The Private Equity Play. Mike Lorelli

Transcription

1 The Private Equity Play Mike Lorelli

2 EBITDA Earnings Before: Interest Taxes Depreciation Amortization 2

3 Stages Idea Up & Running Mature Trailing EBITDA VC PE 3

4 Agenda History Returns Where is the money coming from? Terminology Where they are; where their companies are The p.e. model Some names p.e. compensation Results and Performance Measures The Funnel Management Compensation The Return Drivers The p.e. s Plan In The News Importance of a good LinkedIn profile, and resume 4

5 Worse than real estate brokers in Darien, CT 1977: 1978: 2012: Kohlberg, Kravis, and Roberts leave Bear Stearns, forming KKR 80 Leveraged Buyout Groups in US Estimated 2,800 around the world 1,800 U.S. 5

6 Value Creation 100% Value Creation Value Creation 90% 80% 70% 51% 32% 25% 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 Returns Comparisons 10

11 Percentage of Capital by LP type LBO Funds 11

12 12

13 The Vintage Year 13

14 Add On s now fully half of Deals 14

15 LP s pushing for Exits (i.e. distributions) 15

16 1/4 th of Exits are now to another p.e. firm 16

17 Geography Private Equity Firms Portfolio Companies States % of total States % of total 1 New York 23.3% 1 California 18.8% 2 California 15.1% 2 Texas 8.8% 3 Illinois 9.4% 3 New York 6.6% 4 Texas 7.4% 4 Massachusetts 5.9% 5 Massachusetts 7.0% 5 Florida 4.5% 6 Connecticut 6.5% 6 Pennsylvania 4.2% 7 Pennsylvania 3.7% 7 Illinois 4.2% 8 Virginia 2.4% 8 New Jersey 3.7% 9 Florida 2.2% 9 Georgia 3.2% 10 Michigan 2.0% 10 Ohio 3.0% 11 Ohio 2.0% 11 Colorado 2.7% 12 Colorado 1.9% 12 North Carolina 2.5% 13 North Carolina 1.9% 13 Virginia 2.4% 14 New Jersey 1.8% 14 Minnesota 2.2% 15 Georgia 1.7% 15 Michigan 2.0% 16 Washington DC 1.6% 16 Washington 2.0% 17 Minnesota 1.6% 17 Connecticut 1.9% 18 Maryland 1.4% 18 Maryland 1.9% 19 Indiana 0.8% 19 Wisconsin 1.8% 20 Wisconsin 0.8% 20 Tennessee 1.8% Sample Size: 1,000+ private equity firms, 10,000+ portfolio companies 17

18 Many ways to categorize the 1,800 By size Large Mid-market Small $1 billion+ revenues > $150 million < $150 million By sector specialty Health care Consumer IT Financial services etc. Net-net, sector first; and mid-market; not lower or upper 18

19 Excellent 19

20 Don t unnecessarily limit where you can play 20

21 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 21

22 Top 12 p.e. Investors in

23 The LBO model Purchase 7.0 X $9m = $63 Cash 27 Debt 36 Sale 8.0 X $14.1m = $113 Debt 32 Proceeds 81 23

24 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 24

25 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

26 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 26

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28 A lot of fish vs. Fortune 1,000 and Russell 2,000 28

29 p.e. Compensation 2% of managed capital pays salaries, rent, and nominal bonuses 20% carried interest from profits on distributions* * pre-obama 29

30 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 30

31 Buyout Fund Sample Partnership/Year Capital Committed (M) Capital Cont. (M) Dist. As of (M) Net IRR As of (%) Oregon State Treasury 12/31/12 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 $

32 A typical 10 company fund result out-of-the-park triple doubles singles the bank took the car keys 32

33 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

34 The Funnel 300 teasers 100 books 20 Meetings with Mgmt 7 LOI s 2 due diligence 1 close 34

35 Options for Executives Working with Private Equity Operating Partner salary+bonus+carry Fund Commitment Portfolio Company Management salary+bonus+equity Deal Executive / Executive in Residence retainer+upside Advisor expenses+upside Expert Network / Interim Executive hourly comp Executive s Income David Teten, 35

