private equity as an asset class
DESCRIPTION
Private Equity as an asset class. Stage of Company / Control. Startup. Mature. Private Equity is the asset class that purchases an equity stake in a company that is not publicly traded on a stock exchange - PowerPoint PPT PresentationTRANSCRIPT
• Private Equity is the asset class that purchases an equity stake in a company that is not publicly traded on a stock exchange
• The PE landscape can be broken down by the varying strategies based on the ownership/control, mix of debt & equity, stage of company, risk/reward, etc.
Private Equity as an asset class
VentureCapital Mid-MarketPrivate Equity LeveragedBuyoutAngelInvesting GrowthCapital Distressed
Stage of Company / ControlStartup Mature
Lines are blurring as VCs are investing in earlier and later-stage companies
Private Equity Overview
IntroductionBackground – Mo Yang
• •BU SMG Class of 2009• •J.P. Morgan – Analyst
o •Healthcare Investment Banking (NY)• •Cressey & Company LP – Associate
o •Private equity firm focused on investing and building leading healthcare businesseso •Successor fund of GTCR and Thoma Cresseyo •Based in Chicago, IL and Nashville, TN with over $1bn of committed equity capital
Background – Carolyn Arida• BU CAS and SMG Class of 2009• GE Energy Financial Services – Senior Analyst
o Domestic Power and Renewables Underwritingo Based in Stamford, CT, with over $20bn of committed debt and equity capital
What is private equity?
• •An asset class that consists of equity investments in companies that are not publicly traded
• •Investment strategies include: leveraged buyout, venture capital, growth capital, distressed investments, PIPEs, mezzanine capital
• •“Private equity” generally refers to later-stage investments• •Typically control investments with management teams as partners• •Private equity firms invest on behalf of Limited Partners (“LPs”) over a 3-7 year
investment horizon
How do PE firms generate/realize returns?
• •Returns on private equity investments are created througho •Multiple expansiono •Operational improvements – topline growth / margin improvementso •Leverage
• •Strategies to drive returns: acquisitions, de-novos, financial engineering, etc.• •Exit strategies:
o •Sale to strategic/sponsoro •IPOo •Levered recap
Types of private equity firms“Mega funds”: Multi-billion dollar funds that invest across all industries
• •Invests in mature companies with strong cash flows via leveraged buyouts• •Examples: Blackstone, KKR, Carlyle, TPG, etc.
Middle-market: $500mm to $5bn funds that invest within specific sector or across all industries• •Typically invests in small to mid-cap companies via equity commitments ranging from $25mm to
$100mm• •Examples: Advent International, Golden Gate, Avista Capital, HIG Capital, etc.
Growth equity: funds that invest in earlier-stage companies• •Typically invests in smaller targets via platform or “build-and-buy” investing• •Examples: General Atlantic, TA Associates, Summit Partners, etc.
Sector-specific: funds that invest in one or two industries• •Typically middle-market / growth equity or distressed• •Examples: Silver Lake (tech), Lone Star (financials / real estate), Cressey & Co. (Healthcare), Energy
Capital Partners (Power)Financial Institutions: private equity subsidiaries that invest across all industries
• •Typically invest in mid-stage to mature companies with commitments ranging from $25mm to $1bn with more of a net income focus than other shops
• •Examples: GE Capital, Goldman Sachs, Barclays, etc.
Private equity landscape
Stage of Company / Strategy
“Equity
check” size
Mature / LBOEarly-stage / Growth
“Mega-funds”
Middle-market
Growth equity
Financial institution-backed
Private equity market overview
Note: $ in billions
Note: $ in billions; excludes venture capital, real estate and other funds
• •Need to deploy capital is the big theme in PE• •More demand than supply of assets• •Valuations are being driven higher• •Low PE fundraising activity
Private equity market overview
• •Investment professionals spending more time on diligence and evaluating investment opportunities vs. fundraising and portfolio company management
• •1st half of 2011 activity impacted by volatile credit markets• •Lots of activity expected in 2nd half of 2011 and 2012
Life of a private equity associateResponsibilities of a private equity associate:• •Evaluate new investment ideas (modeling, investment memos, due diligence)• •Perform valuation analyses of potential targets and portfolio companies• •Attend portfolio company board meetings• •Evaluate and manage portfolio company divestiture and acquisition processes• •Execute exit transactions (sale, IPOs, recaps) and acquisitions• •Attend industry conferences and meet with potential target management teams• •Coordinate with portfolio company management, bankers, lawyers, etc.
Lifestyle of a private equity associate:• •Hours: depends on the firm…• •Less structure / more control over hours, deadlines, etc.• •Formal lunches, dinners, etc.• •Traveling
Career in private equity
What do private equity firms look for?• •Most firms typically require background experience in investment banking or consulting for
pre-MBAs• •Strong analytical / modeling skills (excel modeling test)• •Excellent communication skills
PE associate program overview• •Typically two-year commitment for pre-MBAs• •Some firms offer ability to stay without MBA or return post-MBA• •Ability to co-invest available at certain firms
Life after private equity• •Top-tier business school• •Lateral to other PE shops, hedge funds, etc.
