Ascension Point Capital
An Entrepreneurial Investment Firm
Table of Contents
I.
II.
III.
IV.
V.
VI.
Background Information
Investment Structure
Deal Flow Generation
Screening Criteria
Closing & Transition Period
Key Risks & Mitigants
Appendices
A. Example Deal Economics
B. Focus Industry Score Cards
I. BACKGROUND INFO
Philosophy
We are in the early stages of the largest generational wealth transfer in US
history triggered by the retirement of the “baby-boomer” generation.
Ascension Point Capital was formed to take a majority investment in and
operate a sole, privately owned US business. Our model is built to assist the
wealth transfer process by providing owner’s a unique and customizable
liquidity option, whether it is partial or full. Business continuity is paramount
as we carry on a legacy that has taken entrepreneurs many years of hard work
and dedication to create. A meaningful partnership with investors is the first
step towards capitalizing on this economic shift. Leveraging the experience
and knowledge of a diverse group of Limited Partners and Advisors, we will
identify and create value through accelerating growth.
Guiding Principles
I. Integrity
II. Diligence
III. Perseverance
IV.Accountability
Background Info
Andrew Panico graduated from Loyola University in Maryland with
a degree in Finance. While at Loyola, he began his career at Legg
Mason's Private Client Services group assisting with the
management of $200M in retail assets mainly allocated in Legg
Mason Mutual Funds. Next, Andrew assumed the role of Junior
Research Analyst within a newly formed equity fund under CBRE
Investor's umbrella of products. Prior to attending the USC Marshall
School of Business, Andrew worked for JPMorgan Chase’s
Investment Bank in their Global Rates division focusing on municipal
and inflation-linked derivative strategies.
Andrew earned his MBA at the USC Marshall School of Business with a concentration in Finance
and Entrepreneurship. While at Marshall, Andrew undertook an internship as a Summer Credit
Associate at City National Bank where he performed credit analysis for senior tranche primary
and syndicated leveraged loans and revolving credit facilities for financial sponsor backed
middle-market companies across various industries. During the two-year MBA program, Andrew
was a Fixed Income Fund student manager in the USC Graduate Student Investment Fund
Program, board member of USC’s American Finance Association chapter, and active member of
the Entrepreneurial and Venture Management Association. Andrew was also a member the
Silicon Valley Region’s Venture Capital Investment Competition winning team and participant in
the 2013 International Finals at the University of North Carolina in Chapel Hill.
The Search Fund Model
Search Funds are single purpose vehicles used by entrepreneurs to obtain
commitments from investors interested in making micro middle-market investments.
The purpose of the investment vehicle is to purchase a single privately owned business
in which the managing partner signs on as the new President to run and grow the
business, ultimately striving toward a liquidity event for investors. A Search Fund is
structured as a long-term, two-stage investment for which stage one provides funding
for the Search Phase and stage two provides the equity financing of the acquisition.
Investors in the Search Phase have the right, but not the obligation, to participate on
a pro-rata basis in the Acquisition Phase with a 50% step-up meant to compensate
investors for the increased risk of investing in the first round of financing.
Four Pillars of the Search Fund Model
Entrepreneur
Limited Partnership
Growth Industry
Niche Investment
Driven, dedicated
and entrepreneurial
Managing Principal
at lower cost then
current owner with
plan to reinvest in
business growth.
Diverse operational,
financial and
industry experience
to advise in the
discovery, closing
and growth of a
target.
Identifiable industry
tailwinds will
increase the
probability of
increasing value
through expanding
sales.
Investment in a
class of firms too
small for LBOs, too
mature for VC
funds, and too large
for individual
acquisition.
Recent Results
Avg. Search Fund Asset Class Cash
Return Multiple
Avg. Search Fund Asset Class IRR
All Funds
All Funds
37.3%
13.5x
Ex. Top 3
Ex. Top 3
2.5x
Ex. Top 5
Ex. Top 5
1.9x
0.0x
5.0x
10.0x
15.0x
0.0%
20.2%
19.0%
10.0% 20.0% 30.0% 40.0%
Return results based on a 2009 study by the Stanford Center for Entrepreneurial
Studies of 79 funds of which 38% of funds representing 56% of invested capital
produced a gain for investors. Two funds returned investor capital to pursue a
different model. The remaining 59% of funds that resulted in a loss accounted for only
44% of invested capital as a result of the benefits from a staged investment
approach.
Opportunity
$4.8 Trillion of Net
Worth to be
transferred by 2030
Large market is underserved
as an asset class and
provides an opportunity for
excess IRR.