36 Who the p.e. wants to meet Target- Driven Deal Exec Source: Andy Thompson, Notch Partners Thesis-Driven Deal Exec Deal Resource Job Seekers 36

37 Management Compensation CEO $200K - $350K 50-75% 5.0% equity* CFO/COO 125K - $275K 40-50% 1.5% equity VP 125K- $225K 25-33% 1.0% equity * and opportunity to co-invest 37

38 The Three Primary Return Drivers Leverage Value Improvement: EBITDA Growth Exit Multiple Expansion 38 Courtesy: Wind Point Partners

39 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

40 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

41 Project NTL 100 Day Plan 1. Full Court Press on Basic Revenue Projects a GROWING THE BASE BUSINESS- will be relatively easy for an organization in this space that focuses, prioritizes and executes. The ISI partners have for the last two years been focused and spending the majority of ISI's time and resources on acquisitions, strategic alliances, new ventures, etc and have not focused on ISI core brands and business. To date none of these ventures have been successful but have utilized significant management time and expense. A sharp focus on the core business / brands with the some advertising/ promotion and introduction of new products in these brands will result in strong growth. In addition, providing more products and new and improved products to existing customers and improving current service levels and fill rates to existing customers will definitely provide positive growth. New domestic customer opportunities will also be a focal point. b INTERNATIONAL-there is still currently a strong demand for ISI products, especially Twin Lab in the International arena. Again, during the last two years because of the intended Pharmaton acquisition, ISI basically ignored existing International distributors, never hired a new head of International sales and never entertained new distributors that contacted us for our product. ISI is now beginning to refocus on that area with a European head of Intl sales. More resources and specific plan for Int'l growth on a number of fronts could result in strong and quick Int'l growth. c HERBS AND TEAS- these brands have essentially been allowed to run themselves for the last three years. Despite that they have only declined slightly in revenues. Lack of focus and strategy are the primary reasons for these declines. Reversing these revenue declines and growing these brands, which are both in comparatively active and hot growth areas, is not that difficult. We need to hire a brand manager to work with our customers and suppliers to revitalize and contemporize these lines. Both Alvita and Nature's Herbs are well recognized and trusted brands that still have a loyal following. We need to add some new more popular flavors which customers have been asking for and update our packaging. We can also easily look to expand the channels of distribution for these brands.

42 Project NTL August 9th, % 2005 % 2006 % 2007 est % 2008 % 2009 % 2010 % P&L Net Sales 108, % 118, % 113, % 115, % 136, % 150, % 175, % Base business 98,193 97, , , , ,000 Int'l 10,800 8,000 7,000 12,000 15,000 21,000 Water 0 0 1,000 5,000 7,000 12,000 Teas & Herbs 9,300 7,400 7,000 10,000 13,000 17,000 Gross Profit 45, % 48, % 53, % 65, % 73, % 87, % R&D 2, % 1, % 1, % Selling 16, % 13, % 13, % Shipping & dist. 5, % 4, % 4, % Mktg G&A 1, % % 2, % Adv. & Promo. 5, % 2, % 4, % Bus. Planning % 0 0.0% 0 0.0% Consumer Aff % % % Executive 9, % 6, % 6, % Finance 2, % 2, % 2, % General Office 1, % 1, % 2, % HR % % % IT 3, % 2, % 2, % ISI/N2U % % % Legal 1, % 1, % 1, % Order Entry % % % Other expense 1, % 2, % 7, % Production % % % Purchasing 1, % % % Rebus 2, % % % Regulatory 0 0.0% % % Corporate M&A 0 0.0% % % nt'l sales expansion 0 0.0% 0 0.0% % G&Aalloc tocog (3,145) -2.7% (3,407) -3.0% (3,472) -3.0% Total Op. exp. 52, % 42, % 51, % 54, % 58, % 64, % GrossMargin-OpExp +9, , ,666 Int. income % % 0 0.0% Interest exp. 10, % 12, % 11, % Other Exp (Inc.) % (330) -0.3% % Net Income (16,921) -14.3% (6,535) -5.8% (10,970) -9.5% Dep. & Amort. 2, % 3, % 3, % EBITDA (3,814) -3.2% 9, % 4, % adjustments 4, % 3, % 7, % BankAdj.EBITDA % 13, % 12, % 21,000 25,000 33,000 -excessive Mgt. 0.0% 4, % 4, % ProFormaEBITDA 17, % 16, % 25, % 29, % 37, %

