execu net p.e. 101 mike lorelli

ExecuNet 2010 All Rights Reserved

p.e. 101

An ExecuNet Coffee Break

Presented by

Mike Lorelli

1


EBITDA

Earnings Before:

▬ Interest

▬ Taxes

▬ Depreciation

▬ Amortization

2


Stages

Idea Up & Running Mature

VC PE

• Trailing EBITDA

3


Agenda How the p.e.‟s made/make money

Terminology

Where they are; where their companies are

Some names

The p.e. model*

p.e. compensation

Performance measures

The Funnel

Getting to a p.e.

Know who you‟re getting in bed with

Management Compensation

The p.e.‟s Plan

LinkedIn

Resources

(*The p.e. model)

(Debt and Covenants)

4


Worse than real estate brokers in Darien, CT

1978: 80 „Leveraged Buyout Groups‟ in US

2008: Estimated 3,000 around the world

- 2,000 U.S.

5


Private Equity as a % of U.S. M& A Activity

'90 '95 '00 '05 '09

0

5

10

15

20

25

30

35

6


How They Made Money: ‟70‟s and ‟80‟s and today

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Late 70s Mid 80s Late 80s Early 90s Late 90s Today

Acquisition

Revenue Growth

Financial Engineering

Origination

Source: David Offensend, Evercore Capital Partners7


WSJ: “Buyouts Leave Simmons Little Rest”

8


Terminology

The providers of capital: Limited Partners, or

LP‟s- who are they?

The fund manager: General Partner, or

GP, or p.e.

9


10


Percentage of Capital by LP typeLBO Funds

11


Private Equity Firms Portfolio Companies

States % of total States

% of total

1 New York 23.3% 1 California 18.8% 2 California 15.1% 2 Texas 8.8% 3 Illinois 9.4% 3 New York 6.6%

4 Texas 7.4% 4 Massachusetts 5.9% 5 Massachusetts 7.0% 5 Florida 4.5% 6 Connecticut 6.5% 6 Pennsylvania 4.2% 7 Pennsylvania 3.7% 7 Illinois 4.2% 8 Virginia 2.4% 8 New Jersey 3.7%

9 Florida 2.2% 9 Georgia 3.2% 10 Michigan 2.0% 10 Ohio 3.0% 11 Ohio 2.0% 11 Colorado 2.7% 12 Colorado 1.9% 12 North Carolina 2.5% 13 North Carolina 1.9% 13 Virginia 2.4%

14 New Jersey 1.8% 14 Minnesota 2.2% 15 Georgia 1.7% 15 Michigan 2.0%

16 Washington DC 1.6% 16 Washington 2.0% 17 Minnesota 1.6% 17 Connecticut 1.9%

18 Maryland 1.4% 18 Maryland 1.9% 19 Indiana 0.8% 19 Wisconsin 1.8% 20 Wisconsin 0.8% 20 Tennessee 1.8%

Sample Size: 1,000+ private equity firms, 10,000+ portfolio companies

12


Many ways to categorize the 3,000

By size▬ Large $1 billion+ revenues

▬ Mid-market > $150 million

▬ Small < $150 million

By sector specialty▬ Health care

▬ Consumer

▬ IT

▬ Financial services

▬ etc.

And those that chase everything that moves

Net-net, sector first; and mid-market; not lower or upper

13


Excellent

14


Top 50 Fund ManagersRank Firm City Capital

($Millions)

