The Private Equity Play Mike Lorelli
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
EBITDA Earnings Before: Interest Taxes Depreciation Amortization 3
Stages Idea Up & Running Mature Trailing EBITDA VC PE 4
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
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
WSJ: Buyouts Leave Simmons Little Rest 7
Terminology The providers of capital: Limited Partners, or LP s - who are they? The fund manager: General Partner, or GP, or p.e. 8
Returns Well Out-Performed S&P 9
Percentage of Capital by LP type LBO Funds 10
11
The Vintage Year 12
Buyouts: Add-Ons now over half the deals 13
Many ways to categorize the 1,700 By size Large Mid-market Small $1 billion+ revenues > $150 million < $150 million By sector specialty Health care Consumer QSR IT Financial services etc. Net-net, sector first; and mid-market; not lower or upper 14
Excellent 15
Board Seats: Don t limit where you can play 16
Top Fund Managers Rank Firm City Capital ($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 17
Top 12 p.e. Investors in 2014 18
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
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
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 2008 2009 2010 2011 2012 2013 2014 2015 2016
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 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Invest Harvest 22
A lot of (Board) fish vs. Fortune 1,000 and Russell 2,000 24
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
p.e. Compensation 2% of managed capital pays salaries, rent, and nominal bonuses 20% carried interest from profits on distributions* * pre-obama 26
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
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 28
August Directorship 29
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
A typical 10 company fund result 2 1 2 3 2 out-of-the-park triple doubles singles the bank took the car keys 31
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
The Funnel 300 teasers 100 books 20 Meetings with Mgmt 7 LOI s 2 due diligence 1 close 33
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, www.teten.com/executive 34
Who the p.e. wants to meet Target- Driven Deal Exec Source: Andy Thompson, Notch Partners Thesis-Driven Deal Exec Deal Resource Available 35
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
The Three Primary Return Drivers Leverage Value Improvement: EBITDA Growth Exit Multiple Expansion 37 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
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
Carried Interest... 40
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
Bain: The Good News 42
Bain: The Black Eye 43
All the inventions have been invented. 44
The Trades
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
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
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
The Prime Pieces of Real Estate 49
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
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 51
Private Coaching Semester LANDING BOARD SEATS Mike Lorelli 52
Resources Private Equity Info ($85 for 1 month sub, to $895/yr.) www.privateequityinfo.com Andy Jones ajones@privateequityinfo.com (512) 771-3943
Visit: www.linkedin.com/in/mikelorelli www.fasterlandings.com Mike Lorelli (203) 655-2444 MKLorelli@gmail.com 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.com/in/mikelorelli 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.