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1、Seminar:introductiontoprivateequity1ContactAntoineParmentier:A+44(0)7809.510.3732FinalpresentationsCorporategovernanceandpublicdebateoverprivateequity;Privateequityinemergingmarkets;FIP,FCPI,defiscalisation;Investmentsininfrastructure;Privateequitypostcreditcrunch;Privateequityinretailandconsumergoo
2、ds.3ContentIntroduction;WhyallocateassetstoPE?;LBOactivityinEurope;Europeanfundraisingactivity;Themeasureofperfromance;FoFduediligence:selectionofPEmanagers;Theworldsbiggestprivateequityfirms;Themega-buyoutera;Valuecreationinprivateequity;Thestructureofaleveragebuyoutdeal;Theprosandconsofbeingprivat
3、e;Thecreditcrisis:impactandconsequencesonPE;Casestudy:Baneasa4IntroductiontoPrivateEquity5IntroductionAssetclassrepresentingthecompaniesnotpubliclytraded(vs.publicequitytradedonstockexchange);Mediumtolongterminvestment;Venturecapital,growthcapital,buyoutPEfundsareraisedfrompensionfunds,insurancecomp
4、anies,largecorporate,HNWI,etc;InvestorsinPEfundsarecalled“LimitedPartners”;PEfundsaremanagedbythe“GeneralPartners”6Structureofprivateequityparticipations7ThefuelofprivateequityThedebt:Acquisitionsaremadethroughleveragedbuyoutdeals(LBOs);Theinvestors:PEfundsmanagersmustbedisciplinedandpatient;Themana
5、gers:Thesuccessofaninvestmentreliesontheimplementationofthebusinessplan;Themacroenvironment:Acquisitionmultiplearbitragecanbepositiveinperiodofgrowth;8AdiversifiedassetclassPrivateequityincludesalargenumberofstrategies:venture,buyout,distressed,secondaryLike-mindedstrategies:mezzanine,clean-tech/ene
6、rgy,infrastructure,realassets9Venturecapital(1/2)Earlierstage:ventureinvestorsprovidefundsforstart-upandearlyexpansion;Basedoninnovativebusiness,developmentofanewproduct,newpatent;Twosectors:technologyorlifescience;Highlyskilledprofessionalsandscientists;Scalableinvestmentswithalotoffailuresandfewgr
7、eatsuccesses;10Venturecapital(2/2)Investmentfromupto10mandoftenpre-revenuesbalance-sheet;Financinginseveralrounds(round1,round2,round3)withtypicallyclinicaltestresultsasthresholdfornextround;MostoftheexitsareIPO(NASDAQ,Zurich);Examples:Skype,Google,Apple,Atari,Cisco,Yahoo,YouTube,LinkedIn,Paypal.11B
8、uyout(1/3)ThemostimportantstrategyofPE;Buyoutcomesafterventureandgrowthcapital;Takingcontrolofacompanythroughleveragedbuyout(LBO);ManagementteamofthecompanyisinvestingalongsidethePEfund(alignmentofinterest);12Buyout(2/3)Developmentofabusinessplanover4to6yearsinordertoaddvalue;Revenuegrowth+Marginsim
9、provement+deleveraging=addedvalue;Maturecompanieswithleadingmarketposition,activemanagementteam,strongcash-flow;PEfundsprovidecapitalforinternationalexpansion,corporatedivestures,successionissues13Buyout(3/3)Buyoutstartsat5millionenterprisevalue(EV);Atthebottomend:growth/expansioncapital.14Distresse
10、d/Specialsituation(1/2)Investmentindebt-securitiesorequityofacompanyunderfinancialstress;Distressedcompaniesareindefault,underChapter11(reorganization)orunderChapter7(liquidation=bankruptcy);LoansareratedBBandbelowbyS&Pbasedonusualratio(debt/EBITDA,EBITDAinterestcoverage,etc);15Distressed/Specialsit
11、uation(2/2)Distresseddebtinvestorstryfirsttoinfluencetheprocess;Debtholdershaveaccesstoconfidentialinformation;Then,asdebtholders,theycantakethecontrolofthecompany;16Secondary(1/2)Purchaseofexisting(hencesecondary)commitmentsinPEfundsorportfoliosofdirectinvestments;LPsellingtheirportfolio=secondaryd
12、eal;Needsindepthvaluationandbidding/auctionprocess;Specializedinvestors:Alpinvest,CollerCapital,LexingtonPartners;Boomingspecializationasmostofinstitutionalinvestorsareseekcash.17Secondary(2/2)18Mezzanine(1/3)Debtinstrumentimmediatelysubordinatedtotheequity;Themostriskydebtinstrument=highestyield;Re
13、turnsgeneratedby:cashinterestpayment:fixedrateorfluctuatealonganindex(e.g.EURIBOR,LIBOR);PIKinterest:paymentismadebyincreasingtheprincipalborrowed;Ownership:mezzaninefinancingmostofthetimeincludeequityownership.19Mezzanine(2/3)Mezzaninesufferedbeforecreditcrunchasseniordebtwaseasytoaccess;SinceJuly2
