Transcript Joseph V. Rizzi Amsterdam Institute of Finance
Joseph V. Rizzi Amsterdam Institute of Finance December, 2013
Stone Age (1974-84) Bronze Age Silver Age (1985-90) (1990-2000) Cottage Industry KKR Bootstrap deals High Yield Golden Age Back-to-the-Future (2002-07) (2008 - ??) Fund proliferation Goes global Shakeout/consolidation Represents 40% higher equity levels of M&A smaller deals Mega Funds Operating improvements focus. Increase in PIPE and minority interests Regulation
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Macro Uncertainty Banks CLO IPO Window
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Volumes – Leveraged Finance Volume < 1-1-13 – 10-31-13 2012 LBO Loan Volume 4.0B
Non LBO Loan Volume 20.86B
Total € 24.9B
Senior Sec Bds Senior Unsec Bds Subord Bds Total Mez Total 13.3B
16.6B
0.6B
€ 30.5B
€ 1.0B
€ 56.4B
% Mkt 7% 37% 24% 29% 1% 2013 18.0B
30.5B
44% € 58.4B
28.6B
26.3B
4.9B
54% € 61.8B
1.8% 0.1B
€120.4B
% Mkt YOYΔ 15% 368% 33% 90% 49% 135% 24% 24% 4% 51% 115% 71% 656% 102% 0.2% <81%> 113%
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3 Q 13
Strongest Quarter in 3 yrs Germany leading - € 98 double UK; France and Sweden weak Springer ISTA - BC Partners - CVC - € 3.3B
- € 3.1B
CeramTec - Cinven Pipeline - € 1.49B
Exits – ATC – Hg Capital € 300 mln trade sale
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UK Germany Netherlands France U.S.
Denmark Poland Luxembourg Sweden Norway Italy 26.5% 18.2% 15.7% 10.5% 9.3% 5.3% 5.0% 1.7% 1.7% 2.6% 1.5% Source Standard & Poor’s Financial Services LLC. All rights reserved
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Most Active Sponsors Sponsor CVC Carlyle Group Bain Capital Advent International BC Partners Cinven Ltd Bridgepoint Capital Kolhberg, Kravis & Roberts Permira Charterhouse Equity Partners PAI Management Joh. A. Benckiser 3i plc Golden Gate Capital Insight Ventures Clayton, Dubilier & Rice Silver Lake Partners Pamplona Capital Management EQT Partners Blackstone Group Investcorp OMERS Capital Partners Nordic Capital TowerBrook Capital Partners Cobepa Share 8.62% 8.62% 6.90% 5.17% 3.45% 3.45% 3.45% 3.45% 3.45% 3.45% 3.45% 1.72% 1.72% 1.72% 1.72% 1.72% 1.72% 1.72% 1.72% 1.72% 1.72% 1.72% 1.72% 1.72% 1.72% 7
RC T / LA T / LB 2L Other
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Europe 10.7% 22 % 62.6% 0.4% 4.3% U.S.
16.1% 1.1% 71.7% 10.9% 0.2% Source: Standard & Poor’s Financial Services LLC. All rights reserved 8
Volume (€) ◦ ◦ ◦ ◦ ◦ ◦ ◦ 2000 – 1.35B
2001 – 5.24B
2002 – 3.09B
2003 – 3.68B
2004 – 5.92B
2005 – 11.05B
2006 – 35.49B
2007 – 32.20B
2008 – 11.18B
2009 – 0.38B
2010 – 1.41B
2011 – 0.86B
2012 0 2013 (Jan-Oct) 4.83B
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Source: Standard & Poor’s Financial Services LLC. All rights reserved 9
Structure and Spreads Pre Crisis – Post Crisis – 70% 10% 3% 7% 90% Bid / Ask (% of Par) 4 Q 13 4 Q 12 4 Q 11 Bid 100 96 91 AAA -< 50 BP AA A BBB AAA - > 125 BP Ask 101 97 94 Source: Standard & Poor’s Financial Services LLC. All rights reserved
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2013 (9 mo.) 2012 2011 2010 2009 2008 2007 2006 2005
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58.9
29.0
43.9
39.4
5.0
69.3
152.3
164.5
110.0
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PE Firm General Limited Seller Financing Banks CLO Bonds Mez Professionals Lawyers Accountants Advisers
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Institution Investors European Banks U.S. Banks Securities Firms Asian Banks Canadian Banks Other Banks
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47.4% 37.3% 5.5% 5.1% 2.9% 1.2% 0.6%
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Asset Classes Sovereign Corporate Equity Alternatives Styles Value Momentum Carry Volatility Risks Economic Growth Inflation Liquidity Tail
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Fund manager General Partner Carried interest partner LP A
FUND
LP B LP C CLO Hedge funds Investment Leverage finance syndicate participants Bridge finance Syndicate participants Nominee Investment Bank FLL SLL Investment Hold Co.
