private and public equity investing: how do they...
TRANSCRIPT
Private and Public Equity Investing: How do they Diverge?
Michael Miele,
Goldman Sachs Private Equity Group
May 16th 2007
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. For Caesarea Center Conference use only, not for further distribution to the public.
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Private Inv. In Public Co.Going Private Transaction
Going Private
What is Private Equity?
Company Life Cycle
DistressedMatureGrowth /
DevelopmentStart-Up
TurnaroundInvestment
Distressed / Restructuring
Buyout LBO RECAP
Pre-IPO
FinancingGrowth Capital
Late – StageGrowth Fin.
Venture CapitalSeedFinancing
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
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Average Private Equity Managers Tend to Perform in Line with Public Equity Market
Note: Private equity fund returns are compared with 4-year annualized average returns of public funds, realized over a period starting three years after the private equity fund vintage year. This lag and time-averaging is done in order to take into account the private equity investment period and long time-horizon over which private returns are realized. Private equity data is for funds raised between 1990 and 1996. The public data for public fund returns over the years 1993 to 2002. Source: MorningStar (Public equity) and Venture Economics (Private equity)* In US$ terms.
12.6% 12.4%13.5%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Public equity - large
capitalizations
Public equity - small
capitalizations
Private equity
Me
dia
n m
an
ag
er
an
nu
al
pe
rfo
rma
nc
e*
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
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Top Quartile Managers: Private Equity Tends to Add More Value than Public Equity
13%12%
13%
16% 16%
28%
0%
5%
10%
15%
20%
25%
30%
Public equity - large
capitalizations
Public equity - small
capitalizations
Private equity
Av
era
ge
Re
turn
s
Upper QuartileMedian
Dispersion of Manager Performance: Public vs. Private Equity Markets
Note: Private equity fund returns are compared with 4-year annualized average returns of public funds, realized over a period starting three years after the private equity fund vintage year. This lag and time-averaging is done in order to take into account the private equity investment period and long time-horizon over which private returns are realized. Private equity data is for funds raised between 1990 and 1996. The public data for public fund returns over the years 1993 to 2002. Source: MorningStar (Public equity) and Venture Economics (Private equity), gross returns.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
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Manager Selection is Critical
The distribution of returns from private equity suggests that:
• Returns are asymmetrically distributed
• Manager selection is rewarded, not asset allocation
• Investing in a private equity index is neither possible, nor desirable
Source: Goldman Sachs Private Equity Group.Past performance is not indicative of future returns, which may vary. This illustration does not represent the performance of any fund or product managed by GSAM or GS & Co.For illustrative purposes only.
Average Return
Equals Index
Public Equity Markets
Average Return
Target Return
Estimated 10 - 20% of
Private Equity
Managers
Private Equity Markets
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
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Chance
Skill
Company selection
Ability to influence strategy
Financial engineering
Informational advantages
Ability to drive operational improvement
Sourcing
Levers of Value Creation
Private equity managers who take advantage of these sources of returns have potential to offer superior long-term investment performance
relative to public markets.
Private MarketsSources of Value Creation Public Markets
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
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Ability to Influence Strategy
Warner Music Group
Company Description
The world's third-largest recorded music
company and the world's second-largest
music publishing company
Levers of Value Creation
• Hired and replaced the entire executive
management team
• Expanded product offerings, improving the
quality of the core menu
• Closure of a number of underperfoming
franchisees and company owned stores
Levers of Value Creation
• Eliminated multiple music labels
• Aggressively pursued new digital music
distribution model
• Upgraded management and implemented a
meaningful cost reduction program
Burger King
Company Description
The #2 player in the hamburger fast food
segment of the quick service restaurant
industry
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This material has been prepared by GSAM and is not a product of the Goldman Sachs Global Investment Research (GIR) Department. The views and opinions expressed may differ from those of the GIR Department or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.
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Financial Engineering
Texas Genco
Company Description
One of the largest wholesale electric power
generating companies in the U.S.
Seagate Technology
Company Description
Worldwide leader in the design, manufacturing
and marketing of hard disc drives
Levers of Value Creation
• Forward sale of power for multiple years
enabled attractive financing and exit
Levers of Value Creation
• Acquisition of company together with
Veritas in a complex share swap
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This material has been prepared by GSAM and is not a product of the Goldman Sachs Global Investment Research (GIR) Department. The views and opinions expressed may differ from those of the GIR Department or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.
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Informational Advantages
Bare Escentuals
Company Description
Market leader in the fast growing mineral
based cosmetics and skin care category
Levers of Value Creation
• Opportunity not available to public market
investors
• Huron was created in the aftermath of the
Enron/Arthur Andersen scandal
• Grew organically and through acquisition
Huron Consulting
Company Description
Huron provides consulting services to leading
corporate, law firm, and public institution clients
Levers of Value Creation
• Private high growth company unavailable
to public market investors
• Expanded available distribution points by
opening new retail stores, growing
existing wholesale accounts, adding new
wholesale accounts, and growing in
international markets
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This material has been prepared by GSAM and is not a product of the Goldman Sachs Global Investment Research (GIR) Department. The views and opinions expressed may differ from those of the GIR Department or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.
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Ability to Drive Operational Improvement
Hertz
Company Description
The world's largest vehicle rental organization
and the third largest equipment rental
business in North America
VNU (The Nielsen Company)
Company Description
Global information and media company which
employs around 40,000 people
Levers of Value Creation
• Elimination of over 1,500 positions in its first
two phases of productivity and efficiency
initiatives
Levers of Value Creation
• Hired David Calhoun - GE Vice Chairman,
to restructure the company
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This material has been prepared by GSAM and is not a product of the Goldman Sachs Global Investment Research (GIR) Department. The views and opinions expressed may differ from those of the GIR Department or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.
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Private Equity Investing Challenges
• Illiquidity
• Difficulty of Measuring and Benchmarking Performance
• Achieving a Target Allocation
• Portfolio Rebalancing
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
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Private Equity – The Future?
SunGard has 53 research-and-development projects under way, many
of them long-term, compared with about 10 before the takeover.
Cristóbal I. Conde, CEO, SunGard
With private-equity owners, their expectations tend to be even higher than
Wall Street's. David Brandon, CEO, Domino’s Pizza
High debt can lead to a scaled-down executive suite. So top executives
tackle duties typically left to others in a larger corporate setting….You're
going to get involved in things you could never have done in a major
corporation. David Beer, CEO, Bakery Chef
Source: “The Private-Equity CEO: Facing Tough Stakeholders”, The Wall Street Journal, Erin White and Gregory ZuckermanThis material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
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Disclosures
This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell
securities.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any
security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as
investment advice.
Furthermore no action has been or will be taken in Israel that would permit a public offering of the interests or a distribution of this presentation to
the public in Israel. GSAMI will obtain warranties from each offeree that it is purchasing an interest for investment purposes only and not for
purposes of resale.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an
employee, officer, director, or authorized agent of the recipient, without GSAM’s prior written consent.
Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go
down as well as up. Future returns are not guaranteed, and a loss of principal may occur.
The information in this document is for informational purposes only, and it highlights certain investment products that the Private Equity Group
offers. It does not constitute an offer to sell, or a solicitation of an offer to buy, any products referenced herein. Any such offering will be made only
in accordance with the terms and conditions set forth in the Private Placement Memorandum or Offering Memorandum for the Fund.
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Copyright © 2007, Goldman, Sachs & Co. All rights reserved. Ref# 07/1388