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Introduction to

Private Equity

Errol DanzigerDanziger Capital Partners LLP

October 2011

Version 2

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This Presentation covers

Three Topics…

• What is private equity?

• How does private equity differ from other investment models?

• How does private equity boost corporate performance and enhance investor returns?

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Wealth Creation through Private Equity

• Wealth creation through the private equity investment model can be impressive, and sometimes even spectacular

• Although average private equity returns have been shown to track but not exceed the S&P 500, some private equity investments have greatly outperformed other types of investment

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KKR’s Acquisition of Duracell

1.82.4

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$ billions

Investor value

Acquisitionprice

Bank depositat 5%

Selling price

Source: McKinsey

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Desai Capital’s Acquisition of Sunglass Hut

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10%

20%

30%

40%

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100%

Value

Operatingimprovements

Leverage

Industry gain

Market gain

Cost

Source: McKinsey

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Scale of Private Equity Investment Globally

Source: TheCityJK

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Scale of Private Equity Investment in the United Kingdom

Source: TheCityJK

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Scale of Private Equity Investment -Key statistics

Global

• Total funds under management - $2.4 trillion (of which cash is $1 trillion

• New Investments in 2010 - $180 billion

• Exits in 2010 - $232 billion

• New funds raised in 2010 - $150 billion

United Kingdom

� New investments in 2010 - £20.5 billion

� Number of companies receiving private equity investment in 2010 – 1,073

� New funds raised in 2010 - £6.6 billion

Source: TheCityJK

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Scale of Private Equity Investment Global Fundraising

Source: Financial Times

28 September 2011

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2001 2003 2005 2007 2009 2011

Capital raised ($billions)

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Scale of Private Equity Investment Number of Funds

Source: Financial Times

28 September 2011

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2001 2003 2005 2007 2009 2011

Number offunds

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Scale of Private Equity Investment Value of Global LBOs

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2001 2003 2005 2007 2009 2011

Value of LBOs($ billions)

Source: Financial Times

28 September 2011

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Scale of Private Equity Investment Number of Global LBOs

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2001 2003 2005 2007 2009 2011

Number ofdeals

Source: Financial Times

28 September 2011

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Objectives of Private Equity Investment

• Improvements in operating efficiency

• Increases in manufacturing and service productivity

• Increases in shareholder value

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The Private Equity Investment Model

• Resolves public company conflicts of interest

• Helps overcome the failure of public company controls

• Conflicts of interest in the public company have notbeen controlled by –

1. Internal controls, including boards of directors

2. Product markets

• but have been controlled to some extent by capital markets

• Activist investors have intervened and the result has been the development of private equity

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The Strategy of Private Equity

Fund founded by specialist investors

Raises debt and equity capital

Buys out listed and unlisted targets

Takes the listed targets private

Restructures the targets

Exits through sale or IPO

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The Structure of Private Equity

1. Funds

2. Debt

3. Partnership

4. Manager-held equity

5. Institutional investors

6. Management incentives

7. Decentralisation

8. No cross-subsidisation

9. Limited lifespan

10. Targets taken private

The legal and economic structure is made up of these factors and elements

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Public Company Structure Diagram

Director pay: performance sensitivity is small

CEO pay:performance sensitivity is small

Headquarters staff in the 1,000s

Divisional head pay:performance sensitivity is tiny

Board of Directors

CEOCorporate Headquarters

Division1

Division2

Division3

Division4

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Private Equity Structure Diagram

CEO pay:performance sensitivity is big

Headquarters staff in the 10s

LBO target CEO pay:performance sensitivity is big

Partnership Headquarters

LBO target1

LBO target 2

LBO target 3

LBO target4

Limited Partnership

Buyout Fund

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Private Equity Investment Targets

1. Poor management

2. Under-investment

3. Over-investment

4. Strategic neglect

5. Inadequate debt financing

6. Excessive debt financing

7. Incorrect financing mix

8. Excessive cash holdings

9. Excessive conglomeration

Private Equity pursues corporate targets that are underperforming or are undervalued, and that have these features:

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How Private Equity Boosts Corporate Performance

1. Assets in place

2. Redeployment

3. Operating efficiency

4. Tax burden

5. Capital maintenance, working capital

6. Expected growth

7. New investments

8. Existing assets

9. Period of high growth

10. Cost of financing

11. Less discretionary

12. Operating leverage

13. Financing mix

14. Matching

15. Non-operating assets

16. Acquisitions

By focusing on the following factors -

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Features of Private Equity Target Performance

1. Target shareholders gain from leveraged buyouts of target companies

2. Private equity gains are not at made at the expense of other constituencies

3. Leveraged buyouts boost target operating efficiency

4. Private Equity gains are not subsidised by tax system through interest deductibility

5. Private Equity targets taken private are seldom taken public again

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How Private Equity Achieves Outperformance

1. Cash retention is minimised and excess cash is distributed promptly to investors

2. Capital structure is optimised to minimise cost of capital

3. An operating plan is developed and followed rigorously

4. Target company management is heavily incentivised to perform

5. Target company directors play an active and ongoing role in operational management

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