Transcript Document 7426365

The Private Equity Play
Mike Lorelli
EBITDA
Earnings Before:
• Interest
• Taxes
• Depreciation
• Amortization
2
Stages
Idea
Up & Running
Mature
• Trailing EBITDA
VC
PE
3
Agenda
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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
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
Value Creation
Value Creation
Value Creation
100%
90%
32%
25%
80%
70%
51%
60%
39%
50%
40%
30%
46%
31%
36%
20%
22%
10%
18%
0%
Leverage era (1980s)
Multiple Expansion
era (1990s)
Operational improvement
Multiple arbitrage
Earnings growth
era (2000s)
Operational improvement
era (2010s)
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
Returns Comparisons
10
Percentage of Capital by LP type
LBO Funds
11
12
The “Vintage Year”
13
‘Add-On’s now fully half of Deals
14
LP’s pushing for Exits (i.e. distributions)
15
1/4th of Exits are now to another p.e. firm
16
Geography
Private Equity Firms
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
States
New York
California
Illinois
Texas
Massachusetts
Connecticut
Pennsylvania
Virginia
Florida
Michigan
Ohio
Colorado
North Carolina
New Jersey
Georgia
Washington DC
Minnesota
Maryland
Indiana
Wisconsin
% of
total
23.3%
15.1%
9.4%
7.4%
7.0%
6.5%
3.7%
2.4%
2.2%
2.0%
2.0%
1.9%
1.9%
1.8%
1.7%
1.6%
1.6%
1.4%
0.8%
0.8%
Portfolio Companies
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
States
California
Texas
New York
Massachusetts
Florida
Pennsylvania
Illinois
New Jersey
Georgia
Ohio
Colorado
North Carolina
Virginia
Minnesota
Michigan
Washington
Connecticut
Maryland
Wisconsin
Tennessee
% of
total
18.8%
8.8%
6.6%
5.9%
4.5%
4.2%
4.2%
3.7%
3.2%
3.0%
2.7%
2.5%
2.4%
2.2%
2.0%
2.0%
1.9%
1.9%
1.8%
1.8%
Sample Size: 1,000+ private equity firms, 10,000+ portfolio companies
17
Many ways to categorize the 1,800

By size
•
•
•

$1 billion+ revenues
> $150 million
< $150 million
By sector specialty
•
•
•
•
•

Large
Mid-market
Small
Health care
Consumer
IT
Financial services
etc.
Net-net, sector first; and mid-market; not lower or
upper
18
Excellent
19
Don’t unnecessarily limit where you can play
20
Top Fund Managers
Rank
Firm
City
Capital ($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
21
Top 12 p.e. Investors in 2012
22
The LBO model

Purchase
•
•
•
7.0 X $9m = $63
Cash
27
Debt
36

Sale
•
8.0 X $14.1m = $113
•
Debt
Proceeds
•
32
81
23
The LBO model

Purchase
•
•
•
7.0 X $9m = $63
Cash
27
Debt
36

Sale
•
8.0 X $14.1m = $113
•
Debt
Proceeds
•
32
81
= 3.0 X cash-on-cash
24
The p.e. / L.P Model
Pelosi 2008 Fund
Sale
A
D
F
C
E
B
F
C
A
Purchase
D
I
G
J
H
B
E
2008
2009
2010
2011
2012
2013
2014
2015
2016
The p.e. / L.P Model
Pelosi 2008 Fund
Sale
A
D
F
C
E
B
F
C
A
D
B
J
G
H
2011
2012
I
E
Purchase
2008
2009
2010
Invest
2013
2014
2015
2016
2017
Harvest
26
A lot of fish vs. Fortune 1,000 and Russell 2,000
28
p.e. Compensation

2% of managed capital
•

pays salaries, rent, and nominal bonuses
20% carried interest from profits on distributions*
* pre-Obama
29
Performance Measures



IRR
Cash-on-cash return
Hold period
Good Great Awesome
20% 28%
33+%
2X
3X
5+X
8+ years 6 years 3- years
30
Buyout Fund Sample
Partnership/Year
Capital
Committed (M)
Capital
Cont. (M)
Oregon State Treasury
Dist. As of
(M)
Net IRR
As of (%)
12/31/12
12/31/12
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
$400.0
$532.3
$778.8
19.3
$1,000.0
$1,308.8
$1,064.2
17.9
$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
$75.0
$74.1
$21.1
11.1
KKR European Fund LP/1999
KKR Millennium Fund LP/2002
Lion Capital Fund I LP/2004
HarbourVest Partners 2004 Direct Fund/2004
31
A typical 10 company fund result
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