7.7 million business
owners expected to seek
an exit within 10 years.
Robust deal flow increases
probability of finding sound
businesses with clear and
actionable growth prospects.
Over 75% business
owners have no exit
or transition plan
Opportunity to drive
proprietary deal flow from
unsure owners that have not
started a succession plan.
30% of
owners plan
to sell to a
third-party
buyer
Committed and motivated
sellers will increase
screening efficiency and
improve odds of closing a
deal.
* Sources: American Family Business Survey by MassMutual; PWC Family
Business Survey; The Ten Trillion Dollar Question, A Philanthropic Gameplan.
II. INVESTMENT STRUCTURE
Two-Stage Investment
16 Units Issued
Stage 1
Going Long a Call Option
on a Small Business
$25K
Stage 2
Exercise the Call;
Right of First Refusal
$160K
to
$625K
½ & ¼ Units Available
Search Capital
Acquisition Capital
Investment figures listed per unit. Acquisition capital range is an estimate based on
purchase price range of $5 - $20 million and a 50% equity contribution.
Long Term Investment
Given the nature of the investment, the average time until a liquidity event is
5-7 years after the close of the acquisition. This allows the Managing Principal
to fully implement a growth strategy that will allow Limited Partner’s to
experience an excess IRR. Dependent on the Limited Partner’s needs, the
acquisition financing can be structured with the use of Subordinated Debt that
will allow investors to extract value from their investment as debt is serviced.
*See Structure B - Fund Economics in the Appendices for a detailed example of
how this structure returns capital to investors.
Stage 1
Stage 2
Raise
Search
Capital
Search for
Target
2-6 months
1-30 months
Stage 3
Fund and Close
Transaction
6 months
Operation
of Target
and Value
Creation
4-7+ years
Average Time to Liquidity Event: 7 YRS
Stage 4
Exit
6 months
Limited Partner Group
Limited Partners of Ascension Point Capital will have the opportunity to take a passive
or active roll in the search phase of the fund. Regardless of their involvement, investor’s
will receive weekly updates on the search process and the option to participate in a biweekly teleconference discussing current deal flow and provide insight on strategy.
Passive Roll
•
•
•
•
•
•
Receive weekly update letter
Option to participate in bi-weekly
teleconference
Option to screen all deal flow
Access to online database of up-todate search information
Right-of-first-refusal to participate in
acquisition round
50% Step-Up in search phase note
Active Roll
•
•
•
•
•
•
All options of passive investor in
addition to:
Opportunity to present deal flow
Input on search strategy
Input on target industries
Opportunity to speak with potential
sellers.
Opportunity to join the Investment
Advisory Board.
Access to Limited Partner’s investment and operating
experience is ESSENTIAL to the success of the partnership.
Investment Advisory Board
Comprised of 3 to 5 members of the Limited Partnership
Investment Group.
Open to
serve as a
mentor to
the Managing
Principal
Relevant experience in sourcing deal flow and
investing in private companies.
Open to
sharing
professional
network
Willing to
actively assist
with the
search and
acquisition
phase
Transactional
experience
with financing
contacts
Serves as a sounding board for
Managing Principal.
Reviews prospective
investment theses and
offers guidance
Establishes credibility
with potential sellers
River Guides & Advisors
The term River Guide refers to an industry expert who agrees to assist the
Managing Principal through strategic industry introductions that may lead to
viable acquisition targets. These guides may be former consultants, bankers or
industry executives. The use of a River Guide will bring years of focused industry
experience and contacts to Ascension Point Capital. The goal is to form
meaningful relationships with River Guides in each of our focus industries.
Possible River Guides & Advisors will be sourced from the below network.
Professional
Associations
Business
Valuation Firms
Private Co.
Databases
Professional
Network
Alumni
Network
Importance of Investors & Advisors
Investor
Group
River Guides
&
Advisors
- Years of industry and
investment experience
- Potential industry introductions
and deal flow
- Insights on search strategy and
focus industries
- Transactional experience and
relationships with lenders
- Sounding board for deal
screening and analysis
- Increases credibility of fund to
lenders and potential sellers
- Potential Board Member of
acquired company
Manager Earned Equity
The Managing Principal will have an opportunity to earn a
maximum of 25% of the common equity of the target. A
typical performance hurdle for the final restricted tranche (up
to 10%) of the manager’s carried interest is net investor IRR,
but can be customized by the investor group.
