Joseph V. Rizzi
Amsterdam Institute of Finance
December, 2013
Stone Age
Bronze Age
Silver Age
Golden Age
Back-to-the-Future
(1974-84)
(1985-90)
(1990-2000)
(2002-07)
(2008 - ??)
Fund proliferation
Goes global
Shakeout/consolidation
Represents 40%
higher equity levels
of M&A
smaller deals
Mega Funds
Operating improvements
Cottage Industry
KKR
Bootstrap deals
High Yield
focus. Increase in PIPE
and minority interests
Regulation
Amsterdam Institute of Finance
December, 2013
2
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Macro Uncertainty
Banks
CLO
IPO Window
Amsterdam Institute of Finance
December, 2013
3
Volumes – Leveraged Finance Volume < 1-1-13 – 10-31-13
2012
% Mkt
2013
LBO Loan Volume
Non LBO Loan Volume
Total
4.0B
20.86B
€ 24.9B
7%
37%
44%
18.0B
30.5B
€ 58.4B
Senior Sec Bds
Senior Unsec Bds
Subord Bds
Total
13.3B
16.6B
0.6B
€ 30.5B
24%
29%
1%
54%
Mez
Total
€ 1.0B
€ 56.4B
Amsterdam Institute of Finance
December, 2013
1.8%
28.6B
26.3B
4.9B
€ 61.8B
0.1B
€120.4B
% Mkt
YOYΔ
15%
33%
49%
368%
90%
135%
24%
24%
4%
51%
115%
71%
656%
102%
0.2%
<81%>
113%
4
3 Q 13
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Strongest Quarter in 3 yrs
Germany leading - € 98 double UK; France
and Sweden weak
Springer - BC Partners
- € 3.3B
ISTA
- CVC
- € 3.1B
CeramTec - Cinven
- € 1.49B
Pipeline
Exits – ATC – Hg Capital € 300 mln trade sale
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Amsterdam Institute of Finance
December, 2013
5
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UK
Germany
Netherlands
France
U.S.
Denmark
Poland
Luxembourg
Sweden
Norway
Italy
26.5%
18.2%
15.7%
10.5%
9.3%
5.3%
5.0%
1.7%
1.7%
2.6%
1.5%
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Source Standard & Poor’s Financial Services LLC. All rights reserved
Amsterdam Institute of Finance
December, 2013
6
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Most Active Sponsors

