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1、1,Seminar:introduction to private equity,2,Contact,Antoine Parmentier:A+44(0)7809.510.373,3,Final presentations,Corporate governance and public debate over private equity;Private equity in emerging markets;FIP,FCPI,defiscalisation;Investments in infrastructure;Private equity post credit crunch;Priva
2、te equity in retail and consumer goods.,4,Content,Introduction;Why allocate assets to PE?;LBO activity in Europe;European fundraising activity;The measure of perfromance;FoF due diligence:selection of PE managers;The worlds biggest private equity firms;The mega-buyout era;Value creation in private e
3、quity;The structure of a leverage buyout deal;The pros and cons of being private;The credit crisis:impact and consequences on PE;Case study:Baneasa,5,Introduction to Private Equity,6,Introduction,Asset class representing the companies not publicly traded(vs.public equity traded on stock exchange);Me
4、dium to long term investment;Venture capital,growth capital,buyoutPE funds are raised from pension funds,insurance companies,large corporate,HNWI,etc;Investors in PE funds are called“Limited Partners”;PE funds are managed by the“General Partners”,7,Structure of private equity participations,8,The fu
5、el of private equity,The debt:Acquisitions are made through leveraged buyout deals(LBOs);The investors:PE funds managers must be disciplined and patient;The managers:The success of an investment relies on the implementation of the business plan;The macro environment:Acquisition multiple arbitrage ca
6、n be positive in period of growth;,9,A diversified asset class,Private equity includes a large number of strategies:venture,buyout,distressed,secondaryLike-minded strategies:mezzanine,clean-tech/energy,infrastructure,real assets,10,Venture capital(1/2),Earlier stage:venture investors provide funds f
7、or start-up and early expansion;Based on innovative business,development of a new product,new patent;Two sectors:technology or life science;Highly skilled professionals and scientists;Scalable investments with a lot of failures and few great successes;,11,Venture capital(2/2),Investment from up to 1
8、0m and often pre-revenues balance-sheet;Financing in several rounds(round 1,round 2,round 3)with typically clinical test results as threshold for next round;Most of the exits are IPO(NASDAQ,Zurich);Examples:Skype,Google,Apple,Atari,Cisco,Yahoo,YouTube,LinkedIn,Paypal.,12,Buyout(1/3),The most importa
9、nt strategy of PE;Buyout comes after venture and growth capital;Taking control of a company through leveraged buyout(LBO);Management team of the company is investing alongside the PE fund(alignment of interest);,13,Buyout(2/3),Development of a business plan over 4 to 6 years in order to add value;Re
10、venue growth+Margins improvement+deleveraging=added value;Mature companies with leading market position,active management team,strong cash-flow;PE funds provide capital for international expansion,corporate divestures,succession issues,14,Buyout(3/3),Buyout starts at 5 million enterprise value(EV);A
11、t the bottom end:growth/expansion capital.,15,Distressed/Special situation(1/2),Investment in debt-securities or equity of a company under financial stress;Distressed companies are in default,under Chapter 11(reorganization)or under Chapter 7(liquidation=bankruptcy);Loans are rated BB and below by S
12、,16,Distressed/Special situation(2/2),Distressed debt investors try first to influence the process;Debt holders have access to confidential information;Then,as debt holders,they can take the control of the company;,17,Secondary(1/2),Purchase of existing(hence secondary)commitments in PE funds or por
13、tfolios of direct investments;LP selling their portfolio=secondary deal;Needs in depth valuation and bidding/auction process;Specialized investors:Alpinvest,Coller Capital,Lexington Partners;Booming specialization as most of institutional investors are seek cash.,18,Secondary(2/2),19,Mezzanine(1/3),
14、Debt instrument immediately subordinated to the equity;The most risky debt instrument=highest yield;Returns generated by:cash interest payment:fixed rate or fluctuate along an index(e.g.EURIBOR,LIBOR);PIK interest:payment is made by increasing the principal borrowed;Ownership:mezzanine financing mos
15、t of the time include equity ownership.,20,Mezzanine(2/3),Mezzanine suffered before credit crunch as senior debt was easy to access;Since July 2007 and lack of funding,mezzanine is back:As of 30 September 2008,70%of PE deals used mezzanine vs.48%in 2007;Q3 2008 average spread:E+1,042,versus E+979 in
16、 Q2 2008;,21,Mezzanine(3/3),22,Infrastructure(1/2),Among the newest PE-like asset;Global needs for infrastructure assetsRoads,ports,airports,energy plant,hospitals.Prisons,schools,etcMix of private investors and governments through PPP(Public-Private Partnerships);Traditional PE funds raised infrast
17、ructure funds:KKR,CVC,3i,Macquarie;Longer term investment,lower return,steady cash-flow with regular yield;French highways or Viaduc de Millau are contracted to Eiffage/Macquarie;,23,Infrastructure(2/2),A multi trillion market opportunity:$1 trillion to$3 trillion annually through 2030;US:power indu
