presented by ca swatantra singh, b.com, fca, mba email id: [email protected]...
TRANSCRIPT
Presented By
CA Swatantra Singh, B.Com , FCA, MBA
Email ID: [email protected]
New Delhi , 9811322785, www.caindelhiindia.com,
www.carajput.com
Rajput Jain & Associates.
They buy companies…and then sell them (hopefully) at a profit in a few years.
Quick primer on industry jargon:
• Private equity firm = financial sponsor (e.g. The Blackstone Group)
• Strategic investor = corporation (e.g. Walmart)
• LBO = leveraged buyout
The private equity process
• Private equity firms raise ‘funds’ – e.g. ABC Fund I, ABC Fund II
• Within each fund, the private equity firm is a General Partner (GP). GP directly invests 1% of the fund
• All other investors are Limited Partners (LP) and they invest 99% of the fund
• GP – LP is an important distinction both for legal purposes and also for understanding how PE process works
• The fund itself is structured as a limited partnership
• Funds invest in multiple companies, acquire a controlling stake (usually 100% of equity)
• IRR threshold is 20-25% depending on size of the fund
• Lifetime of fund is ~ 5-10 years, this means that all companies in the fund must be sold within this period
• Private Equity firms usually setup groups based on Industry and/or Geography
• Many of the big firms are global
• Most firms are small with 50-100 investment professionals
• Some firms separate investment team from portfolio management team
• At entry level, most PE firms hire investment banking analysts with 2 years of experience
• Hard to break into industry, best way to do so is through contacts
• Lucrative and better hours than banking
• Culture tends to vary by firm – most PE guys are ex-bankers so some similarities in culture
PE hiring
PE exits
• Exits can be of the following types:
• IPO
• Sale to another PE firm
• Sale to a strategic investor
“Any fool can buy a company. You should be congratulated when you sell.”
-- Henry Kravis, founding partner of KKR
• How do Limited Partners make money
• Periodic return on capital (e.g. dividends), 80% of profits
• Profit on exit, proportionate to investment
• How do General Partners make money
• Management fee of 2% per annum on raised fund
• Carry or Carried Interest, usually 20% of profits
• Profit on exit, proportionate to investment
How do private equity firms make money?
• Mature Industry
• Mature Company
• Strong Management Team
• Low Leverage
• Low CapEx Requirements
• Strong Cashflows
• Good Exit Options
What company makes a good target for a buyout?
Step 1
• Determine purchase price
• Determine how much will be paid for using debt vs. equity
• What is the entry multiple (i.e. EV/EBITDA of x)
Step 2
• Project company’s cash flows over investment horizon (e.g. over 5 years)
• Use any excess cash (after operating expenses and interest has been paid) to pay down debt
• Equity holders receive no cash during these years
Step 3
• Assume an exit multiple (i.e. EV/EBITDA of x)
• Multiply this with EBITDA in exit year (e.g. in year 5)
• You now have EV. EV – outstanding debt = Value of Equity at Exit
• Using Equity put in from Step 1 and Equity at exit from Step 3, you can calculate IRR of equity investment
3-step IRR calculation for PE deals
• Deal size ~ $950 million
• Financed by 30% equity, 70% debt
• GPs invest 1% of the equity, LPs invest 99%
• Assume 5 year investment horizon
• 2% management fees per annum
• Profit sharing among GPs & LPs is 20% and 80% respectively
• Assume $120mm debt paid down each year & no cash distribution to equity holders during years 1-5
• Assume entry multiple (EV/EBITDA) of 8.0x and exit multiple (EV/EBITDA) of 8.5x
1. How much money did the General Partners invest initially?
2. How much money will the General Partners make in management fees on this deal?
3. What is the IRR earned by GPs?
Barneys Case Study
Barneys IRR (for LPs)
Deal value 950Total Equity 30% 285Total Debt 70% 665
Equity from GPs 2.85Equity from LPS 282.15
Entry multiple 8.0xExit multiple 8.5x
Year 0 1 2 3 4 5
EBITDA 120 120 120 120 120
Debt begin 665 545 425 305 185
Debt end 545 425 305 185 65
EV at exit 1020
Debt at exit 65
LPs Equity value at exit 945.45
CF to LPs -282.15 0 0 0 0 945.45
IRR 27%
Barneys IRR (for GPs)
Deal value 950Total Equity 30% 285Total Debt 70% 665
Equity from GPs 2.85Equity from LPS 282.15
Entry multiple 8.0xExit multiple 8.5x
Year 0 1 2 3 4 5
EBITDA 120 120 120 120 120
Debt begin 665 545 425 305 185
Debt end 545 425 305 185 65
EV at exit 1020
Debt at exit 65
GPs Equity value at exit 9.55
Management fees 2 2 2 2 2
Total CF to GPs -2.85 2 2 2 2 11.55
IRR 81%
Deal value 950Total Equity 30% 285Total Debt 70% 665
Equity from GPs 2.85Equity from LPS 282.15
Entry multiple 8.0xExit multiple 8.5x
Year 0 1 2 3 4 5
EBITDA 120 120 120 120 120
Debt begin 665 545 425 305 185
Debt end 545 425 305 185 65
EV at exit 1020
Debt at exit 65
GPs Equity value at exit 9.55
Management fees 2 2 2 2 2
Total CF to GPs -2.85 2 2 2 2 11.55
IRR 81%
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Presented By
CA Swatantra Singh, B.Com , FCA, MBA Email ID: [email protected] New Delhi , 9811322785, www.caindelhiindia.com, www.carajput.com