Hold Co.
Operating Entity Investment High Yield Investors Mezzanine Investors US Investors US Exempt Investors Non-US Investors Amsterdam Institute of Finance December, 2013
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EBITDA of Acquired Firm Sale value @ 8 x EBITDA Financing Plan: Equity @ .20
Debt @ .80
Total Capital Raised Fees Net Sale Proceeds on Exit Original Debt Less: Debt pay down over 5 years Debt at end of 5 years Return of Original Equity Net gain to be allocated 10% to mgmt options 20% to general partner 70% to limited partners Total Now 125 1,000 200 800 1,000 30 - $ millions In 5 yrs 188 (c) 1,500 50 1,450 -540 -200 710 71(a) 142 497 (b) 710 800 260 540 (a) Share to CEO Share to next 4 senior officers Share to next 8 key players Total Management share 2% points 1% points 1/2% points or $14.2 x 1 = $14.2
or $ 7.1 x 4 = $28.4 or $ 3.6 x 8 = $28.4 $71.0
(b) Equals a 28.4% compound annual rate of return on investment.
(c) Assumes $12 taken out of cost structure immediately and 6.5% growth/year in EBITDA thereafter.
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Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions Transaction Harvard Business School case 9-206-1 Rev 10/16/06 16
Tax – Legal – Accounting Knowledge Network Management Industry Expertise Corporate Finance Delivery Fund Raising Investing Managing/ Monitoring Exit VALUE
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• Increased Debt (lower taxes) • Bargain Purchase • Operating Improvements • Improved Governance • Bondholder Value transfer • Opportunistic Sale • Restructuring Skills
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Focus on return: what is the maximum price I can pay based on given set uf projection and earn X% return?
Tradition Valuation = Projected cash flows Discounted rate Terminal value LBO Prespective = Purchase Price IRR (Equity discount rate) Projected cash flows Sale Price (Terminal Value)
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DCF Net Income + Dep/Amt +/_ Change in deferred taxes +/- Other noncash items +/- Change in working capital Cash flow from operations +After tax interest CAPEX Unleveraged FCF CFADS Net Income Dep/Amt Change in deferred taxes Other non cash changes Change in working capital Cash flow from operations No interest expense adjustment Capex CFADS
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IRR 10% 20% 30% 40% 50% Equivalent MOC Over 6 Years 1.8X
3.0X
4.8X
7.5X
11.4X
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Bull Market Menu • Holding Company PIK • Tranche Term Loans • Covenant Light • High Yield Debt • Bridge Loans • Second Lien • Hybrid Preferred • Cross Lien Facilities • Asset Carve-outs • OPCO/PROPCO • Recapitalizations Issuer Friendly
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As the credit curve shifts, the menu that is available to Issuers / Arrangers changes Bear Market Menu • Stretch Senior • Seller Notes • Senior Notes • Private Placements • Equity • R/C Lite • Mezzanine • Smaller • floors • Sweeps • Prepayment penalties • covenants Investor Friendly 22
Fixing the Broken Deal – Price and Structural Flex
Increase spread Original issue discount Eliminate PIK Reduce debt Add a subordinate tranche More equity Add covenants Reduce Price Seller Paper
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Credit Accounting Tax Regulation Excess Capacity Fundraising Fund Structure Returns LPs Public GPs
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Fundraising 2013 (9 mo) 69 2012 2011 2010 2009 2008 2007 2006 64 50 44 65 111 Dry Powder 190 175 175 175 200 200 190 150
Source: Standard & Poor’s Financial Services
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Deals chase money Superior returns Attracts capital Macro Disappoint returns Impacts fundraising Financial Markets Deal market Capital chasings deals
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