Sponsor
Share

CVC
8.62%

Carlyle Group
8.62%

Bain Capital
6.90%

Advent International
5.17%

BC Partners
3.45%

Cinven Ltd
3.45%

Bridgepoint Capital
3.45%

Kolhberg, Kravis & Roberts
3.45%

Permira
3.45%

Charterhouse Equity Partners
3.45%

PAI Management
3.45%

Joh. A. Benckiser
1.72%

3i plc
1.72%

Golden Gate Capital
1.72%

Insight Ventures
1.72%

Clayton, Dubilier & Rice
1.72%

Silver Lake Partners
1.72%

Pamplona Capital Management
1.72%

EQT Partners
1.72%

Blackstone Group
1.72%

Investcorp
1.72%

OMERS Capital Partners
1.72%

Nordic Capital
1.72%

TowerBrook Capital Partners
1.72%

Cobepa
1.72%
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Amsterdam Institute of Finance
December, 2013
7
Europe
U.S.
RC
10.7%
16.1%
T / LA
22 %
1.1%
T / LB
62.6%
71.7%
2L
0.4%
10.9%
Other
4.3%
0.2%
Source: Standard & Poor’s Financial Services LLC. All rights reserved
Amsterdam Institute of Finance
December, 2013
8
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Volume (€)
◦
◦
◦
◦
◦
◦
◦
2000
2001
2002
2003
2004
2005
2006
–
–
–
–
–
–
–
1.35B
5.24B
3.09B
3.68B
5.92B
11.05B
35.49B
2007
2008
2009
2010
2011
2012
2013
– 32.20B
– 11.18B
– 0.38B
– 1.41B
– 0.86B
0
(Jan-Oct) 4.83B
Source: Standard & Poor’s Financial Services LLC. All rights reserved
Amsterdam Institute of Finance
December, 2013
9
Structure and Spreads
Pre Crisis –
70%
10%
3%
7%
Post Crisis –
90%
AAA -< 50 BP
AA
A
BBB
AAA - > 125 BP
Bid / Ask (% of Par)
Bid
100
96
91
4 Q 13
4 Q 12
4 Q 11
Ask
101
97
94
Source: Standard & Poor’s Financial Services LLC. All rights reserved
Amsterdam Institute of Finance
December, 2013
10
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2013 (9 mo.)
2012
2011
2010
2009
2008
2007
2006
2005
Amsterdam Institute of Finance
December, 2013
58.9
29.0
43.9
39.4
5.0
69.3
152.3
164.5
110.0
11
PE Firm
 General
 Limited
Seller
Financing
 Banks
 CLO
 Bonds
 Mez
Professionals
 Lawyers
 Accountants
 Advisers
Amsterdam Institute of Finance
December, 2013
12
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Institution Investors
European Banks
U.S. Banks
Securities Firms
Asian Banks
Canadian Banks
Other Banks
Amsterdam Institute of Finance
December, 2013
47.4%
37.3%
5.5%
5.1%
2.9%
1.2%
0.6%
13
Asset Classes
 Sovereign
 Corporate
 Equity
 Alternatives
Styles
 Value
 Momentum
 Carry
 Volatility
Risks
 Economic Growth
 Inflation
 Liquidity
 Tail
Amsterdam Institute of Finance
December, 2013
14
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
December, 2013
High Yield
Investors
Bank
Bridge finance
Investment
Mezzanine
Investors
Operating
Entity
15
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
December, 2013
Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions Transaction
Harvard Business School case 9-206-1 Rev 10/16/06
16
Tax – Legal – Accounting Knowledge
Network Management
Industry Expertise
Corporate Finance Delivery
Fund
Raising
Amsterdam Institute of Finance
December, 2013
Investing
VALUE
Managing/
Monitoring
Exit
17
• Increased Debt (lower taxes)
• Bargain Purchase
• Operating Improvements
• Improved Governance
• Bondholder Value transfer
• Opportunistic Sale
• Restructuring Skills
Amsterdam Institute of Finance
December, 2013
18
Focus on return: what is the maximum price I can pay based on
given set uf projection and earn X% return?
Tradition Valuation =
Projected cash flows
Discounted rate
Terminal value
LBO Prespective = IRR (Equity discount rate)
Projected cash flows
Purchase Price
Sale Price (Terminal Value)
Amsterdam Institute of Finance
December, 2013
19
DCF
CFADS
Net Income
+ Dep/Amt
+/_ Change in deferred taxes
+/- Other noncash items
+/- Change in working capital
Cash flow from operations
+After tax interest
- CAPEX
- Unleveraged FCF
Net Income
Dep/Amt
Change in deferred taxes
Other non cash changes
Change in working capital
Cash flow from operations
No interest expense adjustment
Capex
CFADS
Amsterdam Institute of Finance
December, 2013
20
IRR
10%
20%
30%
40%
50%
Amsterdam Institute of Finance
December, 2013
Equivalent MOC Over 6 Years
1.8X
3.0X
4.8X
7.5X
11.4X
21
As the credit curve shifts,
the menu that is available
to
Issuers / Arrangers
changes
Bull Market Menu
•
•
•
•
•
•
•
•
•
Holding Company PIK
Tranche Term Loans
Covenant Light
High Yield Debt
Bridge Loans
Second Lien
Hybrid Preferred
Cross Lien Facilities
Asset Carve-outs
•
OPCO/PROPCO
•
Recapitalizations
Bear Market Menu
•
•
•
•
•
•
•
•
•
•
•
•
Stretch Senior
Seller Notes
Senior Notes
Private Placements
Equity
R/C Lite
Mezzanine
Smaller
floors
Sweeps
Prepayment penalties
covenants
Investor Friendly
Issuer Friendly
Amsterdam Institute of Finance
December, 2013
22
Fixing the Broken Deal – Price and
Structural Flex
Increase spread
Original issue discount
Eliminate PIK
Reduce debt
Add a subordinate tranche
More equity
Add covenants
Reduce Price
Seller Paper
Amsterdam Institute of Finance
December, 2013
23
Credit
Accounting
Tax
Regulation
Excess Capacity
Fundraising
Fund Structure
Returns
LPs
Public GPs
Amsterdam Institute of Finance
December, 2013
24
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Fundraising
2013 (9 mo) 69
2012
64
2011
50
2010
44
2009
65
2008
111
2007
2006
-
Dry Powder
190
175
175
175
200
200
190
150
Source: Standard & Poor’s Financial Services

Amsterdam Institute of Finance
December, 2013
25
Superior returns
Attracts capital
Deals chase money
Macro
Financial Markets
Disappoint returns
Impacts fundraising
Amsterdam Institute of Finance
December, 2013
Deal market
Capital chasings deals
26