43 Buyout Example Economics Investment (Example) Acquire a business for 5.5x EBITDA Over 5 year horizon Sales grow at 7% annually Margins improve from 14% to 15.5% Sell business in year 5 for 5.5x EBITDA WPP/Co-Investors Results 30% IRR 3.7x cash-on-cash return CEO Assuming CEO co-invest of $750k CEO gets 7.5% of common CEO receives over $10 million Courtesy: Wind Point Partners

44 Components of Equity Value Creation As EBITDA grows, the value of the enterprise increases. At the same time, free cash flow reduces debt. $ millions At Close Y1 Y2 Y3 Y4 Y5 EBITDA Exit Value (5.5x EBITDA) Cash Available for Debt Pay down Net Debt Courtesy: Wind Point Partners

45 A word on covenants Max Capital expenditure $1.5 million Min LTM EBITDA 11.0 million Fixed Charge Coverage 1.00x Total Deb Leverage 3.75x Maximum Senior Leverage 4.50x 45

46 46

47 WSJ 47

48 Private Equity Analyst- November

49 Private Equity Analyst- November

50 WSJ 50

51 WSJ 51

52 The Trades 52

53 The Importance of a Killer LinkedIn Profile 50% of candidates are found via LinkedIn Or they will at least check you out 53

54 140 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 3,999 below average You and 6,999 14,000 serious C Level Candidates =

55 Keywords EBITDA growth Revenue Acceleration Margin Enhancement Multiple Expansion Visioning/Strategic Planning Topgrading New Channels/Markets International Expansion CEO CXO Lean Manufacturing Turnarounds Exit Strategies 55

56 LinkedIn Profile 56

57 Q & A Visit Mike Lorelli (203) MikLorelli@AOL.com (not a typo) 57

58 Michael K. Lorelli Mike Lorelli s 30-year career spans a wide range of consumer products and services, and B2B categories, with responsibilities for both domestic and international units. His years as a lineoperating manager have largely been with Fortune 100 companies: PepsiCo and Bristol Myers Squibb. For the last decade, as CEO, he has led revitalizations and turnarounds for private equity firms. For example, Dr. John Rutledge, Chairman of Rutledge Capital, will say: I would invade China with Mike alone in a rubber boat. Most recently, he was CEO of Carlstadt, NJ based WaterJel Technologies, the leader in burn care products. Today he is Executive Chairman of the Board of Rita s Italian Ices, which was acquired by Falconhead Capital. Mike has also led CEO engagements for Riverside Company, Rutledge Capital, and Pouschine Cook Capital. Michael K. Lorelli 15 Norman Lane Darien, CT Office: FAX: miklorelli@aol.com Website: Mike s assignments at PepsiCo included Executive Vice President Marketing, Sales and R&D for Pepsi-Cola North America, 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 expanding the Company s presence from 68 to 92 countries, surpassing McDonalds in country count. During his PepsiCo tenure, he is given credit for authoring the soft drink company s Big Event Marketing strategy, which coupled the product with leading- edge events in entertainment, sports, consumer electronics, movies and home video. Mike holds a Bachelor of Engineering degree 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. Mike is a Director of CP Keloco, and icontrol. He holds a Professional Director Certification from The American College of Corporate Directors, and is also an NACD 2011 Governance Fellow. Mike is also a registered speaker with Vistage International. He resides in Darien, CT. Leading The World In Burn Care 58