Venture Capital Overview
Introduction
Background – Michael Glick• •BU SMG Class of 2006• •Merrill Lynch Technology Investment Banking - Analyst• •Safeguard Scientifics – Associate
o •58 Year-old Venture Firm Investing in Technology & Life Scienceso •Publicly Traded (NYSE: SFE) o •~$500mm Fund
• •Vocap Ventures – Senior Associateo •Newly Formed Early-Stage Venture Fund focused on Software & Internet Companies
• Private Equity is the asset class that purchases an equity stake in a company that is not publicly traded on a stock exchange
• The PE landscape can be broken down by the varying strategies based on the ownership/control, mix of debt & equity, stage of company, risk/reward, etc.
Venture Capital: Subset of The Private Equity Asset Class
VentureCapital Mid-MarketPrivate Equity LeveragedBuyoutAngelInvesting GrowthCapital Distressed
Stage of Company / ControlStartup Mature
Lines are blurring as VCs are investing in earlier and later-stage companies
• Deploys capital directly into private companies to fund growth• Value creation vs. financial engineering• Purchase a minority stake vs. majority stake• VCs take an active role supporting portfolio companies by assisting with:
o Development of strategyo Hiring/building out the management teamo Making introductionso Future financingo Tuck-in acquisitionso Exit strategy
What is Venture Capital?
Why is Venture Capital Exciting?
The Tech Bubble
Venture Capital Investment
$ Billions
*Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.
Flow of Funds
VC Funds
LPs (Limited Partners)* Endowments, Pension Funds, Fund of
Funds
VC Firms / GPs (General Partners)*Manage Multiple Funds
Portfolio Companies
Exits (IPO or M&A)
Profile of 2009 VC Investments: Industry
*Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.
Profile of 2009 VC Investments: Stage
*Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.
• Early-Stageo Seed: Deployment of a relatively small amount of capital for the entrepreneur / company to prove out a concept
before qualifying for Start-up financing Product Development, Market Research, Build Management Team, Develop a Business Plan
o Start-up: Complete development of product & initial marketing efforts. o Technology / product / market risk
• Growth-Stageo Capital for initial expansion – sales & marketing, continued technology development, hiring, and working capitalo Risk migrates from technology / product risk to execution / market risk
• Later-Stageo After companies have proven their ability to execute at a limited scale they will look to raise a larger round of
capital to scale the business while continuing to fund sales & marketingo Ultimately this stage of financing should enable the company to position themselves for an exit
Stages of Companies
Profile of 2009 VC Investments: Geographic
*Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.
Profile of VC Investments: Internet & Clean TechInternet Clean Tech
*Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.
Profile of VC Firms
Summary StatisticsDistribution of FirmsBy Assets Under
Management 2009
*Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.
$ in Millions
Landscape of Digital Media Focused Firms
The Reason To Play The Game: EXITSThe Exit Funnel:Outcomes of the 11,686 Companies First
Funded 1991 - 2000
*Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.
The Reason To Play The Game: EXITS (Cont’d)
Venture-Backed IPOs
Number of IPOs
Offer Amount ($Billions)
Year
# of IPOs
Offer Amount ($B)
*Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.
The Reason To Play The Game: EXITS (Cont’d)Venture-Backed M&A(1)
(1) This chart is prepared by analyzing all deals where total venture investment and acquisition price are confirmed. Each deal is classified as a ratio of company acquisition (exit) price to total venture investment from all rounds. This chart compares the number of deals in each category. An acquisition where deal price is less than the total venture investment (“<TVI”) clearly did not result in a good return. Four times the investment to 10 times the investment can be a good outcome. An acquisition for more than 10 times venture investment is usually a nice outcome.*Source: National Venture Capital Association Yearbook 2010. Includes statistics from the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters.
What Do VC’s Do?
30%
My Stack
15%
25%
10%
15%
Research / Prospecting / Sourcing
Pre Term Sheet Diligence
Post Term Sheet Diligence
Portfolio Company Support
Internal Projects / Reporting
• Researching industry trends & opportunities; building domain expertise• Prospecting: Identifying companies of interest to proactively contact• Sourcing
o Reaching out to companies proactively or tapping the network to make first contact with CEOs/Companies
o Networking with other VCs, law firms, accounting firms, and entrepreneurs
• Process to determine if the firm should bid (and at what price) on a company/deal: o Relationship building, diligence, deal structuring & returns analysis, firm buy-in, term
sheet construction, negotiations• Summary Diligence: Management, Market, Company / Product, Technology, Barriers to Entry,
Financials
• The company has selected our firm and we enter into a period of exclusivity where the firm spends a significant amount of time conducting diligence on every aspect of the business before completing the transactiono Full model; transaction memo; legal documents; continued negotiations
• Attend board meetings• Support companies with strategy, hiring, future financing, and exits• Ad hoc projects
• Fundraising• Reporting on company, deal, and fund performance• Ad hoc projects
• Bookso Venture Deals – Brad Feldo The Startup Game – William Drapero Mastering the VC Game – Jeffrey Bussgango Done Deals: Venture Capitalists Tell Their Stories – Udayan Guptao Crossing The Chasm – Geoffrey Mooreo Venture Capital and the Finance of Innovation – Andrew Metricko Venture Capital Due Diligence – Justin Camp
• News & Other Resourceso Fortune’s The Term Sheeto peHUB.como Business Insider – SAI (Silicon Alley Insider)o Techcrunch.como Xconomy.como NVCA.orgo VC & Entrepreneur Blogs
Recommended Resources