Joseph V. Rizzi
Amsterdam Institute of Finance
June, 2010
The euro has fallen 3.9 percent to $1.2358 in the past seven
days. It traded for $1.2311 at 9:14 a.m. Central European
Time. German Chancellor Angela Merkel said May 14 that
Europe is in a “very, very serious situation,” even after a
rescue package for the region’s most indebted nations. The
Spanish newspaper El Pais reported the same day that French
president Nicolas Sarkozy threatened to withdraw his country
from the euro. Finance Minister Christine Lagarde and other
government officials denied the report.
(Bloomberg, 17 May 2010)
Amsterdam Institute of Finance
June, 2010
2
Nominal interest rates can be negative
There is no risk free asset
Equity risk premiums can change dramatically even in mature markets
Large investment grade firms in developed markets cannot always raise new
capital
Diversification across asset classes does provide protection
Debt is a double edge sword
Cash balances are not wasting assets, but protection against danger
Ignore liquidity at your peril
Risk is not a number
If something cannot last for ever it ends
The only perfect hedge is in a Japanese garden
Most dangerous words in Finance
Leverage
Hedge
Arbitrage
This time is different
Risk management is somewhere between alchemy and astrology
Amsterdam Institute of Finance
June 2010
3
US Investors
Fund manager
US Exempt
Investors
General
Carried interest
LP
LP
LP
Partner
partner
A
B
C
Non-US
Investors
FUND
Nominee
Investment
CLO
Leverage finance
Hedge funds
syndicate participants
Investment
Investment
Hold Co.
Hold Co.
FLL
Syndicate participants
SLL
Amsterdam Institute of Finance
June, 2010
High Yield
Investors
Bank
Bridge finance
Investment
Mezzanine
Investors
Operating
Entity
4
Now
EBITDA of Acquired Firm
Sale value @ 8 x EBITDA
125
1,000
Financing Plan: Equity @ .20
Debt @ .80
Total Capital Raised
200
800
1,000
Fees
- $ millions -
188 (c)
1,500
30
50
Net Sale Proceeds on Exit
1,450
Original Debt
Less: Debt pay down over 5 years
Debt at end of 5 years
Return of Original Equity
Net gain to be allocated
10% to mgmt options
20% to general partner
70% to limited partners
Total
(a)
Share to CEO
Share to next 4 senior officers
Share to next 8 key players
Total Management share
In 5 yrs
-540
-200
710
71(a)
142
497 (b)
710
2% points
1% points
1/2% points
or
or
or
800
260
540
$14.2 x 1 = $14.2
$ 7.1 x 4 = $28.4
$ 3.6 x 8 = $28.4
$71.0
(b) Equals a 28.4% compound annual rate of return on investment.
(c) Assumes $12 taken out of cost structure immediately and 6.5% growth/year in EBITDA thereafter.
Amsterdam Institute of Finance
June, 2010
Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions Transaction
Harvard Business School case 9-206-1 Rev 10/16/06
5
Amsterdam Institute of Finance
June, 2010
6
• Increased
Debt (lower taxes)
• Bargain Purchase
• Operating Improvements
• Improved Governance
• Bondholder Value transfer
• Opportunistic Sale
Amsterdam Institute of Finance
June, 2010
7
• Banks (Relationship Driven)
• Typically invest in the pro-rata portion of bank facilities
(Revolver and Term Loan A)
• Seek first priority claim on assets
• Preference for price stability over liquidity
• Institutional Investors (Yield Driven)
• Primarily looking for high coupon/yield. Embedded option and
subordination translate to higher coupons
• Cross over investors (relative value between bank loans and high
yield bonds)
• Hedge Funds (unknown impact)
Amsterdam Institute of Finance
June, 2010
8
Movement on Transactions and Fundraising
2003-2009 (U.S.)
2003
2007
2009
Fundraising
$30B
$244B
$102B
Purchase Price Multiple
7X
9.6X
7.7X
Funded Debt EBITDA Multiple
4.6X
6.2X
3.8X
LBO Volume
$47B
$433B
$81B
Average Deal Size
$716M
$2.1B
$722
Percent of P2P LBO Volume
15%
45%
15%
Dry Powder
$200B
IRR Mediuan
25%
Amsterdam Institute of Finance
June, 2010
$500B
2%
$500B
<9%>
9
Asset Class Returns
Merrill Lynch $ HY
Credit Suisse Leveraged Loan
NASDAQ
LBOs
Financials
2008
(26.4%)
(28.73%)
(39.98%)
(18%)
(29%)
2009
57.5%
44.87%
45.36%
3%
64%
Activity
1Q10
Vol
LBO
HYB
FDX
PPX
CLO
Institutional
Amsterdam Institute of Finance
June, 2010
US
$26.3B
$10.3B
$13B
4X
8.8X
80%
Europe
€9B
€ 6B
€ 12.8B
4X
9,3X
30%
10
Credit
Accounting
Tax
Regulation
Excess Capacity
Fundraising
Fund Structure
Returns
LPs
Public 6Ps
Amsterdam Institute of Finance
June, 2010
11
Disclosure
This information has been prepared solely for informational purposes
and is not intended to provide or should not be relied upon for
accounting, legal, tax, or investment advice. The factual statements
herein have been taken from sources believed to be reliable, but such
statements are made without any representation as to accuracy or
completeness.
Opinions expressed are current opinions as of the
date appearing in this material only. These materials are subject to
change, completion, or amendment from time to time without notice
and CapGen Financial is not under any obligation to keep you advise
of such changes. All views expressed in this presentation are those of
the presenter, and not necessarily those of CapGen Financial.
Amsterdam Institute of Finance
June, 2010
12