1 Carlyle Group LP Washington $32,000

2 Permira Advisers LLP London $27,388

3 Bain Capital Inc. Boston $26,000

4 Blackstone Group New York $25,000

5 Kohlberg Kravis Roberts & Co. New York $24,300

6 Credit Suisse Private Equity New York $22,100

7 GS Capital Partners Inc. New York $21,500

8 Apax Partners Worldwide LLP London $20,750

9 Texas Pacific Group Inc. Fort Worth, TX $20,000

10 CVC Capital Partners London $18,784

11 Thomas H. Lee Partners Boston $18,000

12 HarborVest Partners Boston $16,800

13 Cerberus Capital Management LLC New York $16,500

14 Welsh Carson Anderson & Stowe New York $16,000

15 Apollo Advisors LP New York $15,000

16 Adams Street Partners LLC Chicago $12,700

17 Lehman Brothers Merchant Banking New York $12,600

15


Very Respectable Mid-Market

American Capital

Capital Partners

Founders Equity

Mid-Ocean

Nautic Partners

North Castle

Riverside Company

Wind Point

Goodrich Capital

Fenway Partners

Frontenac

Hamilton Robinson

Pegasus

HIG

Charter House Group

Gemini Investors

Lincolnshire

MCG Capital

16


The LBO model

Purchase▬ 7.0 X $9m = $63

▬ Cash 27

▬ Debt 36

Sale▬ 8.0 X 13 = $112

▬ Debt 32

▬ Proceeds 80

17


The LBO model

Purchase▬ 7.0 X $9m = $63

▬ Cash 27

▬ Debt 36

Sale▬ 8.0 X 13 = $112

▬ Debt 32

▬ Proceeds 80

= 3.1 X cash-on-cash

18


Maslow‟s Hierarchy of Needs

Air

19


p.e. Hierarchy of Needs

Air

Water

EBITDA

Sex

Self-actualization

Clothing

Shelter

Social Needs

20


21


The p.e. / L.P Model Pelosi 2008

Fund

2008 2009 2010 2011 2012 2013 2014 2015 2016

A

B

CD

E

F

G

H

I

J

F

E

DA

B

C

Sale

Purchase

22


The p.e. / L.P Model Pelosi 2008

Fund

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

A

B

CD

E

G

H

I

J

F

E

DA

B

C

Sale

Purchase

Invest Harvest

F

23


The “Vintage Year”

24


p.e. Compensation

2% of managed capital

▬ pays salaries, rent, and nominal bonuses

20% carried interest from profits on distributions*

* pre-Obama

25


Performance Measures

IRR 20% 28% 33+%

Cash-on-cash return 2X 3X 5+X

Hold period years 8+ years 6 years 3 years

26


Buyout Fund Sample

Partnership/Year

Capital

Committed (M)

Capital

Cont. (M)

Dist. As of

(M)

Net IRR

As of (%)

02/28/09 02/28/0

9

Endeavour Capital Fund III LP/2000 $25.0 $24.5 $41.9 29.6

Endeavour Capital Fund IV LP/2004 $50.0 $45.6 $16.1 25.2

Wellspring Capital Partners III LP/2002 $75.0 $80.9 $85.4 24.9

TPG Partners III LP/2000 $300.0 $284.5 $549.9 24.5

BDCM Opportunity Fund LP/2002 $50.0 $108.5 $128.1 23.3

Providence Equity Partners IV LP/2000 $150.0 $210.1 $243.9 22.5

2000 Riverside Capital Appreciation Fund/2000 $50.0 $45.9 $68.0 22.4

Green Equity Investors III LP/1999 $50.0 $49.4 $104.1 21.7

Hicks Muse Tate & Furst Europe Fund LP/1999 $99.3 $116.8 $195.9 21.6

Fox Paine Capital Fund II LP/2000 $50.0 $42.0 $47.8 20.0

Castle Harlan Partners IV LP/2002 $100.0 $98.3 $90.7 18.4

KKR European Fund LP/1999 $400.0 $532.0 $737.3 18.1

OCM Principal Opportunity Fund II LP/2001 $50.0 $61.3 $79.4 17.3

Aurora Equity Partners III LP/2004 $50.0 $39.0 $20.8 16.9

Providence Equity Partners III LP/1999 $100.0 $106.4 $157.2 15.6

2003 Riverside Capital Appreciation Fund/2003 $75.0 $72.2 $29.2 15.6

Matlin Patterson Global Opportunities Partners/2001 $75.0 $76.6 $117.1 15.2

OCM Opportunities Fund V LP/2004 $50.0 $50.0 $66.3 13.9

Vestar Capital Partners IV LP/1999 $100.0 $97.6 $101.1 13.9

27


The Funnel

300 teasers

100 books

7 LOI‟s

2 due diligence

1 close

28


“ The Capital Call” Pelosi 2008

Fund

2008 2009 2010 2011 2012 2013 2014 2015 2016

Sale

Purchase

A

B

CD

E

F

G

H

I

J

F

E

DA

B

C

29


Landing in a Portfolio Company

CEO

CFO or COO

C-level in „the leverage point‟

Other C-Level

* Check their web site

Direct to p.e. Deal Team (Board Members)*

Direct to p.e. Board Members and portfolio company CEO

Direct to p.e. Board Members

and portfolio company CEO

Portfolio company CEO

30


Who the p.e. wants to meet

Job Seekers

Deal Resource

Thesis-Driven

Deal Exec

Target-Driven

Deal Exec

Source: Andy Thompson, Notch Partners

31


Elements of a Deal Thesis

Clear definition of industry – niche, size, geography, etc.

