PRESENTATION ON

PRIVATE EQUITY

By Gitanshu Khurana
What Is Private Equity
 Private equity consists of investors and funds that
make investments directly into private companies
or conduct buyouts of public companies that result
in a delisting of public equity.
 Capital for private equity is raised from retail and
institutional investors, and can be used to fund new
technologies, expand working capital within an
owned company, make acquisitions, or to
strengthen a balance sheet.
 Participants
 Private Equity Firm: also called LBO firm, buyout firm or
financial sponsor
 Investment Banks
 Introduce potential acquisition targets to PE firms
 Help negotiate acquisition price
 Provide loans or arrange bond financing
 Arrange exit transaction
 Investors: also called Limited Partners
 Management
 Co-invest with the PE firm: both will do very well if there is a successful
exit
 Accept lower cash compensation, but also receive options and other forms
of incentive compensation
 Private Equity VS. Hedge Funds
Private Equity Hedge Funds
 Private equity investment  Hedge funds usually focus on
groups are geared towards short or medium term liquid
long-hold, multiple-year securities which are more quickly
investment strategies in illiquid convertible to cash, and they do
assets not have direct control over the
 Have more control and influence business or asset in which they
over operations or asset are investing.
management to influence their  Have less control over the assets
long-term returns and lack in voting power.
 Fund of Funds
 A private equity fund of funds consolidates
investments from many individual and institutional
investors to make investments in a number of
different private equity funds
 This enables investors to access certain private
equity fund managers that they otherwise may not
be able to invest with, diversifies their private
equity investment portfolio and augments their due
diligence process in an effort to invest in high
quality funds that have a high probability of
achieving their investment objectives
 Private equity fund of funds represent about 15%
of committed capital in the private equity market
 Types Of Private Equity
 Private equity can be broadly defined to include the following
different forms of investment:

 Leveraged Buyout: Leveraged buyout (LBO) refers to

the purchase of all or most of a company or a business
unit by using equity from a small group of investors in
combination with a significant amount of debt.
 The targets of LBOs are typically mature companies that
generate strong operating cash flows. Private equity
firms view target companies :-
1.Platform companies
2.add-on or tuck-in acquisitions
 Growth Capital :- refers to equity investments, in
relatively mature companies that are looking for
capital to expand or restructure operations, enter new
markets or finance a major acquisition without a
change of control of the business.
 Because of lack of scale these companies generally
have a few alternative conduits to secure capital for
growth.
 The primary owner of the company may not be
willing to take the financial risk alone.
 Mezzanine capital
 Mezzanine capital refers to subordinated debt or preferred
equity securities that often represent the most junior portion
of a company's capital structure that is senior to the
company's common equity.
 This form of financing is often used by private equity
investors to reduce the amount of equity capital required to
finance a leveraged buyout or major expansion.
 Mezzanine capital, which is often used by smaller companies
that are unable to access the high yield market, allows such
companies to borrow additional capital beyond the levels
that traditional lenders are willing to provide through bank
loans.
 Venture capital
 Venture capital is a broad subcategory of private equity
that refers to equity investments made, typically in less
mature companies, for the launch of a seed or start-up
company, early stage development, or expansion of a
business.
 Venture investment is most often found in the application
of new technology, new marketing concepts.
 Many entrepreneurs do not have sufficient funds to
finance projects themselves, and they must therefore seek
outside financing.
 Venture capital is most suitable for businesses with large
up-front capital requirements which cannot be financed by
cheaper alternatives such as debt.
 History And Development
 The seeds of the US private equity industry were planted in
1946 with the founding of two venture capital firms: American
Research and Development Corporation (ARDC) and J.H.
Whitney & Company.
 Before World War II, venture capital investments (originally
known as "development capital") were primarily the domain of
wealthy individuals and families. In 1901 J.P. Morgan arguably
managed the first leveraged buyout of the Carnegie Steel
Company using private equity.
 Modern era private equity, however, is credited to Georges
Doriot, the "father of venture capitalism" with the founding of
ARDC and founder of INSEAD, with capital raised from
institutional investors, to encourage private sector investments in
businesses run by soldiers who were returning from World War
II.
 Origins of the leveraged buyout

