private equity. history of pe american research and development corporation (1946) investment in...
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Private Equity
History of PE
American Research and Development Corporation (1946)
Investment in Digital Equipment
Annualized return on capital of 101%
$70,000 > $355 Million
Panic of 1893
US relied heavily on high commodity prices
Argentina – failure of wheat (1890)
Run on gold
Railroad overextension
Union Pacific
Badly run railroad
Cheaply built with corrupt officials
E.H. Harriman (with the help of Kuhn Loeb)
Converted to cash cow
First Leveraged Buyout
1901 JP Morgan & Co.
Bought out Carnegie Steel for $480 Million (This would be equivalent to $15 Billion in today’s dollars)
New company Capital = $1.4 Billion
US Government Spending = $524 Million
Fun Fact: Carnegie + Rockefeller + Vanderbilt = > $1Trillion in net worth
Glass Steagall Act
1933 – In the wake of Great Depression and bank failure
Separated Investment and Commercial Banking
Kept large banks out of PE space
Only smaller deals
Kohlberg Kravis Roberts
Known today as KKR
Created in 1978
Partners from Bear Sterns
Smaller/family deals
Gibson Greeting
Producer of greeting cards
$80 Million of which $1 Million was cash
One investor (William E. Simmon) made $66 Million
Caught attention of others
RJR Nabisco
Culmination of 80’s boom
KKR acquired RJR for $31.1 Billion
Deal eventually went bust
Trend arose of failed LBOs
PE industry went quiet
Second Boom
1993-2003
New degree of respectability and legitimacy
Companies focused on attractive deals
What is Private Equity?
Equity capital not quoted on public exchange
Two paths Directly into private companies Buyout of public company (delisting)
Raising Funds
Retail and institutional investors
Four uses for cash R&D in existing company Expand working capital Making acquisitions Strengthening balance sheet
Layout
Types of Funds
LBO
Venture Capital
Growth Equity
Fund of Funds
Mezzanine Capital
Distressed PE
Secondaries
LBO – Leveraged Buyout Fund
Investor + Borrowed
Financial Leverage
Majority Position
Controls firm’s strategy
LBO
Usually 90% debt to 10% equity
Collateral Component
Hostile Takeover
Risk – who goes bankrupt?
Venture Capital
Money provided to startup firms
Significant long-term growth potential
High risk
Above average returns
When does the money come?
Growth Equity
Mature companies
No future capital requirements
Minority stake
Company with little debt
Invest at inflection point
Fund of Funds
Fund doesn’t invest in companies directly
Buys into portfolio of other PE firms
Allows for greater diversification
Fee charged (Professional portfolio management)
Mezzanine Capital
Halfway between debt and equity
Subordinated notes
Preferred stock
Hybrid financing
Higher returns than debt, lower risk than equity
Mezzanine Financing
Distressed PE
Serious financial difficulty
Funds can buy shares cheaply
Restructuring
Breakdown of Distressed PE
Secondaries
Buy commitments from PE
Turn a profit on positions
Sometimes buy companies or assets from PE firms
Industry Analysis
PE firms boom and bust (Cyclical) Why?
Debt
Marco-economic trends
Short on capital
Fully Saturated Industry
Relative Size of PE
Deal Value & CAGR
Capital Raised by PE
Buyout-Backed Exits
Last year’s data
Exits by Investment Length
PE Life Cycle
Next Week
Come in with an investment idea
You will be pitching your stock to the group
You can use a PPT to present
We will be tracking these over the next quarter
Thank you!