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
2
1
2
3
2
out-of-the-park
triple
doubles
singles
the bank took the car keys
32
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
The Funnel
300 teasers
100 books
20 Meetings with Mgmt
7 LOI’s
2 due diligence
1 close
34
Options for Executives Working with Private Equity
Operating Partner
salary+bonus+carry
Portfolio Company Management
salary+bonus+equity
Fund
Commitment
Deal Executive / Executive in Residence
retainer+upside
Advisor
expenses+upside
Expert Network / Interim Executive
hourly comp
Executive’s Income
35
David Teten, www.Teten.com/executive
Who the p.e. wants to meet
TargetDriven Deal
Exec
Thesis-Driven
Deal Exec
Deal Resource
Job Seekers
Source: Andy Thompson, Notch Partners
36
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
The Three Primary Return Drivers
Leverage
 Value Improvement: EBITDA Growth
 Exit Multiple Expansion

Courtesy: Wind Point Partners
38
The Deal
Project NTL
Offer:
Sept 1st, 2007
$55 million for 75% of the company + $34 million debt, implies $107 million
Bank Adj.
2007 Adjusted EBITDA
EBITDA Multiple
Offer Price
Company Debt
Current Equity
+$4.0 excesses
12,744
16,744
8.4x
6.41x
107,333 107,333
34,000
34,000
73,333
73,333
Current Owner Proceeds
55,000
new p.e. $
Equity Rollover
Total Post-Deal Equity
35,000
11,667
46,667
75%
25%
100.0%
Sources
Debt Financing
new p.e. Equity
Total Sources:
Uses
Payment to 5 owners
Refinancing of Debt
Estimated Fees and Expenses
Total Uses:
58,000
35,000
93,000
55,000
34,000
4,000
93,000
? equity
Year 3 Ownership
new p.e.
10,782 Current Owners
5,881 Immediate skin in game
3,921 3 year option program
4,313
1,176
1,176
1,176
980
29,406
196,039
Management:
of 15.0 pts 2.5%now
Mike Lorelli
0.0550
672
CFO
0.0300
367
EVP
0.0200
244
V.P. and GC
0.0220
269
R&D
0.0060
73
Sub. GM
0.0060
73
CMO (new hire)
0.0060
73
VP Supply Chain (new hire)
0.0050
61
Total Management
0.1500
1,833
2011
63.8%
21.3%
2.5%
12.5%
100.0%
2006 EBITDA
Debt Multiple
3.46x
2008
17,840
2009
23,700
2010
29,300
Interest @ 12%
(6,553)
(5,645)
(4,450)
Taxes % 40%
(4,515)
(7,222)
(9,940)
Capex
(2,500)
(2,500)
(2,500)
Debt Pay
(6,788)
(8,333)
(11,591)
EBITDA
2007
12,744
Cash Flow
0.0
0.0
0.0
Cash
0
Debt
58,000
51,212
42,877
31,286
Net Debt
58,000
51,212
42,877
31,286
Exit EV
0.0
0.0
0.0
142,720
189,600
234,400
Exit Equity
91,508
146,723
203,114
Equity to p.e.
58,336
93,536
129,485
19,445
74,445
31,179
86,179
50,920
105,920
Equity to 5 owners
Total cash to 5 owners
p.e. cash
IRR (5 years)
Exit multiple
8
The Plan