Tranche 1
Tranche 2
Tranche 3
5%
10%
Up to 10%
Vests at acquisition
Vests over 5 year
period; accelerated
at liquidity event
Vests according to
investor IRR hurdle
schedule
III. DEAL FLOW GENERATION
Geographic Focus
Primary
Region
North East – NY, NJ, MD,
CT, RI, MA, PA, VA, DE
55% of Time
Secondary Region
Tertiary Region
West Coast – CA, OR, WA
South West – TX, AZ, OK
35% of Time
10% of Time
Sourcing Deal Flow – A Comprehensive
Approach
“Out-Side” In
•
•
•
•
•
Independent Business Brokers
Professional Business Brokers
Venture Capital Firms
Middle Market Private Equity Firms
Professional service firms:
• Middle Market divisions of BulgeBracket Investment Banks
• Boutique / Regional Investment Banks
• Accountants
• Lawyers
• Insurance providers
• Financial planners / private bankers
• Personal network (100 bp finders fee)
“In-Side” Out
• Generate lists on companies that fall within
focus industries
• Capital IQ, FactSet, PrivCo.
• Dun & Bradstreet
• OneSource
• Scrub company list to filter on minimum
target criteria
• Use of River Guides to gain introductions
• Send formal introduction letter and sell
sheet to all potential sellers
• Make contact with key aspects of supply
chain
• Attend industry trade shows
A robust deal flow pipeline is essential to identifying and
acquiring a potential target. Time will be devoted according to
the quality of the deal flow produced.
Typical Deal Flow Sources
According to the study Search Funds 2009 conducted by Stanford’s Center
for Entrepreneurial Studies, search funds on average conducted a hybrid
approach to sourcing deal flow. This method results in a manageable
number of potential targets for the Managing Principal to filter and
analyze in and effort to submit a Letter of Intent and enter due diligence.
Sources of Deal Flow
Investor Group
5%
Identification
306
Initial Approach
Other
15%
Proprietary
44%
Business
Brokers
36%
Acquisition Funnel
175
Serious Discussion
39
Due Dilligence
7
Acquisition
1
0
100
200
300
400
IV. SCREENING CRITERIA
Minimum Target Attributes
Investment Criteria
Industry
Favorable
•
•
•
•
•
•
•
•
Company
•
•
•
•
•
•
•
Unfavorable
Highly fragmented industry
Identifiable growth drivers
Positive macroeconomic tailwinds
Straightforward industry operations
Relatively early in industry life cycle
Numerous companies in $5-$50 million
sales range
Sizeable industry – both in revenues
and number of companies
•
Healthy and sustainable EBITDA
margins > 10%
Competitive advantage within value
proposition
Historically proven recurring revenue
Diversified revenue streams
Multiple avenues for future growth
Strong middle management committed
to staying with firm
Lender friendly model
Reasonable valuation
•
•
•
•
•
•
•
•
•
•
•
•
•
Highly concentrated industry; major
players control > 50% of market
Industry in secular decline
Intense company rivalry and low barriers
to entry
Customer base with high purchasing
power
Severe dependence on concentrated
supply chain
Turnaround / distressed situation
Poor or damaged reputation amongst
peers.
High customer concentration
High customer turnover rate
Small company - < $1M of EBITDA
Weak middle management team or
plans on leaving
High employee turnover
Sale for business reasons
Competitive auction sale
Industry Selection
Idea Generation
Initial Screening
Data Mining
The focus industry
will serve as another
screening criteria
but will not limited
the scope of the
opportunistic search
Thesis
Development
Select
Industry
Companies within
the focus industry
will be scored using
the same Investment
Scorecard as targets
that fall out of scope
Industry Analysis
Macroeconomic Influences
(stage of bus. cycle, growth trends, structural trends)
Gov’t Reg.
& Trends
Demographic
Trends
Technology
Trends
Existing Competitive
Landscape
Number of Firms
Intensity of Competition
Brand Equity
Type of Competition
Threat of Substitute
Products/Services
Purchasing Power of Consumers
Purchasing Power of Suppliers
Barriers to Entry
Social
Trends
Industry Score Card
Industry
Concentration
(-1)
(0)
(+1)
High – 2-3 major players control > 60% of market.
Moderate – Existence of a clear market leader, but several competing rivals.
Low – High number of companies within target revenue band and one level above.
Market
Growth
(-2)
(0)
(+2)
Low/No – Industry in secular decline. Unfavorable social, tech., and Gov. headwinds.
Moderate – Average growth at or close to US GDP.
