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