18、stry needs$1.5 trillion between 2010 and 2030;Mexico:a 5-year and$250 billion plan will be funded 50%by private capital;EU:164 billion to be invested in natural gas infrastructure by 2030 to facilitate import of gas to meet long-term shortfall;China:close to 100 airports will be needed.,Source:Globa
19、l Infrastructure Demand through 2030,CG/LA Infrastructure,March 2008.Infrastructure to 2030,volume 2,OECD publication,2007.,24,Real assets(1/2),Cash-flow producing asset or pool of assets privately originated:Equipment leasing(shipping,aircraft):the asset is purchased and simultaneously leased back
20、to the seller;Agricultural finance(forests,timber lands,etc):growing demand from the renewable energy sector;Mines,intellectual property rights,financial assets on the secondary market,etcIt is usually not asset-backed securities but a direct investment in the assets,25,Real assets(2/2),Steady and r
21、egular cash flow:10%-15%annual cash return;Downside protection due to high recovery value of the assets:loss of value of the asset is unlikely;Uncorrelated assets;,26,Why allocate assets to PE?,27,Portfolio management,Asset allocation is define by returns,risk(measured by standard deviations of retu
22、rns)and correlations;Diversification improve returns while reducing risk;Allocation is determined using public information of traditional asset classes(equity,bonds,REIT,etc.),28,The issue with private equity,Private market:PE funds invest in private companies=no public market to help set the valuat
23、ion;PE funds are themselves private companies=no market to value them and no public disclosure required.Quarterly valuation:Risk of inconsistency:quarterly marked-to-market valuation=significant degree of subjectivity;Risk of stale valuation:quarterly valuation can understate the standard deviation
24、and correlation to other asset classes.,29,The issue with private equity,Illiquid investments:PE funds are closed-end funds(except secondary market);Time line too long:PE funds has a 5-year investment period and a 10-year life;Restricted information disclosure:Only LPs have access to the funds perfo
25、rmance.,Private equity is an inefficient market,30,However,Allocation to PE increased significantly over the last years:Low correlation to pricing trends of traditional assets;Diversification thus risk reduction;Good returns over the years:Average annual IRR 1986-2005 is 18.3%,31,Reason to invest in
26、 PE,Adding a risky asset with a low correlation of pricing trends compared to traditional asset classes can reduce the risk of an overall portfolio;Relatively good returns of PE over the last years.,32,LBO activity in Europe,33,Geography,34,Sectors,35,European buyout value,European buyout value:72 b
27、illion in Q1-Q3 2008,36,European buyout by region,37,PE as a percentage of GDP,Nordic countries have the most important PE activity;Benelux figures are impacted by few mega deals.,38,European fundraising activity,39,Funds on the market,40,Seeking capital is becoming difficult,Number of vehicles seek
28、ing capital keep on increasing;But the number of final closing and the path investors deploy capital has slowed down dramatically;Investors(LPs)are hesitant and sometimes face liquidity issues;,41,Distributions are expected to decrease as well:this wont ease the fundraising processes;Average fundrai
29、sing:2008:14.2 months;2007:12 months;2006:11.1 months,42,Average fundraising,43,State of the market,Aggregate PE commitments globally are close to$2,000 billion(vs.$1,000 billion in 2003 and an expected$5,000 billion within 5 to 7 years);Globally:app.1,200 funds are currently seeking$713 billion inc
30、luding:Buyout:290 funds seeking$320 billion;Venture:470 funds seeking$85 billion;Mezzanine:25 funds seeking$10 billion;FoF:205 funds seeking$220 billion.,44,Funds of the market,Permira:13.5 billion;CVC:13.7 billion;Apax Partners:11.4 billion;Cinven:8.2 billion;Charterhouse:7.4 billion;PAI Partners:5
31、.5 billion.,45,Outlook,PE is set to enter its most challenging time;Increasing pressure and difficulties for managers seeking capital;Fundraising take more time;Less deals are being signed so theres no rush to raise;Historical performances and focus strategies will become key factors in the future:s
32、ome GPs wont survive;Some LPs will need to free up some capital and clean up their portfolio:increase in secondary transactions.,46,Outlook,PE AUM has grown steadily since 1996:60%of LPs are expected to increase their allocation to PE;Sovereign wealth funds are a huge source of capital:Represent tod
33、ay$3,000 of assets and are expected to reach$7,900 billion by 2011;Europe accounts for 19%($580 billion)of SW funds capital;,47,Fundraising sources,48,LPs usually invest in home-based funds;,49,Globally,US is the single largest investor;In Europe,UK is ahead of anybody;,50,Profile of the LPs,51,The