High – Favorable macroeconomic and demographic factors. Mega trend. 20%+ CAGR.
Degree of
Rivalry
(-1)
(0)
(+1)
High – Adversarial competition focused on price. Thin margins. Bad for business.
Moderate – Competition focused on retaining market share. Little price competition.
Low – Friendly competition that drives innovation. Focused on quality or service.
Degree of
Cyclicality
(-2)
(0)
(+2)
High – Majority of industry sales driven by both seasonality and business cycle.
Moderate – <50% of industry sales impacted by seasonality and business cycle trends.
Low/No – Revenue stream not subject to seasonal or cyclical factors.
Regulation
(-1)
(0)
(+1)
High – Directly dictates how BAU is conducted. Creates litigation liability.
Moderate – Regulation exists and requires specific processes that increase costs.
Low/No – Regulation does not impact core business operations.
Capital
Intensity
(-1)
(0)
(+1)
High – Greater than $0.33 of capital expense per $1.00 of labor expense
Moderate – Between $0.125 - $0.33 of capital expense per $1.00 of labor expense
Low – Less than $0.125 of capital expense per $1.00 of labor expense
Barriers to
Entry
(-1)
(0)
(+1)
Low/No – No barriers to entry. Short lead time to entrance. Anyone can do it.
Moderate – Some barriers exist. Difficult to compete at first. Low survivor rate.
High – No competitive entrance possible. IP protection for product or service. Scale.
Product/Servic
e Alternatives
(-1)
(0)
(+1)
High – Many alternatives exists. Declining trends in use. High tech. replacement risk.
Moderate – Established industry with several unproven or weaker alternatives.
Low – Only one on the block. Low tech. replacement risk. Established industry.
Industries of Focus
Alarm Security
Services
Mobile Security
Software
• Favorable consumer
trends towards
treating their pets
like family members.
• Increased scope and
sophistication of
veterinary services.
• Increased cost of
veterinary expenses.
• Sponsorship for
preventative health
awareness.
• Favorable trends in
disposable income,
unemployment, and
corporate profits.
• New advanced full
service monitoring
systems helping the
upgrade cycle.
• New technology
allowing for product
and service
differentiation.
• Increased use of
mobile devices to
access sensitive data
stored in the cloud.
• BYOD policies at
businesses increases
security threats.
• Increased adoption
of mobile payments.
• Internet accessed
via mobile set to
outpace PC.
(+5)
(+4)
(+4)
Medical Claims
Processing
Companion Pet
Insurance
• Superior industry
growth due to
favorable
demographic trends,
healthcare reform,
and government
sponsored program
participation.
• Opportunity for
claim diversification.
• New technology can
streamline process.
(+6)
*See Appendix for complete Industry Scorecards
The above listed industries have been selected due to
favorable tailwinds that will help drive overall industry growth.
Each industry presents an understandable and executable
strategy for future growth
Investment Score Card
Competitive
Advantage
(-2)
(0)
(+2)
Low/No – Commoditized business model easily replicated. Low margins. High comp.
Moderate – Advantage exists but is weak giving competitors an opportunity.
High – Easily identifiable and defensible advantage over competitors.
Growth
Potential
(-2)
(0)
(+2)
Low – Below industry average. Little opportunity for market and/or product expansion.
Moderate – Possibility of product line and/or geographic expansion. Cross selling.
High – Easily identifiable strategy to expand market and add ancillary/new products.
Operational
Complexity
(-1)
(0)
(+1)
High – Large workforce of highly specialized PhD’s/engineers required to operate.
Moderate – Difficult in practice, understandable and manageable in theory.
Low – Managing Partner can confidently handle all business related tasks.
Recurring
Revenues
Streams
(-1)
(0)
(+1)
Low/No – Highly seasonal and cyclical.
Moderate – Recurring revenue exists or there is no seasonality to revenue streams.
High – Revenues are both recurring and not subject to seasonal fluctuations.
Investment
Entry Point
(-1)
(0)
(+1)
High – Little room for error. Growth potential must be realized to meet IRR hurdles.
Moderate – Priced close to average industry multiple.
Low – Priced below industry average. (Must be for non-business related reasons)
Financing
Potential
(-1)
(0)
(+1)
Low – Non-recurring, concentrated revenue stream. No proven financing track record.
Moderate – Strong cash flow profile but highly leveraged. Declining asset base.
High – Large A/R and Inventory base. Strong cash flow generation. Diversified.
Middle
Management
(-1)
(0)
(+1)
Replace – Existing management team divided and shopping for other jobs.
