSACTION HISTORY (ALL TRANSACTIONS W/U.S. TARGET)
                         16,000                                                                                                             2000


                                                                                                                                            1800
                         14,000
                                                                                      Fifth Wave:
                                                                                     Bull Market                                            1600
                         12,000                                                        and Tech
                                   Third Wave: Rise of       Fourth Wave:                Fueled                                             1400




                                                                                                                                                   Value of Transactions in billions
                                  Conglomerates (1965-   Megamergers & Hostile            Wave
Number of Transactions




                         10,000          1969)           Takeovers (1981-1989)       (1992-2001)
                                                                                                                                            1200


                          8,000                                                                                                             1000


                                                                                                                                            800
                          6,000

                                                                                                                                            600
                          4,000
                                                                                                                                            400
                                                                                                              Sixth Wave: Private Equity,
                          2,000
                                                                                                              Bull Market, High Liquidity   200
                                                                                                                     (2003-2008)
                             -                                                                                                              0
                                  1962
                                  1963
                                  1964
                                  1965
                                  1966
                                  1967
                                  1968
                                  1969
                                  1970
                                  1971
                                  1972
                                  1973
                                  1974
                                  1975
                                  1976
                                  1977
                                  1978
                                  1979
                                  1980
                                  1981
                                  1982
                                  1983
                                  1984
                                  1985
                                  1986
                                  1987
                                  1988
                                  1989
                                  1990
                                  1991
                                  1992
                                  1993
                                  1994
                                  1995
                                  1996
                                  1997
                                  1998
                                  1999
                                  2000
                                  2001
                                  2002
                                  2003
                                  2004
                                  2005
                                  2006
                                  2007
                                  2008
                                  2009
                                                              # of Transactions    Value of Transactions

  Sources: M&A Waves are discussed in detail in Mergers, Acquisitions, and Corporate Restructurings, Fourth Edition by
  Patrick Gaughan. Transaction data is from Mergerstat (1962 to 2002), Capital IQ (2003 to 2008).

				
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Description: Process of Fund Raising in Private Equity document sample