Outline of value-creation opportunities

Outline of plan for pursuing those sources of value

Explanation of why you/ your team are ideally suited to lead

such an effort – include description of team if applicable

Roster of 5-20 target companies

Status of discussions with target companies (if any)

Thoughts on likely exits

Source: Andy Thompson, Notch Partners

32


Management Compensation

CEO $150K - $300K 50-75% 5.0% equity*

CFO/COO $125K - $275K 40-50% 1.5% equity

VP $125K - $225K 25-33% 1.0% equity

* and opportunity to co-invest

33


Know Who You‟re Getting in Bed With

Professionals

▬ results with class

Sharks

The tell-tale signs of people who re-use dental floss

$150K base

Low bonus

Minimal equity

No contract

34


The Plan

Fleshed out approach for how value will be created

▬ Strategic and operational blueprint

Rapid change principles

▬ 80/100 rule: an 80% solution that‟s ready to go now,

beats a 100% effective, theoretical solution, ready to go in 4

months

Make capital work hard

▬ Re-deploy underperforming assets

35


Buyout Example Economics

WPP/Co-Investors Results

• 30% IRR• 3.7x cash-on-cash return

CEO • Assuming

CEO co-invest of $750k CEO gets 7.5% of common

• CEO receives over $10 million

Investment (Example)

• Acquire a business for 5.5x EBITDA• Over 5 year horizon

Sales grow at 7% annually Margins improve from 14% to

15.5%• Sell business in year 5 for 5.5x EBITDA

Courtesy: Wind Point Partners

36


Components of Equity Value Creation

As EBITDA grows, the value of the enterprise increases.

At the same time, free cash flow reduces debt.


At Close Y1 Y2 Y3 Y4 Y5

EBITDA 25.2 27.5 30.1 32.9 35.9 39.1

Exit Value (5.5x EBITDA) 138.6 151.5 165.5 180.7 197.2 215.2

Cash Available for Debt Pay down 7.9 9.6 11.5 13.6 15.8

Net Debt 100.8 92.9 83.2 71.7 58.1 42.4

$ millions

37


The Three Primary Return Drivers

Leverage

Value Improvement: EBITDA Growth

Exit Multiple Expansion


38


WSJ April, 2010

39


APRIL 23, 2010

Blackstone Rides a Better Portfolio

By PETER LATTMAN

NEW YORK—More signs of strength emerged in the private-equity business Thursday, as Blackstone Group LP reported solid first-

quarter earnings results. The firm said the value of its private-equity portfolio rose 16% in the first quarter and its real-estate

holdings increased 12%. Its hedge-fund business, which has about $50 billion under management, also posted good performance.

Shares of Blackstone fell 11 cents, or 0.74%, to $14.84 in 4 p.m. New York Stock Exchange trading.

The report from New York-based Blackstone, the industry's largest player, came as its private-equity peers struck a flurry of

leveraged buyouts in the $1 billion range, underscoring the recovery of the large banks that provide the corporate loans to fund

such deals.

Blackstone Chairman Stephen Schwarzman sees 'concrete signs of economic improvement in our portfolio.„

The private-equity business has settled into a "new normal" after a volatile period. After a buyout bubble during the middle of

last decade defined by record-size acquisitions and reckless lending practices, the financial crisis brought the industry to its

knees. After a sharp recovery, today's environment is characterized by fewer headline-grabbing deals and more-conservative

financing packages.

If there's one concern across the industry, it's the pushback private-equity firms are receiving from their investor base of

pension funds and sovereign-wealth funds. These investors, called limited partners, are arguing for lower fees and greater

disclosure from buyout shops. Fund raising remains difficult; Blackstone is raising its sixth flagship buyout fund and expects to

raise $12.5 billion, according to a person familiar with the fund, down from its $21.7 billion fifth fund.