14、007andlackoffunding,mezzanineisback:Asof30September2008,70%ofPEdealsusedmezzaninevs.48%in2007;Q32008averagespread:E+1,042,versusE+979inQ22008;20Mezzanine(3/3)21Infrastructure(1/2)AmongthenewestPE-likeasset;GlobalneedsforinfrastructureassetsRoads,ports,airports,energyplant,hospitals.Prisons,schools,e
15、tcMixofprivateinvestorsandgovernmentsthroughPPP(Public-PrivatePartnerships);TraditionalPEfundsraisedinfrastructurefunds:KKR,CVC,3i,Macquarie;Longerterminvestment,lowerreturn,steadycash-flowwithregularyield;FrenchhighwaysorViaducdeMillauarecontractedtoEiffage/Macquarie;22Infrastructure(2/2)Amultitril
16、lionmarketopportunity:$1trillionto$3trillionannuallythrough2030;US:powerindustryneeds$1.5trillionbetween2010and2030;Mexico:a5-yearand$250billionplanwillbefunded50%byprivatecapital;EU:164billiontobeinvestedinnaturalgasinfrastructureby2030tofacilitateimportofgastomeetlong-termshortfall;China:closeto10
17、0airportswillbeneeded.Source:Global Infrastructure Demand through 2030,CG/LAInfrastructure,March2008.Infrastructure to 2030,volume2,OECDpublication,2007.23Realassets(1/2)Cash-flowproducingassetorpoolofassetsprivatelyoriginated:Equipmentleasing(shipping,aircraft):theassetispurchasedandsimultaneouslyl
18、easedbacktotheseller;Agriculturalfinance(forests,timberlands,etc):growingdemandfromtherenewableenergysector;Mines,intellectualpropertyrights,financialassetsonthesecondarymarket,etcItisusuallynotasset-backedsecuritiesbutadirectinvestmentintheassets24Realassets(2/2)Steadyandregularcashflow:10%-15%annu
19、alcashreturn;Downsideprotectionduetohighrecoveryvalueoftheassets:lossofvalueoftheassetisunlikely;Uncorrelatedassets;25WhyallocateassetstoPE?26PortfoliomanagementAssetallocationisdefinebyreturns,risk(measuredbystandarddeviationsofreturns)andcorrelations;Diversificationimprovereturnswhilereducingrisk;
20、Allocationisdeterminedusingpublicinformationoftraditionalassetclasses(equity,bonds,REIT,etc.)27TheissuewithprivateequityPrivatemarket:PEfundsinvestinprivatecompanies=nopublicmarkettohelpsetthevaluation;PEfundsarethemselvesprivatecompanies=nomarkettovaluethemandnopublicdisclosurerequired.Quarterlyval
21、uation:Riskofinconsistency:quarterlymarked-to-marketvaluation=significantdegreeofsubjectivity;Riskofstalevaluation:quarterlyvaluationcanunderstatethestandarddeviationandcorrelationtootherassetclasses.28TheissuewithprivateequityIlliquidinvestments:PEfundsareclosed-endfunds(exceptsecondarymarket);Time
22、linetoolong:PEfundshasa5-yearinvestmentperiodanda10-yearlife;Restrictedinformationdisclosure:OnlyLPshaveaccesstothefundsperformance.Private equity is an inefficient market29However,AllocationtoPEincreasedsignificantlyoverthelastyears:Lowcorrelationtopricingtrendsoftraditionalassets;Diversificationth
23、usriskreduction;Goodreturnsovertheyears:AverageannualIRR1986-2005is18.3%30ReasontoinvestinPEAddingariskyassetwithalowcorrelationofpricingtrendscomparedtotraditionalassetclassescanreducetheriskofanoverallportfolio;RelativelygoodreturnsofPEoverthelastyears.31LBO activity in Europe32Geography33Sectors3
24、4EuropeanbuyoutvalueEuropeanbuyoutvalue:72billioninQ1-Q3200835Europeanbuyoutbyregion36PEasapercentageofGDPNordiccountrieshavethemostimportantPEactivity;Beneluxfiguresareimpactedbyfewmegadeals.37Europeanfundraisingactivity38Fundsonthemarket39SeekingcapitalisbecomingdifficultNumberofvehiclesseekingcap
25、italkeeponincreasing;Butthenumberoffinalclosingandthepathinvestorsdeploycapitalhassloweddowndramatically;Investors(LPs)arehesitantandsometimesfaceliquidityissues;40Distributionsareexpectedtodecreaseaswell:thiswonteasethefundraisingprocesses;Averagefundraising:2008:14.2months;2007:12months;2006:11.1m
26、onths41Averagefundraising42StateofthemarketAggregatePEcommitmentsgloballyarecloseto$2,000billion(vs.$1,000billionin2003andanexpected$5,000billionwithin5to7years);Globally:app.1,200fundsarecurrentlyseeking$713billionincluding:Buyout:290fundsseeking$320billion;Venture:470fundsseeking$85billion;Mezzani
27、ne:25fundsseeking$10billion;FoF:205fundsseeking$220billion.43FundsofthemarketPermira:13.5billion;CVC:13.7billion;ApaxPartners:11.4billion;Cinven:8.2billion;Charterhouse:7.4billion;PAIPartners:5.5billion.44OutlookPEissettoenteritsmostchallengingtime;Increasingpressureanddifficultiesformanagersseeking