Retool – Competent team missing one or two pieces to the puzzle.
Rockstars – Cohesive, hard working team incentivized to grow business.
Market
Position
(-1)
(0)
(+1)
Lager – Clear lager in market position and content with current practices.
Follower – Emulates best practice of industry leader but always one step behind.
Leader – In market share, brand equity, quality of product/service, customer service.
Deep Credit Analysis
Balance sheets will not be taken at face value. In depth credit analysis
will be performed to understand a companies true liabilities and total
leverage including lease, pension, and contract obligations
Lease Accounting
• Treat operating leases as rental expenses. Capital leases place asset and liability on the
balance sheet.
Equity Method
• Avoids consolidation of assets and liabilities on the balance sheet which often understates
leverage measures such as the debt-to-equity ratio.
Pension Accounting
• Determine whether return assumptions are appropriate given current environment.
Uncover any potential investment losses that can be amortized.
Take or Pay Contracts
• These contracts establish long-term liabilities if used and need to be accounted for when
measuring a targets total leverage.
Environmental Liabilities
• Ensure there are not current or future liabilities related to decommissioning liability,
asbestos liability and carbon regulation. Can increase company leverage.
V. CLOSING & TRANSITION PERIOD
Possible Deal Structure
Structure A
100% - Nonredeemable Participating
Preferred Stock with a 10% Preferred
Return
Structure B
• 50% - Subordinated Debt with
17% coupon
• 50% - Nonredeemable
Participating Preferred with No
Preferred Return
Structure A vs. Structure B ($ in thousands)
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Structure A
10% Non-Redeemable Preferred Equity
Face Value of Investor Capital
5,000.0
5,000.0
5,500.0
5,500.0
6,050.0
6,050.0
6,655.0
6,655.0
7,320.5
7,320.5
8,052.6
8,052.6
8,857.8
8,857.8
9,743.6
9,743.6
Structure B
17% Subordinated Debt
0% Non-Redeemable Preferred Equity
Face Value of Investor Capital
2,500.0
2,500.0
5,000.0
2,925.0
2,500.0
5,425.0
3,422.3
2,500.0
5,922.3
4,004.0
2,500.0
6,504.0
4,684.7
2,500.0
7,184.7
5,481.1
2,500.0
7,981.1
6,412.9
2,500.0
8,912.9
7,503.1
2,500.0
10,003.1
0.0
75.0
127.8
151.0
135.8
71.4
(55.1)
(259.5)
Structure A vs. Structure B
Acquisition capital will be structured to meet both the needs of the investors and the
seller. Similar equivalencies can be calculated across a range of coupon combinations.
Acquisition Capitalization
Rate
Structure A
Senior Debt
Seller Financing
Search Capital
Investor Capital - Pref.
Investor Capital - Sub. Debt
Total (b)
4,500.0
3,000.0
450.0
7,500.0
0.0
15,450.0
EBITDA Mult.
1.5x
1.0x
0.2x
2.5x
0.0x
5.2x
% of Total
29.1%
19.4%
2.9%
48.5%
0.0%
100.0%
Cash
8.0%
0.0%
0.0%
0.0%
0.0%
PIK
0.0%
10.0%
50.0%
10.0%
0.0%
Rate
Structure B
Senior Debt
Seller Financing
Search Capital
Investor Capital - Pref.
Investor Capital - Sub. Debt
Total (b)
4,500.0
3,000.0
450.0
3,750.0
3,750.0
15,450.0
EBITDA Mult.
1.5x
1.0x
0.2x
1.3x
1.3x
5.2x
% of Total
29.1%
19.4%
2.9%
24.3%
24.3%
100.0%
Cash
8.0%
0.0%
0.0%
0.0%
0.0%
(a) Includes search capital of $300K at a 50% step-up. Acquisition cash investment of $7,500K.
(b) Ignores transaction costs
PIK
0.0%
10.0%
50.0%
0.0%
17.0%
First 100 Days Plan
A granular operational plan created during the due diligence
process that outlines how the post-closing transition period
will be handled. During this period, the Managing Partner will
refrain from implementing any large strategic initiatives and
will become familiar with the business BAU and employees.
Communication
Education
Evaluation
Governance
• Create a highly
specific plan to
communicate with
employees,
customers,
suppliers, the
industry, and
investors
• Clear and consistent
message
• Specific timeline
• Best method
• Focus on learning
the business
• Meet and interview
all employees,
customers, and
important members
of the supply chain
• Gain experience in
the “tranches” and
areas that are core
to the business
model.