Fleshed out approach for how value will be created
•

Rapid change principles
•

Strategic and operational blueprint
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
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.
Project NTL
P&L
Net Sales
August 9th, 2007
2004
108,874
Base business
Int'l
Water
Teas & Herbs
Gross Profit
R&D
Selling
Shipping & dist.
Mktg G&A
Adv. & Promo.
Bus. Planning
Consumer Aff.
Executive
Finance
General Office
HR
IT
ISI/N2U
Legal
Order Entry
Other expense
Production
Purchasing
Rebus
Regulatory
Corporate M&A
int'l sales expansion
G&Aalloc toCOG
Total Op. exp.
%
100.0%
2005
%
118,293 100.0%
98,193
10,800
0
9,300
45,436
2,192
16,624
5,022
1,607
5,445
493
132
9,172
2,010
1,543
709
3,058
282
1,494
284
1,458
365
1,092
2,259
0
0
0
(3,145)
52,147
2006
%
113,168 100.0%
97,768
8,000
0
7,400
38.4%
1.9%
14.1%
4.2%
1.4%
4.6%
0.4%
0.1%
7.8%
1.7%
1.3%
0.6%
2.6%
0.2%
1.3%
0.2%
1.2%
0.3%
0.9%
1.9%
0.0%
0.0%
0.0%
-2.7%
44.1%
48,829 43.1%
1,923
1.7%
13,783 12.2%
4,411
3.9%
147
0.1%
2,438
2.2%
0
0.0%
140
0.1%
6,596
5.8%
2,633
2.3%
1,809
1.6%
818
0.7%
2,921
2.6%
549
0.5%
1,949
1.7%
255
0.2%
2,509
2.2%
534
0.5%
860
0.8%
807
0.7%
158
0.1%
308
0.3%
0
0.0%
(3,407) -3.0%
42,952 38.0%
2007 est
%
ProFormaEBITDA
58
0.0%
10,101
8.5%
167
0.1%
(16,921) -14.3%
2,897
2.4%
(3,814) -3.2%
4,505
3.8%
690
0.6%
0.0%
18
0.0%
12,594 11.1%
(330) -0.3%
(6,535) -5.8%
3,457
3.1%
9,334
8.2%
3,729
3.3%
13,065 11.5%
4,000
3.5%
17,065 15.1%
%
2009
%
2010
%
100.0%
115,579 100.0%
136,000 100.0%
150,000 100.0%
175,000
100,579
7,000
1,000
7,000
109,000
12,000
5,000
10,000
115,000
15,000
7,000
13,000
125,000
21,000
12,000
17,000
53,124 46.0%
1,919
1.7%
13,298 11.5%
4,411
3.8%
2,700
2.3%
4,600
4.0%
0
0.0%
125
0.1%
6,307
5.5%
2,529
2.2%
2,071
1.8%
830
0.7%
2,291
2.0%
547
0.5%
1,783
1.5%
249
0.2%
7,819
6.8%
313
0.3%
761
0.7%
459
0.4%
180
0.2%
215
0.2%
536
0.5%
(3,472) -3.0%
51,920 44.9%
∆ GrossMargin-OpExp
Int. income
Interest exp.
Other Exp (Inc.)
Net Income
Dep. & Amort.
EBITDA
adjustments
BankAdj.EBITDA
-excessive Mgt.
2008
0
0.0%
11,825 10.2%
350
0.3%
(10,970) -9.5%
3,721
3.2%
4,925
4.3%
7,819
6.8%
12,744 11.0%
4,000
3.5%
16,744 14.5%
65,280
48.0%
73,500
49.0%
87,500
50.00%
54,400
40.0%
58,000
38.7%
64,000
36.60%
+9,046
+13,666
21,000
25,000
25,000
18.4%
29,000
+21,666
33,000
19.3%
37,000
21.1%
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
Components of Equity Value Creation
As EBITDA grows, the value of the enterprise increases.
At the same time, free cash flow reduces debt.
$ millions
EBITDA
Exit Value (5.5x EBITDA)
Cash Available for Debt Pay down
Net Debt
At Close
Y1
Y2
Y3
Y4
Y5
25.2
138.6
27.5
151.5
30.1
165.5
32.9
180.7
35.9
197.2
39.1
215.2
100.8
7.9
92.9
9.6
83.2
11.5
71.7
13.6
58.1
15.8
42.4
Courtesy: Wind Point Partners
A word on covenants





Max Capital expenditure
Min LTM EBITDA
Fixed Charge Coverage
Total Deb Leverage
Maximum Senior Leverage
$1.5 million
11.0 million
1.00x
3.75x
4.50x
45
46
WSJ
47
Private Equity Analyst- November 2012
48
Private Equity Analyst- November 2012
49
The Trades
50
The Importance of a Killer LinkedIn Profile

50% of candidates are
found via LinkedIn

Or they will at least check you
out
51
140 million LinkedIn members
Killer*
Outstanding
Excellent
Very Good
Above average
slightly above average
below average
You and 99
You and 199
You and 499
You and 999
You and 1,999
You and 3,999
You and 6,999
14,000 serious C-Level Candidates = .0001
52
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
53
LinkedIn Profile
54
Q &A
Visit www.linkedin.com/in/mikelorelli
Mike Lorelli
(203) 655-2444
[email protected]
55
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 06820
Office:
203 655-2444
FAX:
203 655-6916
Email:
[email protected]
Website: www.Lorelli.net
www.LinkedIn.com/in/MikeLorelli
http://www.gplus.to/MikeLorelli
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 Kelco, 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.
Leading The World In Burn Care
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