28、capital;Fundraisingtakemoretime;Lessdealsarebeingsignedsotheresnorushtoraise;Historicalperformancesandfocusstrategieswillbecomekeyfactorsinthefuture:someGPswontsurvive;SomeLPswillneedtofreeupsomecapitalandcleanuptheirportfolio:increaseinsecondarytransactions.45OutlookPEAUMhasgrownsteadilysince1996:6
29、0%ofLPsareexpectedtoincreasetheirallocationtoPE;Sovereignwealthfundsareahugesourceofcapital:Representtoday$3,000ofassetsandareexpectedtoreach$7,900billionby2011;Europeaccountsfor19%($580billion)ofSWfundscapital;46Fundraisingsources47LPsusuallyinvestinhome-basedfunds;48Globally,USisthesinglelargestin
30、vestor;InEurope,UKisaheadofanybody;49ProfileoftheLPs50Themeasureofperformance51Trackrecord52MeasuresofperformanceMultipleofcost:AlsocalledTotalValueoverPaid-Incapital(TVPI);(Cashdistributions+Unrealizedvalue)/capitalinvested;Cashreturnedregardlessoftiming(totalreturn).InternalRateofReturn(IRR):Disco
31、untratethatmakesNPVofallcashflowsequalzero;Linkedtotiming:Quickflip=highIRR.53TheJ-curveIntheearlyyears,lowornegativevaluationdueto:Managementfeesdrawnfromcommittedcapital;Initialinvestmentstoidentifyandimproveinefficiencies;54TheJ-curveFeesarechargedbasedonthefundsentirecommittedcapital;Example:Fun
32、dsize:100million;Managementfee:annual2%committedcapital;Organizationalexpenses:300,0002,300,000expenses/feescalledregardlessofanyinvestmentmade.55TheJ-curveIf5investmentsaremadethefirstyearfor3millioneach:5x3million=15million;If20%ofcommittedcapitaliscalledthefirstyear:20million;Interimvalueisthus:1
33、7.7millionor0.89xcontributedcapital;56TheJ-curveUnderperforminginvestmentstendtobewrittendownmorequicklythansuccessfulcompaniesdevelop;Example2ndyear:Another20%ofcommittedcapital:20million;Fivenewdealsat3millioneach:15million;Twofirst-yearinvestmentsarewrittendown/off;Annualmanagementfee:2million.57
34、TheJ-curveCompaniesperformingwell,heldatcostorconservativevaluation,understatethevalueoftheportfolio;Interimisthusoftenmisleading;NAV+cumulativedistributionstrackovertimerelativetocontributedcapital:58FundofFundsduediligence:theselectionofPEmanagers59DuediligencefocusQuantitativeanalysis:Pastinvestm
35、entsandtrackrecord;Leverageanddebt;Sourcesofproceeds.Qualitativeanalysis:Team;Strategy;Marketopportunity60CriticalitemsofduediligenceTrackrecord:whatsbehindabadinvestment?;Unrealizedportfolio:lackofrecenttrackrecordandabilityofcurrentteamlookatcurrentvaluationcarefully.Organization:fundsize,multiors
36、ingleoffice,Pan-European,domesticortransatlantic,riskofspin-off,autocraticmanagement,etc;Team:numberofPartners,PrinciplesandAssociates,carrysplit,staffretentionandturnover,motivationincaseoflargedistributionunderpreviousfunds,keymanclause,successionissues.61ReasonstoinvestAttractivetrackrecord;Exper
37、iencedinvestmentteam;Differentiatedinvestmentstrategy;Proprietarydealflow;Sector/geographicfocus.MustbecombinedwithFoFportfoliomanagementandexposureseekdiversification.62TrackrecordEntryandexitdate;Realizedandunrealizedvalue(partsellofforrecapitalization);MultiplesofcostandIRR.63BenchmarkanalysisDPI
38、:DistributedPaidInProceedsdistributed,onlyrealizeddeals;RVPI:ResidualValuePaidInUnrealizedvalue;TVPI:TotalValuePaidIn:RealizedandUnrealizedvalue.64Vintageyearperformance65PresentationPrivateequityinvestorsandtheirmanagers:Vivreavecunfonddinvestissement,LesEchos,October200666Theworldsbiggestprivateeq
39、uityfirms67CarlyleFoundedin1987byDavidRubenstein,DanielDAnielloandWilliamConway;Sinceinception,Carlylehasinvested$49.4billionofequityin836dealsforatotalpurchasepriceof$220billion;Over$89billionAUMthroughout64fundsinbuyouts(69%),growthcapital(4%),realestate(12%)andleveragedfinance(15%);Over525investm
40、entprofessionalsoperatingin21countries;AssetsdeployedinAmericas(59%),Europe(28%)andAsia(13%);Currently:140companies,$68billioninrevenuesand200,000workers.Source:68CarlyledealsHertzZodiacTerrealLeFigaroVNU69BlackstoneFoundedin1985byStevenSchwarzmanandPeterPeterson;GlobalAUM$119.4billioninprivateequit
41、y,realestate,FundsofHedgeFunds,CLOs,Mutualfunds;89seniorMDsandtotalstaffofover750investmentsandadvisoryprofessionalsinUS,EuropeandAsia;BlackstoneisthefirstmajorPEfirmtobecomepublic:IPOwasinJune2007at$36underwatersincefirstday!Currently:47companies,$85billioninannualrevenuesandmorethan350,000employee