• Evaluate every
aspect of the
company
• Management team
and employees
• Systems and
controls
• Core competencies
of the business
• Processes in place
• Work ethic and
environment
• Establish and or
enhance current
governance
mechanisms
• Put in place the
Board of Directors
• Create Board
Meeting schedule
• Ensure appropriate
checks and balances
are in place for cash
management
Levers for Value Creation
Operations
Finance
Valuation
• Revenue growth
through increased
sales and marketing
efforts
• Strategic initiatives
such as new
products/services,
geographic expansion,
and pricing changes
• Margin expansion
through cost reduction
or operating leverage
• Bolt-on acquisitions to
enhance scale,
product/service
offerings, or
capabilities
• Optimizing the capital
structure for future
growth
• Sustainable and
serviceable amount of
leverage
• Lower cost of capital
• Capital intensity
reduction – fixed
assets, working capital,
and/or capital
expenditures
• Reach next level of
EBITDA range that
justifies higher
multiples
• Buy at trough business
cycle multiples and sell
at peak business cycle
multiples
Ancillary
True valuation creation
will result from an
improvement and
increased efficiency in
business operations
Primary
Ancillary
Board of Directors
Structure & Composition
General Responsibilities
• Balanced board with mix of deep
operational experience, specific industry or
business model experience, and financial
expertise.
• Complementary skill set to those of existing
middle management and Managing Partner.
• Five Member, staggered structure with one
independent third party.
• Term of board seat determined before
service begins.
• At a minimum, all Board Member expenses
will be covered by the company. An annual
fee will be assessed according to the
company’s cash flow structure.
• First Board Meeting held 2-weeks after
closing. Three follow up board meetings to
be held within the First 100 Days.
• Four Board Meetings annually at the end of
each fiscal quarter. Schedule TBD.
• Participation at Board Meetings at minimum
via phone.
• Establish Audit Committee and
Compensation Committee as a subset of
current board members.
• Deep understanding of companies business
model and ability to contribute to strategy.
• Monitor company capital structure.
Potential 5-Member Board Composition
CEO
Senior
Mgmt
Member
Investor
Group
Investor
Group
Independent
Potential Liquidity Events
Sale of company
• Pool of financial and strategic buyers will increase as size of company EBITDA
increases.
Dividend Recapitalization
• An attractive model for investors to cash out while retaining ownership given
the cash flow profile of potential targets and ability to pay down/service debt.
Repayment of subordinated debt
• If present in the deal structure, investor subordinated debt will be paid down
second only to Senior Credit Facilities and offers investors access to cash prior
to a major liquidity event.
Share Buy-Backs
• Investor equity may be sold to either other investors in the group or be
repurchase from the management team of the company.
VI. KEY RISKS & MITIGANTS
Key Risks and Mitigants
Risk: Not being able to find an attractive company to acquire
during the Search Phase.
Mitigating Factors
Fragmented Industries
Searching for targets in industries
with low levels of concentration will
help produce a robust pipeline of
potential deal flow.
Sizeable Industry
Selecting industries with sizeable
revenues and number of operators
will increase the odds of finding a
target that meets our criteria.
Comprehensive Sourcing
Applying both the “in-side” out and
“out-side” in approach to sourcing
deals increases the odds of finding a
quality proprietary deal.
Detailed Deal/Target Criteria
Minimum company requirements,
deal criteria and an industry and
target scoring matrix increase search
efficiency and instill discipline.
Key Risks and Mitigants
Risk: Not being able to complete the acquisition after an
attractive target is identified.
Mitigating Factors
Willing and Motivated Seller
Negotiations will be continued only
with sellers that have shown a clear
and proven desire to liquidate their
stake in the company.
Limited Partner Group
A successful Search Fund leverages
the experience, knowledge and
network of its partners. Selecting the
right investor group is crucial.
Attractive Financing Profile
Bank loans play an important part in
many deal structures and increase
potential IRRs. Companies with
proven cash flows are a prerequisite.
Reasonable Valuation
Buying a good company at a bad
price can destroy potential IRRs. The
partnership must understand
valuation drivers and trends.
Key Risks and Mitigants
Risk: Being unable to manage and grow the company to
provide an attractive return for investor group.
Mitigating Factors
Growing Industry
Choosing a growing industry with a
tailwind allows companies to grow
without stealing market share or
entering into aggressive price wars.
Straightforward Operations
Allows the MP to scale the learning
curve quickly and identify business
fundamentals and levers for growth
and profit improvement.