34、measure of performance,52,Track record,53,Measures of performance,Multiple of cost:Also called Total Value over Paid-In capital(TVPI);(Cash distributions+Unrealized value)/capital invested;Cash returned regardless of timing(total return).Internal Rate of Return(IRR):Discount rate that makes NPV of a
35、ll cash flows equal zero;Linked to timing:Quick flip=high IRR.,54,The J-curve,In the early years,low or negative valuation due to:Management fees drawn from committed capital;Initial investments to identify and improve inefficiencies;,55,The J-curve,Fees are charged based on the funds entire committ
36、ed capital;Example:Fund size:100 million;Management fee:annual 2%committed capital;Organizational expenses:300,000 2,300,000 expenses/fees called regardless of any investment made.,56,The J-curve,If 5 investments are made the first year for 3 million each:5 x 3 million=15 million;If 20%of committed
37、capital is called the first year:20 million;Interim value is thus:17.7 million or 0.89x contributed capital;,57,The J-curve,Underperforming investments tend to be written down more quickly than successful companies develop;Example 2nd year:Another 20%of committed capital:20 million;Five new deals at
38、 3 million each:15 million;Two first-year investments are written down/off;Annual management fee:2 million.,58,The J-curve,Companies performing well,held at cost or conservative valuation,understate the value of the portfolio;Interim is thus often misleading;NAV+cumulative distributions track over t
39、ime relative to contributed capital:,59,Fund of Funds due diligence:the selection of PE managers,60,Due diligence focus,Quantitative analysis:Past investments and track record;Leverage and debt;Sources of proceeds.Qualitative analysis:Team;Strategy;Market opportunity,61,Critical items of due diligen
40、ce,Track record:whats behind a bad investment?;Unrealized portfolio:lack of recent track record and ability of current team look at current valuation carefully.Organization:fund size,multi or single office,Pan-European,domestic or transatlantic,risk of spin-off,autocratic management,etc;Team:number
41、of Partners,Principles and Associates,carry split,staff retention and turnover,motivation in case of large distribution under previous funds,key man clause,succession issues.,62,Reasons to invest,Attractive track record;Experienced investment team;Differentiated investment strategy;Proprietary deal
42、flow;Sector/geographic focus.Must be combined with FoF portfolio management and exposure seek diversification.,63,Track record,Entry and exit date;Realized and unrealized value(part sell off or recapitalization);Multiples of cost and IRR.,64,Benchmark analysis,DPI:Distributed Paid In Proceeds distri
43、buted,only realized deals;RVPI:Residual Value Paid In Unrealized value;TVPI:Total Value Paid In:Realized and Unrealized value.,65,Vintage year performance,66,Presentation,Private equity investors and their managers:Vivre avec un fond dinvestissement,Les Echos,October 2006,67,The worlds biggest priva
44、te equity firms,68,Carlyle,Founded in 1987 by David Rubenstein,Daniel DAniello and William Conway;Since inception,Carlyle has invested$49.4 billion of equity in 836 deals for a total purchase price of$220 billion;Over$89 billion AUM throughout 64 funds in buyouts(69%),growth capital(4%),real estate(
45、12%)and leveraged finance(15%);Over 525 investment professionals operating in 21 countries;Assets deployed in Americas(59%),Europe(28%)and Asia(13%);Currently:140 companies,$68 billion in revenues and 200,000 workers.,Source:,69,Carlyle deals,HertzZodiacTerrealLe FigaroVNU,70,Blackstone,Founded in 1
46、985 by Steven Schwarzman and Peter Peterson;Global AUM$119.4 billion in private equity,real estate,Funds of Hedge Funds,CLOs,Mutual funds;89 senior MDs and total staff of over 750 investments and advisory professionals in US,Europe and Asia;Blackstone is the first major PE firm to become public:IPO
47、was in June 2007 at$36 under water since first day!Currently:47 companies,$85 billion in annual revenues and more than 350,000 employees.,71,Blackstone deals,The weather channel:$3.6bn in September 2008;Hilton:$26.9bn in October 2007;Center Parcs:$2.1bn in May 2006;Deutsche Telekom:3.3bn in April 20
48、06(minority);Orangina:$2.6bn in February 2006;,72,KKR,Founded in 1976 by James Kohlberg,Henry Kravis and George Roberts;Total AUM$68.3bn from$25.4bn invested capital;Total of 165 deals since inception with an aggregate enterprise value of$420bn;KKR is currently from a“one-trick pony”to a multi asset
49、 manager with infrastructure and mezzanine funds being raised;The$31bn buyout of RJR Nabisco inspired the book“Barbarians at the gate”;Currently:35 companies,$95 billion in annual revenues and more than 500,000 employees.,73,KKR deals,Legrand;Pages Jaunes;Tarkett;Alliance Boots;ProSieben;TDC;Toys R
50、Us.,74,PAI Partners,The biggest French PE firms formerly known as Paribas Affaires Industrielles;Since 1998,PAI invested 3.92bn in 36 deals across Europe;Last fund raised reach 5.2bnInvestments include:Kaufman&Broad,Vivarte,Neuf Cegetel,Panzani Lustucru,Atos Origin,75,Private equity deals,Private eq