42、s.70BlackstonedealsTheweatherchannel:$3.6bninSeptember2008;Hilton:$26.9bninOctober2007;CenterParcs:$2.1bninMay2006;DeutscheTelekom:3.3bninApril2006(minority);Orangina:$2.6bninFebruary2006;71KKRFoundedin1976byJamesKohlberg,HenryKravisandGeorgeRoberts;TotalAUM$68.3bnfrom$25.4bninvestedcapital;Totalof1
43、65dealssinceinceptionwithanaggregateenterprisevalueof$420bn;KKRiscurrentlyfroma“one-trickpony”toamultiassetmanagerwithinfrastructureandmezzaninefundsbeingraised;The$31bnbuyoutofRJRNabiscoinspiredthebook“Barbarians at the gate”;Currently:35companies,$95billioninannualrevenuesandmorethan500,000employe
44、es.72KKRdealsLegrand;PagesJaunes;Tarkett;AllianceBoots;ProSieben;TDC;ToysRUs.73PAIPartnersThebiggestFrenchPEfirmsformerlyknownasParibasAffairesIndustrielles;Since1998,PAIinvested3.92bnin36dealsacrossEurope;Lastfundraisedreach5.2bnInvestmentsinclude:Kaufman&Broad,Vivarte,NeufCegetel,PanzaniLustucru,A
45、tosOrigin74PrivateequitydealsPrivateequityfundsowncompaniesof“everydaylife”Pagesjaunes;Comptoirdescotonniers;PizzaPino;Picard;AlainAfflelou;JimmyChoo;Odlo;Orangina75ImpactofPEonFrencheconomyisoverallpositive2006-2007employeesgrowthrate:+2.1%(vs.0.5%forCAC40);2006-2007salesgrowth:+5.3%(vs.4.1%forCAC4
46、0);Source:AFIC/Ernst&Young76Asof30June2006:55%ofPE-backedcompanieshavelessthan100empoyeesand83%havelessthan500employees;79%havelessthan50mrevenues;4852PE-backedcompaniesinFrance;Workforceof1.5millionpeople(9%oftotalprivateemployees);199bninrevenuesincluding128bngeneratedabroad.Source:AFIC/Ernst&Youn
47、g77PresentationsKKRBlackstoneCarlyle78Themegabuyoutera79FundgrowthPEAUM1980-2006:24%CAGR;2003-2006:PEcommitmentsincreased260%;CostofdebthistoricallylowGlobalvolumeofLBOsincreasedto$700billionin2006(4x2003level);GlobalvolumeofLBOsinH12007reached$560billion(25%ofglobalM&A).80Biggerarethefunds,biggerar
48、ethetargetcompanies;Fundsizeanddealsizearecorrelated;“Club-deals”wererequiredtocompletethebiggestacquisitions;Morecashyouhave,morecashyouneed:Co-investorssuchasotherfunds,LPsorshareholdersoftargetcompaniesweresoughtafter;Somefundscreatedquotedvehiclestoaccesspermanentcapitalorlistedthemanagementcomp
49、aniesonthepublicmarket;81Largefundsaregetting(much)largerUS12largestfundsraisedintheUSasofJune2007totaledcloseto$155billion:Thisrepresentsa142%increasecomparedwiththeirpredecessorfunds;InEurope,thefund-to-fundincreaseofthe12largestfundswasonly75%;Inaddition,GPswerestartingtoraiseatshorterintervals.8
50、2RationalforlargerpoolsofcapitalEconomiesofscaleinthemanagementofthefund;Highermanagementfeeenabletobuildtopinvestmentteams;Expandedbuyoutopportunitiesatthelargerendofthemarket:Higherqualityassets;Lesscompetitionattheupper-endofthemarket;Hugepotentialreturns.83RationalforlargerpoolsofcapitalAbilityt
51、opursueapro-activeacquisitionstrategy;Implementaleveredcapitalstructure;Flexible(covenant-lite)andlow-costfinancing;Variousexitoptions(IPO,Corporatetransaction,secondarybuyouts.)84TargetcompaniesVerylargecompaniesareattractivetargets:Maturecompaniesneedrestructuringefforttogetridofthe“fat”;Thevalue-
52、additionisthusoftenobviousanobviouspath;Usuallylesscompetitionamongthebuyers.Publicmarketofferalotofopportunities:PEinvestorsaddvaluetothecompanytheyinvestinasopposedtopassivepublicshareholders.85RiseofClub-dealsClub-dealsareiconicoftheconcentrationtrendsofprivateequity;91%ofUSbuyoutsofover$5billion
53、wereclub-deals.butalso38%ofP-to-Pvaluedbetween$250millionand$1billionwereclubdeals:Manyfirmssharedtherisksandpooledresources.86Disappearanceofclub-dealsCollusioncharges;Difficultiestoshareinformations;Tendencytomonopolizethecontrolthecontrol;Ego-issues.87ExamplesofmegaclubdealsTargetValueBuyersHospi
54、talCorp,ofAmerica$32.7billionBainCapital,KKR,MerrillLynchHarrahsEntertainment$27.4billionApollo,TPGClearChannel$25.7billionBain,ThomasHLeeKinderMorgan$21.6billionCarlyle,Riverstone,GoldmanSachsFreescaleSemiconductor$17.6billionBlackstone,Carlyle,Permira,TPGHertz$15.0billionCarlyle,CD&R,MerrillLynchT
