The Private Equity Play. Mike Lorelli

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1 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 2

3 EBITDA Earnings Before: Interest Taxes Depreciation Amortization 3

4 Stages Idea Up & Running Mature Trailing EBITDA VC PE 4

5 Worse than real estate brokers in Darien, CT 1977: 1978: 2014: Kohlberg, Kravis, and Roberts leave Bear Stearns, forming KKR 80 Leveraged Buyout Groups in US Estimated 2,700 around the world 1,700 U.S. 5

6 Value Creation Value Creation 100% Value Creation 90% 80% 32% 25% 70% 51% 60% 39% 50% 40% 30% 20% 31% 46% 36% 10% 0% 18% 22% Leverage era (1980s) Multiple Expansion era (1990s) Earnings growth era (2000s) Operational improvement era (2010s) Operational improvement Multiple arbitrage Leverage 6

7 WSJ: Buyouts Leave Simmons Little Rest 7

8 Terminology The providers of capital: Limited Partners, or LP s - who are they? The fund manager: General Partner, or GP, or p.e. 8

9 Returns Well Out-Performed S&P 9

10 Percentage of Capital by LP type LBO Funds 10

11 11

12 The Vintage Year 12

13 Buyouts: Add-Ons now over half the deals 13

14 Many ways to categorize the 1,700 By size Large Mid-market Small $1 billion+ revenues > $150 million < $150 million By sector specialty Health care Consumer QSR IT Financial services etc. Net-net, sector first; and mid-market; not lower or upper 14

15 Excellent 15

16 Board Seats: Don t limit where you can play 16

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, Apax Partners London $16, Warburg Pincus New York $15, Cerberus Capital Management New York $14, Advent International Boston $14, Permia London $13, Oaktree Capital Management Los Angeles $13, Tera Firma Capital Partners London $12, Providence Equity Partners Providence (RI) $12, Clayton Dubilier & Rice New York $11, Charterhouse Capital Partners London $11, Teacher s Private Captial Toronto $10,758 17

18 Top 12 p.e. Investors in

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 19

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 20

21 The p.e. / L.P Model Pelosi 2008 Fund Sale A D F Purchase A B C D E C F B G H I E J

22 The p.e. / L.P Model Pelosi 2008 Fund Sale A D F C B E Purchase A B C D E F G H I J Invest Harvest 22

24 A lot of (Board) fish vs. Fortune 1,000 and Russell 2,000 24

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 25

26 p.e. Compensation 2% of managed capital pays salaries, rent, and nominal bonuses 20% carried interest from profits on distributions* * pre-obama 26

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 27

28 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/ Riverside Capital Appreciation Fund/2000 $50.0 $46.3 $ Riverside Capital Appreciation Fund/2003 $75.0 $77.4 $ Apollo Investment Fund VI LP/2006 $200.0 $223.1 $ Aurora Equity Partners III LP/2004 $50.0 $53.0 $ BCI Growth V LP/1999 $75.0 $72.9 $ Castle Harlan Partners IV LP/2002 $100.0 $102.3 $ CVC Capital Partners Asia Pacific II LP/2005 $100.0 $122.4 $ Diamond Castle Partners IV LP/2005 $100.0 $71.3 $ Endeavor Capital Fund III LP/2000 $25.0 $24.5 $ Fenway Partners Capital Fund III LP/2006 $50.0 $53.9 $ Hicks Muse Tate & Furst Europe Fund LP/1999 $99.3 $116.8 $ KKR European Fund LP/1999 $400.0 $532.3 $ KKR Millennium Fund LP/2002 $1,000.0 $1,308.8 $1, Lion Capital Fund I LP/2004 $99.8 $108.8 $ Oak Hill Capital Partners II LP/2004 $100.0 $105.8 $ Parthenon Investors III LP/2005 $100.0 $67.8 $ Rhone Partners III LP/2006 $100.0 $65.4 $ TPG Partners III LP/2000 $300.0 $284.5 $ HarbourVest Partners 2004 Direct Fund/2004 $75.0 $74.1 $

29 August Directorship 29

30 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 30

31 A typical 10 company fund result out-of-the-park triple doubles singles the bank took the car keys 31

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 32

33 The Funnel 300 teasers 100 books 20 Meetings with Mgmt 7 LOI s 2 due diligence 1 close 33

34 Options for Executives Working with Private Equity Operating Partner salary+bonus+carry Fund Commitment Portfolio Company Management salary+bonus+equity Outside Director retainer+options Advisor expenses+upside Expert Network / Interim Executive hourly comp Executive s Income David Teten, 34

35 Who the p.e. wants to meet Target- Driven Deal Exec Source: Andy Thompson, Notch Partners Thesis-Driven Deal Exec Deal Resource Available 35

36 Management Compensation CEO CFO/COO CMO $200K - $350K 50-75% 5.0% equity* 125K - $275K 40-50% 1.5% equity 125K- $225K 25-33% 1.0% equity * and opportunity to co-invest 36

37 The Three Primary Return Drivers Leverage Value Improvement: EBITDA Growth Exit Multiple Expansion 37 Courtesy: Wind Point Partners

38 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, x Offer Price 107, ,333 new p.e. Equity 35, 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 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 new p.e. $ 35,000 75% Total Uses: 93,000 Equity Rollover 11,667 25% Cash Total Post-Deal Equity 46, %? equity Debt 58,000 51,212 42,877 31, ,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 ,782 Current Owners 21.3% Exit EV 142, , ,400 CFO ,881 Immediate skin in game 2.5% Exit Equity 91, , ,114 EVP ,921 3 year option program 12.5% Equity to p.e. 58,336 93, ,485 V.P. and GC , % Equity to 5 owners 19,445 31,179 50,920 R&D ,176 Total cash to 5 owners 74,445 86, ,920 Sub. GM ,176 p.e. cash CMO (new hire) ,176 IRR (5 years) VP Supply Chain (new hire) Exit multiple 8 Total Management ,833 29,406

39 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 39

40 Carried Interest... 40

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. 41

42 Bain: The Good News 42

43 Bain: The Black Eye 43

44 All the inventions have been invented. 44

45 The Trades

46 The Importance of a Killer LinkedIn Profile 35% of p.e. Board candidates are found via LinkedIn Or they will at least check you out! 46

47 390 million LinkedIn members Killer* Outstanding Excellent Very Good Above average You and 99 You and 199 You and 499 You and 999 You and 1,999 slightly above average You and 4,999 below average You and 9,999

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 48

49 The Prime Pieces of Real Estate 49

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 50

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: 51

52 Private Coaching Semester LANDING BOARD SEATS Mike Lorelli 52

53 Resources Private Equity Info ($85 for 1 month sub, to $895/yr.) Andy Jones ajones@privateequityinfo.com (512)

54 Visit: Mike Lorelli (203) Questions? 54

Michael K. Lorelli Michael K. Lorelli 15 Norman Lane Darien, CT 06820 Office: 203 253-1238 FAX: 203 655-6916 Email: MKLorelli@gmail.com Website: www.lorelli.net www.linkedin.

55 Michael K. Lorelli Michael K. Lorelli 15 Norman Lane Darien, CT Office: FAX: Website: 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 bestseller 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.

The Private Equity Play. Mike Lorelli

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