The private-equity business is certainly heating up again. In particular, firms announced several deals in which one group of

private-equity owners have acquired a business from another private-equity group. Such transactions are less complicated than

selling a business to a public company or via a public offering. Some private-equity investors frown upon the practice, as they

can create the perception that these deals are being done for expediency rather than maximizing value.

40

http://online.wsj.com/search/term.html?KEYWORDS=PETER+LATTMAN&bylinesearch=true

http://online.wsj.com/public/quotes/main.html?type=djn&symbol=BX


A word on covenants

Max Capital expenditure $1.5 million

Min LTM EBITDA 11.0 million

Fixed Charge Coverage 1.00x

Total Deb Leverage 3.75x

Maximum Senior Leverage 4.50x

41


The trades . . .

42


A few words about

Have a killer handle

- Premium Brand Building CEO - Idea Monitizer - Rapid new revenue streams for brands

Work hard at your keywords . . . ask the recruiter!

Refresh your „Activities‟

A business picture, not a tourist photo

Reco‟s matter . . . 25+

Don‟t be “unconnected” . . . 250+

Consider having it professionally prepared

Claim your personal URL and put on your resume

www.LinkedIn.com/in/mikelorelli not www.LinkedIn.com/in/02264lorelli9946

43

http://www.linkedin.com/in/mikelorelli

http://www.linkedin.com/in/02264lorelli9946

http://www.linkedin.com/home?trk=hb_logo


Resources

▬ Private Equity Info www.PrivateEquityinfo.com Andy Jones

[email protected]

(512) 771-3943

▬ Galante‟s

▬ E-blasts: Solutions Marketing:

- Llew Smith (203) 655-2601

- [email protected]

- 2,700 p.e.‟s/VC‟s $499

- 2,700 search + 2,700 p.e.‟s $699

▬ LinkedIn: Jan Wallen [email protected]

44

http://www.privateequityinfo.com/

mailto:[email protected]



Good luck!

Mike Lorelli

CEO and Chief Passionate Officer

WaterJel Technologies, Inc.

(201) 806-3110

[email protected]

45



Michael K. Lorelli

15 Norman Lane

Darien, CT 06820

Office: 203 655-2444

FAX: 203 655-6916

Email: [email protected]

Website: www.Lorelli.net

Michael K. Lorelli

Mike Lorelli‟s 30-year career spans a wide range of consumer products and services, and B2B

categories, with responsibilities for both domestic and international units. His years as a line-

operating manager have largely been with Fortune 100 companies: PepsiCo and Bristol Myers

Squibb. For the last decade, as CEO, he has led revitalizations and turnarounds for private

equity firms. For example, Dr. John Rutledge, Chairman of Rutledge Capital, will say: “I would

invade China with Mike alone in a rubber boat.” He is presently CEO of Carlstadt, NJ based

WaterJel Technologies, the leader in burn care products. WaterJel is a Riverside Company.

Previously, he led the growth of Latex International, a Pouschine-Cook company. Mike has also

led CEO engagements for Rutledge Capital, and Cerberus.

Mike‟s assignments at PepsiCo included Executive Vice President – Marketing, Sales and R&D

for Pepsi-Cola North America, President of Pepsi-Cola East, a $1.5 Billion operating company,

and President for Pizza Hut‟s International division where he led a “global or bust” charge,

resulting in expanding the Company‟s presence from 68 to 92 countries, surpassing McDonalds

in country count. During his PepsiCo tenure, he is given credit for authoring the soft drink

company‟s “Big Event Marketing” strategy, which coupled the product with leading- edge events

in entertainment, sports, consumer electronics, movies and home video.

Mike holds a Bachelor of Engineering degree in Industrial Engineering from New York University,

and an MBA in Marketing from NYU‟s Stern Graduate School of Business. He has traveled to 54

countries, is an avid runner, claims to excel at no sport, is an active private pilot, member The

CEO Trust, former member of YPO, and author of the childrens‟ best-seller “Traveling Again,

Dad?” with profits donated to childrens‟ charities. Mike is a Director of iMedicor (Ticker: VMCI).

He resides in Darien, CT with his wife Nancy.

46


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execu net p.e. 101 mike lorelli

Economy & Finance

andy thompson

5x ebitda

equity business

rutledge capital

portfolio

led

business

lorelli