55、DC$13.9billionApax,Blackstone,KKR,Permira,Providence88PresentationsCaveatInvestor/theuneasycrown,TheEconomist,Feb2007;Whosnext,TheDeal,July200889Valuecreationinprivateequity90ValuecreationdriversEBITDAgenerationMultipleexpansionDebtreduction91EBITDAgenerationEBITDAisgeneratedby:Salesexpansion;Margin
56、improvement;Add-onacquisitions;Organicgrowth(=GDPgrowth)92MultipleexpansionMultiple:EV/EBITDA;Basedoncomparabletransactions;Multipleexpansion:Differencebetweenentryandexitmultiple;=MultipleupliftxExitEBITDAMultipleuplift:=ExitEV/EBITDAentryEV/EBITDA93Debtreduction=Entrynetdebtexitnetdebt94Example95W
57、hattounderstandfromEVcreationIfmostofthevaluecomesfrom:EBITDAincrease:growingindustryand/orcompany,possiblyinayoungmarketoreffortsmainlyonsalesforce;Multipleexpansion:marginincreasedovertheholdingperiod;theinvestorsrationalizedandoptimizedtheproduction,cutcosts,disposedofnoncoreassets,arbitragestrat
58、egy,etcDeleveraging:usuallythelastfactortobeimplemented;Debtreducedbycashnotreinvested.969798FactorsofvaluecreationChangingbusinessanddrivinggrowth:Takingadvantageofmarketcycles(buyingcheap,sellingatbetterprice)andfinancialengineeringarenolongerenough;Objectivesmustbewelldefined;Managementisincentiv
59、ized:alignmentofinterestbetweenBoardmembersandshareholders;Mustcreatevalueforthenextacquirer:PEisnotnecessarilyshorttermfocused.99Otherfactor:IndustrycharacteristicsStability,lowcyclicality;Highmargins(orpotentialforimprovement);Strongoperatingcash-flows:PEbusinessesarecash-flowdrivenratherthanearni
60、ngdriven:needtopaydownthedebtIndustry-widerevenuegrowth;Potentialforoverallefficiencyimprovements.100Otherfactor:TheGPmakesthedifferenceManagerscontributetovaluecreation:Selecttherighttargetcompanies;Undertakeappropriatechanges;ExperienceoftheGPs/priorbuyoutexperienceFocusonfewsectorsgeneratesbetter
61、returns:Industry-focusstrategygeneratebetterreturns;butmoderatelydiversifiedapproachgeneratesbetterreturns;Focusstrategyexposestoindustrycyclesbutgoodindustryexpertise;Exampleofbaddealinthewrongindustry:Foxtondeal“The deal of the century”,FT101Recruitment/management;Buy-and-build;Newinvestmentstodev
62、eloptonewmarkets;Optimization/costcutting;Divestureofnoncorebusiness(es)102Primarysourceofvaluecreation(%)Almost2/3ofthevaluegeneratedcomesfromcompanyoutperformance:Companiesfundamentalsarekeydriversofgrowth.Sample: 60 deals from 11 leading PE firms103Fivefeaturesofaleading-edgepractice:Expertiseand
63、knowledge:insightsfromthemanagement,trustedexternalsource;Substantialandfocusedperformanceincentives:topmanagementusuallyowns15-20%oftheequity;Performancemanagementprocess:initialbusinessplansaresubjecttocontinualreviewandrevision;Focused100-dayplan:dealpartnersmustdevotemostoftheirtimetoanewdealsto
64、buildrelationship,detailresponsibilitiesandchallengethemanagement;Managementshouldbechangedsoonerratherthanlater104PresentationFoxtons:Thesaleofthecentury,FTmagazine,June2008105StructureofaLeverageBuyouttransaction106StructureofaleveragebuyoutDealstructure:EquityDebtDebtiseither:UnsecuredSecured107L
65、BOstructure108EquityCommonequity,preferredequity,shareholderloan;Equityisunsecuredandthemostriskyandrewardingtranche;Equityisheldbytheshareholders:privateequityfund,management,variousinvestors,oftendebtmezzanineproviders,sometimesintermediaries.109MezzaninedebtSecureddebtbutsubordinatedtoseniordebt;
66、Mezzanineisprovidedbymezzaninefundsandsometimeshedgefunds;ReimbursementaftertheseniordebtbuthaspriorityovertheequityholdersReimbursementiscashorPIK;PIKnote:paymentmadeinadditionalbondsorpreferredstockswhichincreasetheperformanceoftheinvestment;Mezzanineisusuallyreimbursedatexitifnotrefinancedbefore.
67、H12008cashspread:E+414.7bpsH12008PIKspread:E+535.3bps110SecondlienDevelopedpre-July2007anddoesnotreallyexistanymore:asofQ32008,12%ofLBOsused2ndlienversus52%in2007;Reimbursementincash,prioritylevelbetweenseniordebtandmezzanine;Secondlienwasseenasacheapmezzanine.111SeniordebtNegotiatedforaperiodoftime
68、between7and9yearsusuallybasedonexpectedcashflow;TrancheAisfirstreimbursed.Othertranches(BandC)areusuallyreimbursedinfine;TrancheDisarevolvingcredittorefinancepreviousdebtofthetargetcompany;H12008spread:E+337.48bps112Capitalstructure113Theloanmarket:in2008AverageleverageofEuropeanLBOs:4.5xinQ32008vs.