Competitive Advantage
A defensible competitive advantage
increases profit margins and allows
for company to, at a minimum,
maintain current market share.
Strong Middle Management
A strong management team highly
capable of executing BAU activities
will allow the MP to focus on the
strategic direction of the company.
APPENDIX A – EXAMPLE DEAL
ECONOMICS
Example Deal Economics
•
•
•
•
Transaction Assumptions
$15.0M in sales and $3.0M EBITDA
5.0x EBITDA purchase multiple ($15.0M purchase price)
1.5x traditional Senior Credit Facility
1.0x Seller note (Total Leverage 2.5x Purchase EBITDA)
Optimistic
Base Case
Pessimistic
Revenue Growth
17.5%
12.5%
0.0%
Annual EBITDA Margin Expansion
50 bps
25 bps
0 bps
5.5x
5.0x
4.5x
Exit Multiple
Increase in NWC
Cash Tax Payments
Depreciation & Amortization
Capital Expenditures
20% of Revenue Growth
40% of Earnings Before Taxes
$500K in Year 0; fixed margin thereafter
Equal to Deprecation & Amortization
Earned Equity IRR Hurdles of Final Tranche
Investor IRR
Third Tranche Earned Equity
≥ 30%
10.0%
≥ 25%
7.5%
≥ 20%
5.0%
≥ 15%
2.5%
< 10%
0.0%
Structure A Economics – Upside Case
Structure A Economics – Base Case
Structure A Economics – Downside
Structure B Economics – Upside
Structure B Economics – Base Case
Structure B Economics – Downside
APPENDIX B – FOCUS INDUSTRY SCORE
CARDS
Medical Claims Processing Industry - (+6)
(+1)
LOW – The largest player in the industry, HMS Holdings, commands 14.3% of the
market. Small businesses will increase in the space as the number of industry claims
increase and present an opportunity to take market share.
(+2)
HIGH – Overall industry growth expected to continue at a 6.7% CAGR. The three major
factors driving industry growth are demographic trends, healthcare reform, and
government sponsored program participation rates.
(-1)
HIGH – Providing customers with a cost-saving service is essential in the industry. Price
is an obvious competition point and must clear the cost-savings hurdle for the
customer to be a viable option. Customer service is also a key to success.
Degree of
Cyclicality
(+2)
LOW – Industry growth drivers will mitigate negative factors tied to unemployment and
the health of the overall economy. However, all else equal, number of people insured
and physician visits is inversely correlated with the unemployment rate.
Regulation
(+0)
MODERATE – Each operator must be licensed in the state in which it wishes to provide
services in. Also, there are regulations around the processing of medical claims that
must be followed. Government sponsored programs and reform trends are increasing.
(+1)
LOW – $0.08 of capital expense for every $1.00 of labor expense. Wages account for
approximately 26.1% of revenues due to current manual nature of claim processing.
New technology presents an opportunity to streamline the process.
(0)
MODERATE – Operators must be licensed and abide by state-set regulations in order to
operate. Also, the complexity of medical claims as a result of reform and government
sponsored programs requires a highly knowledgeable workforce.
(+1)
LOW – In-house claim processing is the only alternative to outsourcing the process.
The in-house model is viable until a certain level of business. As volumes increase,
potential customers will turn to outsourcing to cut costs.
Industry
Concentration
Market
Growth
Degree of
Rivalry
Capital
Intensity
Barriers to
Entry
Product/Servic
e Alternatives
Companion Pet Insurance Industry - (+5)
(-1)
HIGH – The industry’s top 4 players control over 90% of the market with VPI Pet
Insurance commanding a 61% share. Although a negative factor, these large players
could present a strategic exit opportunity for a smaller, growing business.
(+2)
HIGH – The total industry is expected to grow 6% annually through the year 2017.
Favorable trends in consumer disposable income, pets per household, and the
treatment of pets like family members known as humanization will support growth.
(0)
MODERATE – Firms compete on price, scope of product offering, and brand image.
Although consumers are price sensitive to the product, the high end of the market can
be enticed with quality of service, customer service, and overall experience.
Degree of
Cyclicality
(+2)
LOW/NO – Aside from being tied to consumer spending and disposable income, the
industry is fairly resilient in terms of revenue growth. Through the economic downturn
of 2008-2009, the industry grew 4% in the face of declining consumer spending.
Regulation
(0)
MODERATE – Industry is subject to the regulations of any insurance provider. Providers
require licensing in all 50 states and governed by the National Association of Insurance
Commissioners. The State Department of Insurance investigates financials.