 The first leveraged buyout may have been the purchase

by McLean Industries, Inc. of Pan-Atlantic Steamship Company in
January 1955 and Waterman Steamship Corporation in May
1955.Under the terms of that transaction, McLean borrowed
$42 million and raised an additional $7 million through an issue
of preferred stock.
 When the deal closed, $20 million of Waterman cash and assets
were used to retire $20 million of the loan debt.
 Similar to the approach employed in the McLean transaction, the
use of publicly traded holding companies as investment vehicles to
acquire portfolios of investments in corporate assets was a
relatively new trend in the 1960s popularized by the likes
of Warren Buffett (Berkshire Hathaway) and later adopted
by Nelson Peltz (Triarc), Saul Steinberg (Reliance Insurance)
and Gerry Schwartz.
 Role And Importance Of private Equity

 They help in growth of the Economy

 Helps the companies for expanding to international
markets
 Life Boat for the companies who have unfortunately
come under hard times and need a turnaround
 Expertise to lead them on a new and sustainable
path.
 Greater expansion of business create more
employment.
 Private equity fund
performance
 Due to limited disclosure, studying the returns to private equity is
relatively difficult, unlike Mutual funds.
 It is challenging to compare private equity performance to public
equity performance, in particular because private equity fund
investments are drawn and returned over time as investments are made
and subsequently realized
 It is also claimed that PE fund managers manipulate data to present
themselves as strong performers, which makes it even more essential to
standardize the industry
 The application of the Freedom of Information Act (FOIA) in U.S. and
Guidelines for Disclosure and Transparency in Private Equity in U.K ,
now makes data readily available.
 Returns On Private Equity Investments

 Returns on private equity investments are created

through one or a combination of three factors that
include:
1. debt repayment or cash accumulation through cash
flows from operations
2. operational improvements that increase earnings over
the life of the investment and multiple expansion
3. selling the business for a higher multiple of earnings
than was originally paid
Ways To Exit A Company
 Initial Public Offering (IPO) – shares of the company
are offered to the public, typically providing a partial
immediate realization to the financial sponsor as well as
a public market into which it can later sell additional
shares;
 Merger or Acquisition – the company is sold for either
cash or shares in another company;
 Recapitalization – cash is distributed to the shareholders
(in this case the financial sponsor) and its private equity
funds either from cash flow generated by the company
or through raising debt or other securities to fund the
distribution.
 Size of the industry

 The state of the industry around the end of 2011 was as

follows:-
 Private equity assets under management probably exceeded $2.0 trillion at the end
of March 2012, and funds available for investment totaled $949bn.
 Some $246bn of private equity was invested globally in 2011, down 6% on the
previous year and around two-thirds below the peak activity in 2006 and 2007.
 Following on from a strong start, deal activity slowed in the second half of 2011
due to concerns over the global economy and sovereign debt crisis in Europe.
 The fund raising environment remained stable for the third year running in 2011
with $270bn in new funds raised, slightly down on the previous year’s total. Around
$130bn in funds was raised in the first half of 2012, down around a fifth on the
first half of 2011
 Assets Under Management (AUM)
Private Equity Assets Under Management Reached $1.2 Trillion in 2008
Leveraged buyout assets under management 1, 2003 – 2008, $ in billions

$1,249
Rest of World 30
70
Asia
Europe +38%
$906
North America 399
15
45
$679
293
8
$478 32
$401 241
$399 4
4 2 22 183 750
6 13 143
134 553
398
225 243 269

2003 2004 2005 2006 2007 2008

Note 1: Assets under management defined as sum of funds raised in the current year plus the previous four years.
Source: McKinsey Global Institute; Preqin
 Assets Under Management (AUM)
2005 Global Allocations to Private Equity LBO Funds by Type of Limited Partner

Other 2
Banks 8%
Investment 4%
companies Private equity
5% fund of funds1
Endowments / 37%
foundations
6%
Insurance
companies
7%

Corporate
pension funds Public pension
10% funds
23%

Note 1: Assets come from pensions, other institutions, and wealthy individuals.
Note 2: Includes wealthy individuals.
Source: McKinsey Global Institute; Preqin
 Private equity firms
 According to an updated 2013 ranking created by industry
magazine Private Equity International, based on the amount of
private equity direct-investment capital raised over a five-year
window :-
 10.

 Headquarters London, United Kingdom

Luxembourg City
09.

Headquarters:-200 Clarendon Street

Boston, Massachusetts, U.S.
 08.

GLOBAL MANAGEMENT

 Headquarters Solow Building

New York City, United States
07.

Headquarters :- Boston, Massachusetts, United States

 06.