69、7.0xinQ32007;Averageequitycontributions:43%inQ32008vs.34%inQ32007EuropeanSeniorloaninQ32008:450-550bps(comparedto225bps-275bpsinearly2007)partlyoffsetbylowerbaserates;Mezzaninemarginshaveincreasedto11001300bpspluswarrantsorequityco-invest(comparedto750-900bpswithlittlecallprotectionandnoequitypartic
70、ipationin2007);114AverageLBOequitycontributionLess debt available = more equity required to close a deal115LoanvolumedroppedsignificantlyBankslendingcapacitiesaredry!Q1-Q32008loanvolume:46.6billionQ12007loanvolume:45.75billion116EvolutionofcapitalstructureBack to the classic structure: Senior Debt +
71、 Mezzanine117CostofdebtCost of debt increased significantly in 2008118LBOspread119TheloanmarketLoansstartedtofallbelow“parvalue”(100)inJune2007;Secondarymarketbecamedepressed(lessliquidity,declineinvalue,etc)butpresentssomegoodbuyingopportunities;Defaultrateatitslowestlevelalthoughwasexpectedtoincre
72、asein2008;Alotofnewinvestors(incl.traditionalPEfunds)enteredtheloanmarketinH12008withleveredvehicles;Theydidnotanticipatethattheloanmarketwilldeclineevenmoresharplyin2008=BADSponsor-backedcreditisusuallypoorlyvaluedregardlessofthecompanysperformance120ConsequencesThemarketisstuck:sellershavenotyetad
73、justedtheirprice;Buyersdontwant/cannotpayhighprice.Dealsarenegotiatedatcheaper:EBITDAmultiplesarelowerMoreequityandlessdebt=moreconservativestructure121EBITDAmultiples122PurchasepricesSecondarybuyoutsarethemostimpactedas:Theyweretraditionallythemostexpensivetransactions=priceadjustment;Sellersarever
74、ylikelyforcedtosellsoacceptlowerprices.123Theprosandconsofbeingprivate124Resultsofa2008McKinseysurvey:PrivateequityBoardsareoverallmoreefficientthanpublicequityBoards:Betterfinancialengineering;Strongeroperatonalperformance.ProsandconsofpublicequityBoardsoffersome:Superioraccesstocapitalandliquidity
75、;Moreextensiveandtransparentapproachtogovernanceandmoreexplicitbalancingofstakeholderinterests.125PublicversusPrivate:differencesinownershipstructuresandgovernancePubliccompanieshavearmslengthshareholders:Needforaccurateandequalinformationamongshareholdersandcapitalmarket(audit,remuneration,complian
76、ce,risk);Managementdevelopmentacrosstheboard.Privateequitycompanieshavemoreefficientprocesses:Strongerstrategicleadership;Moreeffectiveperformanceoversight;Manageonlykeystakeholdersinterests.126RatingofpublicandprivateBoardsofDirectors127StrategicleadershipinPEcompaniesJoinedeffortsofallDirectors;Us
77、ually,definedandshapeddringtheduediligence(prioracquisition);Boardsapprovemanagementstrategicdecision(inM&Aforexample);PEfundsstimulatemanagementsambitionandcreativity;Executivemanagementreportsontheprogressofthelateststrategicdecisionimplemented.128StrategicleadershipinpubliccompaniesBoardsonlyover
78、see,challengeandshapethestrategicplans,accompanyingthemanagementintheimplementation;Theexecutivemanagementtakestheleadinproposinganddevelopingit;itismainlyaformalreporting.129PerformancemanagementinprivateequitycompaniesPrivateequityhaveonefocus:realisationoftheirinvestment;Consequently,PEBoardshave
79、arelentlessfocusonvaluecreationdrivers;Performanceindicatorsareclearlydefinedandfocusoncashmetricsandspeedofdelivery.130PerformancemanagementinpubliccompaniesHighlevelperformancemanagment,norealdetailedanalysis;Focusonquarterlyprofittargetsandmarketexpectations;Needtocommunicateanaccuratepictureofsh
80、ort-termperformance;Budgetarycontrol,short-termaccountingprofits;PubliccompaniesBoardsfocusoninformationthatwillimpacttheshareprice.131ManagementdevelopmentandsuccessioninprivatecompaniesPEcompaniesmainlyfocusontopmanagement(CEO,CFO)andreplaceunderperformersveryquickly;Verylittleeffortsdeployedonlon
81、g-termchallengessuchasdevelopmentofmanagement,succession,etc132ManagementdevelopmentandsuccessioninpubliccompaniesEfficientthoroughmanagement-review:topmanagementandtheirsuccessors;Focusonchallengesandkeycapabilitiesforlong-termsuccess:managementdevelopmentandremunerationpolicies;However,publicBoard
82、shaveweaknesses:Slowtoreactandtheirvoiceismore(perceivedas)advisorythandirective;Remunerationdecisionssometimesmoredrivenbypublic/stakeholdersexpectedreactionthanperformance133StakeholdermanagementinprivatecompaniesExecutivemanagementcanclearlyidentifyamajorityshareholder;PEfundsarelocked-inforthedu
83、rationofthefund;PEfundrepresentasingleblockandaremuchmoreinvolvedandinformedthanpublicshareholders;Lessonerousandconstructivedialogue;Noorlittleexperiencedealingwithmediaandunions(seeWalkerreportanddebateoverPEin2007)134StakeholdermanagementinpubliccompaniesShareholdingstrutureismorecomplexanddivers
84、ifiedthanprivatecompanies:Institutionals,minorityindividuals,growthinvestors,long-termstrategic,short-termhedgefunds.Differentprioritiesanddemands:CEOsneedtolearntocopewiththisverydiverserangeofinvestors;IncaseofP2P,HFcanblocktheprivatization(95%thresholdtodelist):AlainAffleloupurchasebyBridgepoint.