(+1)
LOW – $0.117 of capital expense for every $1.00 of labor expense. CAPEX is generally
for running office space and other aspects of PP&E. Wages account for approximately
10.3% of revenues due to the sales related structure and improves with scale.
(0)
MODERATE – New entrants must comply with strict state and federal regulation to
operate. Providers must obtain a Certificate of Authority in each state they wish to
supply insurance. Also, major players market share could make it hard to compete.
(+1)
LOW – Main alternative to pet insurance is having no pet insurance and paying out of
pocket for any veterinary expenses that are incurred over the companion pet’s life
including routine, preventative, and emergency services.
Industry
Concentration
Market
Growth
Degree of
Rivalry
Capital
Intensity
Barriers to
Entry
Product/Servic
e Alternatives
Alarm Security Services Industry - (+4)
(+1)
LOW – 80.5% of all industry enterprises are small businesses with nine or fewer
employees. Large number of businesses at over 8.5K. Increased concentration over the
past five years due to increased M&A activity.
(+1)
MODERATE – Overall industry growth expected to continue at a 2.1% CAGR. Although
the majority of the industry is mature, new technology is reviving consumer interests
in upgrading old systems and purchasing ancillary products.
(0)
Moderate – Firms compete on price, scope of product offering, and brand image.
Although consumers are price sensitive to the product, the high end of the market can
be enticed with quality of service, customer service, and overall experience.
Degree of
Cyclicality
(+1)
LOW – Residential revenue is tied closely to residential real estate values and crime
rates. Although the industry does collect monitoring fees, installation and sales make
up the majority of revenues. Business and government contracts are also more stable.
Regulation
(+1)
LOW – Aside from fire and building codes, regulation in the industry does not hamper
industry growth. Instead, more strict government regulation around fire and security
monitoring systems is likely to serve as a tailwind for the industry in the near future.
(+1)
LOW – $0.097 of capital expense for every $1.00 of labor expense. Wages account for
approximately 30.8% of revenues due to the manual nature of the installation and
service aspect of the business. Employees also must be trained.
(-1)
LOW – With a low level of capital intensity and a large portion of installation costs
being pushed through to the consumer, barriers to entry into the industry are low.
However, key large client accounts are won through years of relationship building.
(0)
MODERATE – In-person security services offer alternative solutions for larger
commercial clients. Staying with out of date systems is also an alternative that could
threaten future industry growth.
Industry
Concentration
Market
Growth
Degree of
Rivalry
Capital
Intensity
Barriers to
Entry
Product/Servic
e Alternatives
Mobile Security Software Industry - (+4)
(+1)
LOW – Although large players such as SAP, Intel owned McAfee, and Symantec
(Norton) dominate the PC and web-based security market, no player has taken
majority share in the upcoming mSecurity market which is filled with smaller players.
(+2)
HIGH – Demand for mobile security is expected to significantly increase as smartphone
adoption levels increase, mobile payments takeoff, and more sensitive consumer and
enterprise data is stored on the cloud and accessed via mobile devices.
(-1)
HIGH – Constant product iterations, changing technology, multi-platform requirements
and customizable solutions set the framework for competition. With low
concentration, price is a factor, however increased security concerns may drive price.
Degree of
Cyclicality
(+1)
LOW – According to a Galvin Consulting survey, current spend on mobile security
accounts for 5% of IT budgets and is expected to increase to 10% next year. SaaS
delivery models will stabilize cash flows but revenues are still dependent on IT spend.
Regulation
(+1)
LOW – Regulation for highly secured data and networks will provide a tailwind for
operators who can garner these types of relationships. For consumer and small
enterprise solutions the regulation threat is considered to be low.
(+1)
LOW – $0.08 of capital expense for every $1.00 of labor expense. Wages account for
approximately 26.1% of revenues due to current manual nature of claim processing.
New technology presents an opportunity to streamline the process.
(-1)
LOW – Developer talent is the largest barrier to entry into this market. Entering into
Managed Solutions will require a sales force dependent on the size of the enterprise
that is being targeted. Low concentration levels confirm lower barriers to entry.
(0)
MODERATE – Malware on mobile devices is in its infancy and as a result, mobile
security adoption levels are still on the low side. Accordingly, the main alternative to
the use of security software is not to use security software to protect devices and data.
Industry
Concentration
Market
Growth
Degree of
Rivalry
Capital
Intensity
Barriers to
Entry
Product/Servic
e Alternatives