 Headquarters85 Broad Street

New York City, New York, United States
 05.

 Headquarters450 Lexington Avenue

New York City, New York, United States
 04

Headquarters :-9 West 57th Street Suite 4200

New York, New York 10019
U.S.
03.

Headquarters :-345 Park Avenue

Manhattan, New York City, USA
02.

Headquarters :-Washington, DC, U.S.

 01.

 Headquarters :- Fort Worth, Texas

San Francisco, California, U.S.
 TOP 10 Biggest Private Equity Buyouts
in History

 #10 Alliance Boots

 Deal value in
2007: $24.8 billion
 Inflation adjusted
value: $26.4 billion
 Buyers: KKR
 The British pharmacy
and healthcare chain is
the largest leveraged
buyout in the history of
European business.
 #9 Hilton Hotels

 Deal value in 2007: $26

billion
 Inflation adjusted
value: $27.68 billion
 Buyers: Blackstone
 Blackstone took control of
Conrad Hilton's resort and
hotel empire by spending
billions and moving fast to
take the company private
towards the end of 2007

 #8 Clear Channel

 Deal value in 2006: $25.7

billion
 Inflation adjusted
value: $28.14 billion
 Buyers: KKR, Bain Capital
and Thomas H. Lee
 Buying out Clear Channel
communications gave the
three firms involved in the
deal access to what was a
compellingly emergent
satellite radio market in
2006.
 #7 Alltel

 Deal value in 2007: $27 billion

 Inflation adjusted
value: $28.74 billion
 Buyers: Goldman Sachs and
TPG Capital
 After picking up Alltel for a
rather hefty sum in 2007,
Goldman and TPG turned
around and sold the wireless
company to Verizon for a profit
of almost $3 billion, less than a
year later.
 #6 Harrah's Entertainment

 Deal value in 2006: $27.4 billion

 Inflation adjusted value: $30
billion
 Buyers: Apollo Global
Management and TPG
 After the gaming conglomerate
acquired the Caesar's
Entertainment corporation in
2005, shares jumped, but that
didn't deter Apollo and TPG
from forming Hamlet Holdings and
taking Harrah's private in 2008.
 #5 First Data

 Deal value in 2007: $29

billion
 Inflation adjusted
value: $30.87 billion
 Buyers: KKR and TPG
 The 2007 KKR-led buyout
of internet commerce giant
First Data took over the
title of the largest
technology deal in the
history of private equity. A
title it still holds.
 #4 Hospital Corp. of America

 Deal value in 2006: $32.7

billion
 Inflation adjusted
value: $35.81 billion
 Buyers: Bain, KKR and
Merrill Lynch
 At the time (and without
being adjusted for
inflation), the 2006 buyout
of HCA was the largest
private equity deal in
history.
 #3 Equity Office Properties

 Deal value in
2007: $38.9 billion
 Inflation adjusted
value: $41.41 billion
 Buyers: Blackstone
 This deal was a veritable
"Clash of the Titans"
between Sam Zell and
Steve Schwarzman.
 Well, if by "Clash" one
means "Everybody gets
wealthier."
 #2 Energy Future Holdings

 Deal value in 2007: $44.37

billion
 Inflation adjusted
value: $47.23 billion
 Buyers: KKR, TPG and Goldman
Sachs
 As if they felt challenged by
Blackstone's enormous deal to
acquire Equity Office, KKR,
Goldman and TPG moved fast to
spend $45 billion on the massive
Dallas-based electric utility
company and then appoint
former Secretary of State to run
the whole thing.
 #1 RJR Nabisco

 Deal value in 1989: $31.1

billion
 Inflation adjusted value: $55.38
billion
 Buyers: KKR
 Still the biggest, badest and most
iconic private equity buyout of all
time, KKR's staggeringly
aggressive (and inevitably
contentious) move on the tobacco
and food titan can be fairly
credited with giving rise to the
leveraged buyout boom over the
next twenty-odd years.
 Top 10 Private Equity Firms In India
1.ICICI Venture
2.Chrys Capital
3.Sequoia Capital
4.India Value Fund
5.Kotak Private Equity Group
6.Baring Private Equity Partners
7.Ascent Capital
8.CX Partners
9.Everstone Capital
10.Blackstone Group
 Questions for discussion:

 1.Does private equity ownership provide a better

form of governance and incentives?

 2. Should policy makers be worried about the

practices of PE houses?