85、135GovernanceandriskmanagementinpubliccompaniesWherepubliccompaniesscorethebest:consequencesofSarbanes-OxleylegislationandHiggsReport;Severalsubcommitteestoscrutinizeremuneration,audit,nomination,etcOverallBoardsuperviseandcanrelyanddecideonthesub-committeesrecommendations;Importantfactorofinvestorc
86、onfidence;Downside:expensive,time-consuming,inefficientsometimes(“Thefocusisonbox-tickingandcoveringtherightinputs,notdeliveringtherightoutputs”)136GovernanceandriskmanagementinprivatecompaniesLowerlevelofgovernancethaninpubliccompanies:onlyauditcommitteesareneededinPEsapproach;Morefocusonriskmanage
87、mentthanriskavoidance;Notperceivedasapureoperationalfactor.137Toppriorities138SurveysconclusionPubliccompaniesDirectorsaremorefocusonriskavoidancethanvaluecreation:TheyarenotaswellfinanciallyrewardedasPEDirectorsbyacompanyssuccessbuttheycanstilllosetheirhard-earnedreputationsifinvestorsaredisappoint
88、ed.GreaterlevelofengagementbynonexecutiveDirectorsatPE-backedcompanies:Inadditiontoformalmeetings,PEnonexecutiveDirectorsspendanadditional35to40daysayeartoinformalcommunicationwiththemanagement.139Creditcrisis:impactandconsequencesonprivateequity140BeforeJuly2007(1/3)Growthoftheinstitutionalloanmark
89、et,CDOsandsecondlienloans;Intermediaries/brokersunderwrotedebttoselltootherinvestorsforsyndicationfee:becamelessdemandingintermsofpotentialrisk/reward;Multiplicationofhighlyratedstructuredcreditproducts(CDOs/CLOs)althoughtheirinherentvaluewasincreasinglycomplextocalculate;Increasinginterestfrominves
90、torsforLBOfundsledtohigherleverage;Newloanswereissuedas“covenantlitearrangements”:DONNER DES EXEMPLES DE COVENANT A RESPECTER DANS UN LOAN TYPE141BeforeJuly2007(2/3)Increasingleverageloanactivitybutdeclineofcreditqualityofthenewdebtdueto:Covenantlite;RisingratioofdebttoearningsforUSandEULBOs;Midandl
91、argeLBOdebt/EBITDAratioswereatalltimehighin2007(andwereevenhigherforlargethanmidLBOs).142BeforeJuly2007(3/3)Threeindicatorsofabubble:Debt/EBITDAratioatalltimehighin2007:adeclineofoperatingperformancewillexposethecompanytotheriskofdefault;CompaniesunderLBOshavelessliquiditytoservetheirdebt;Interestco
92、verageratiodecreasedsince2003reachingaten-yearlowof1.7xin2007.Moreequity+moredebt=biggerdealsandbiggerleverage;143AfterJuly2007(1/5)Suddenincreaseincreditspreadsmakesthedebtmoreexpensiveandmoreinlinewiththerealriskheldbythedebtholder;Banksanddebtunderwritterscouldnotdistributetheirdebttootherinvesto
93、rs:hadtokeepitontheirbalancesheetwhiletheirvaluewasdeclining;Anumberoftransactionscollapsedandcouldnotbeclosed;Banksthatdidnotdistributetheirdebthadtoreportsignificantlossesontheirbooks.144AfterJuly2007(2/5)SlowingbuyoutactivityinUSandEurope(almostnoactivityin2008);Debtwasrepricedandmoredifficulttoa
94、ccess;DefaultratewashistoricalylowasofJuly2007;Meanttorisesharplysincethen,startingwithconstruction,airlineandretailindustriesasglobalrecessionisimpactingoureconomy;145AfterJuly2007(3/5)Increaseintheissuanceofjunkbonds:inthepastfouryears,almosthalfofthenewlyissuedbondshavebeenratedas“junk”attheirout
95、set;Defaultrisk(accordingtoMoodysandEdwardAltman(NYUSalomonCenter):CCC4-yeardefaultrisk:53.6%;CCC10-yeardefaultrisk:91.4%in10years;Bdefaultrisk:25.2%afterfouryears.Inreality,thedefaultrateoverthelastyearsismuchlowerthatthosepredictions;146AfterJuly2007(4/5)Reasonsforthelowdeafultrate:Giventhelaregam
96、ountofliquidity,bondsthatwouldhavedefaultedhavebeenrefinanced;Theriseofcovenantlitemeansthatanyeventshortofafailuretopayinterestwouldnotresultinadefault;Privateequitydealsshouldbeseriouslyimpactedverysoon;Dealssignedin2005,2006andH12007arethemostriskydeals;147AfterJuly2007(5/5)Thecrisisopensdoorston
97、ewinvestmentopportunities:Distresseddebtandspecialsituationfunds;Needforleverageshouldbenefitmezzaninefunds;Creditdislocationfunds:purchaseloansatadiscountfromlenders;Smalltomid-marketbuyoutfundswillbenefitfromdesaffectionformegabuyoutfirms;Secondaryfunds:somelargeinstitutionsneedcash.148Consequence
98、sJune2007June2008TopofthecycleRecessionPricesaretoohighPricesarefalling.MoretogoRisklevelsareextraordinaryTheriskprofilehaschangedfundamentallyLiquidityisdrivingbehaviourLackofliquidityisdrivingbehaviourSellersmarketBuyersmarketbutmustproceedcarefullyandbewarethefallingknivesNodistressedopportunitie
99、sSomeinterestingdistressedsituations(andevenmoretocome)149Crisis=opportunitiesRecessionyearshaveproducedthebestvintagesforprivateequity;AlthoughsomeLPsarefacingliquiditycrisis,moremoneyshouldbedeployednowandin2009!Recessionyearsconsideredtobe1991+2yearsand2001+2years.150Recessionyearsareusuallygoodv
100、intageyears151RecessionvsNon-recession152Casestudy:Baneasa153InvestmentrationaleMarketleaderinFrenchretail(#1inFootwearand#2inclothing);Experiencedmanagementteam:BogdanNovachasalongstandingexperienceofthesectorandthegroup;Strongfinancialperformanceandstronggrowthinsalesexpectedoverthenext3years;Resi
101、lientbusinessmodel:lowerendofthemarketanddiversifiedrangeofproducts;Diversifiedoffering:geography(citycentreoroutoftown,Franceandoverseas,apparelandfootwear);Potentialgrowthprospect:organicgrowth(newstoresopenings)andconsolidation(fragmentedindustry).154Banesais#1footwearretailerwith14.4%oftheFrench
102、marketand#2clothingretailerinFrancewithonly3.7%oftheFrenchapparelmarketFragmentedindustry,givesM&Aopportunity/growthbyacquisition15545%ofOOTfootwearmarketand24%ofOOTclothingmarketIndicationaboutcompetition:Zara,H&M,Mango,etcarecitycentres=Baneasahasadominantpositionwherethosecompetitorsarenotpresent
103、.Zara,H&M,Mango,etcarethusthemaincitycentrecompetitors;156Historically,BaneasahasalwaysbeenactiveinOOT:createdsuburbandiscountshoestoresin1981withOsierChaussures;andin1984withOsierVetementsFirstmoveradvantage157Clothingbusiness:44%salesand43%ofEBITDAandFootwearbusiness:56%salesand57%EBITDAWellbalanc
104、ed,similarEBITDAmarginsinbothsegments158France:93%salesand95%EBITDA;OutOfTown:68%salesand72%EBITDABaneasaisdiversified(butmaybenotasmuchastheinvestorthinks);SalesandEBITDAindicatesthatcitycentresandoverseasstoresaremoreexpensive(lowermargins,Baneasahaslowerperformancesabroadandincitycentreswhereisth
105、etoughcompetition)159BogdanNovacwasCEOofBaneasafrom2000to2003and2004totoday.EBITDAhasgrownfrom231mto365m(aCAGRof16.4%)Goodmanagementteam/experiencedCEOStrongperformanceoverthelastyears(since2003)160NatafestimatessalesandEBITDAinthefinancialyearto28February2007of237millionand23millionrespectively(9.7
106、%margin).Berriliohadsalesinthe12monthsto30September2006of64.5millionandEBITDAof4.6million(7.3%margin).NatafandBerrilioofferpotentialmarginimprovementsasthemarginis9.7%and7.3%respectivelyversus16.1%marginforBaneasa.161Frenchclothingmarkethasbeenstablesince2000with0.2%CAGRTheactorsmustgainmarketsharet
107、ogrow:noorganicgrowthresultingfromindustrygrowth162Averagepriceshavedecreasedby1.5%CAGR.Price-volumeelasticityishighwithdeclinesinaveragepricesdrivenbythepass-throughofpurchasinggainsfromlower-costsourcing(Asia)toend-customersandfromtheincreasingdevelopmentofvalueretail.Pressureoncost,marginsarediff
108、iculttoincreaseandcanonlybeincreasedthroughcostreduction(ratherthanpriceincrease):pricepressureonBaneasa+toughcompetition+needtokeepproductioncostlow(costcuttingandtoughnegotiationwithsuppliers)163WomenswearrepresentsthemajorityoftheFrenchmarketwith51%ofsales.Itwasthestrongestgrowingsegmentaswellast
109、hemostcompetitiveandinnovativeuntil2002.Womenswearisthecorebusiness164Menswearhasexperiencedfastgrowthratesinrecentyearsduetotheintroductionofsemi-annualcollectionsandhasincreaseditsshareofthetotalFrenchclothingmarket(from31%in2002upto35%in2004).Menswearisanewbusinesswithhighgrowthsoabsoluteneedtobe
110、active165Babyandchildrenswearareexpectedtoremainbroadlystable,withupsidecomingfromincreasedspendperchildandtheemergingtrendofhigher-priceddesignerbabyandchildrenswear.Childrenwearisagoodmarketwithhigherconsumerspending166Between2001and2003,out-of-townbannerssawtheirmarketsharedeclinefrom11.9%in2000t
111、o10.9%in2003.Thisreflectedtheimpactofharddiscountretailingandthegrowthofcity-centrebanners.Since2003,however,OOTspecialisedchainshaveregainedshareandhavereturnedto11.7%marketshare,growingby3.9%in2004and4.7%in2005,to3.1billion.Thisdynamismhasbeendrivenbynewstoreopeningsandvolumeincreasessupportedbyin
112、creasedprice-competitiveness.PotentialdeclineofOOT/inconsistentgrowthrate:risk.167Specialistout-of-town(OOT)distributionhasseenthestrongestgrowthinshare(2.3%growthperannumover2003-05and3.2%over1998-2003)andcontinuestogainmarketshareonthefoodretailersandthelower-endcity-centreplayersduetoabroadproduc
113、trangeandlowprices.Footwear:OOThasastronggrowthinshare;OOTiswhereBaneasaisthebestwith45%marketshare(withOsierChaussures,VeloandBlueShoes)whiletheclosestcompetitorhasonly10%.168TheSpanishfootwearmarketismoredynamicthantheFrenchone(3.9%p.agrowthsince2000)butexperiencesthesamevolumeandpricetrendswithvo
114、lumesup6.5%p.awhilepricesdecreasedby2.6%p.alargelydrivenbygrowingAsianimports.Themarketisstilldominatedbyindependentcitycentrestores(40%marketsharevs15%inFrance)andOOTfootwearisgainingshare(8.4%p.abetween1998and2003).Spanishmarket:activemarketatthetimeoftheinvestment(quidnow?)butcitycentreshavemorem
115、arketsharesthanOOT(risk:BaneasaisbetterinOOT).169Suburbanstoresaretypicallylargeformatvaluestoresandaccountforthegreatmajorityofsalesandprofits,whilstcitycentrestoresaremorefashionablepremiumstores.OOTstoresneedhighvolumesalestobeprofitable/citycentresaremorefashionableproductssopotentiallyhighermarginsalthoughprobablyhighercosts(includingmarketingcosts)170Over2003-06,grossmarginhasgrownata9.5%CAGRandEBITDAat16.4%CAGRwhilesalesCAGRwas5.8%,ofwhichlike-for-likesalesgrowthof3.7%.IndicatesthatBaneasahasgrownorganicallyandbyacquisitionsbutacquisitionsarethemaingrowthfactor.171
