tpg pe presentation
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TPG Private Equity PresentationTRANSCRIPT
Introduction to Private Equity
September 2009
Slides 1 – 6 inserted by Professor Blemaster
1
Private Equity Generic LBO Candidates
2
Private Equity Generic LBO Capital Structure
3
Private Equity What Does PE Offer?For investors, superior returns, at least for the top quartile players
– The diversification of another asset class
A better governance model– Stable shareholder– Direct involvement with the business via the board and control of CEO
selection– Proactive intervention frequent – i.e. replacing the CEO
A longer time frame not quarters but not forever – Buy, improve, sell
Superior compensation – more and better designed– Better alignment– Attract the best talent
More efficient capital structures – i.e. more debt– Debts helps returns and acts as a governance item
Higher expectations, a sense of urgency
4
Private Equity
Ability to support global infrastructure– Requires over $20bn under management– Allows firm to move with opportunities over time
Ability to organize around sector groups– Requires substantial size to support 10-15 sector groups– Allows firm to follow sector cycles
Portfolio power– Creates investment insight (easier to understand a retailer if you
already own 5 of them)– Economic cycles, both positive and negative, can be identified
from portfolio data– Large base to encourage investment banking-created
opportunities– Ability to attract senior advisors to sit on significant boards
Ability to support a functional operating group– Requires 30-40 portfolio companies– Must be large enough to offer Ops team a career path
Strategic relationships with major capital partners
Competitive Advantages of a Leading Buyout FirmCompetitive Advantages of a Leading Buyout Firm
Big Time PE Firm Advantages
5
Private Equity Structural Issues
Remember whose money it is!
The risks are largely limited to the special purpose borrowing entity
The PE firm and its partners are not primarily the ones at risk
The limited partners investors i.e. the institutional investors and the lenders have 95% of the risk more or less
For example, Blackstone is not liable for the debt of any specific buyout deal
The risks to the PE firm are more reputational and related to their ability to raise future funds
6
Private EquityThis presentation is provided for informational purposes and reference only. The contents hereof should not be construed as investment, legal, tax or other advice. This presentation may not be used or relied upon in evaluating the merits of any investment. No representation or warranty, express or implied, is made as to the accuracy or completeness of the information contained herein.
By acceptance hereof, you agree that you will keep confidential all information contained in this presentation and will only use it for informational purposes.
Disclaimer
7
Private Equity Agenda
I. Nuts and Bolts of Private Equity
II. Overview of TPG
III. Case Studies
IV. Discussion
8
Private Equity
Buy operating businesses
Usually obtain control or significant influence
Pension funds
Life insurance companies
Financial institutions
High net worth individuals/families
Active members of board of directors
Help in development of strategy
Provide direct assistance in certain areas (M&A; corporate finance)
Hold period typically 3-7 years
Capital markets
Strategic sales
Private Equity Investors
4. Sell Invest-ments
1. Raise Capital
2. InvestCapital
3. Manage Investments
What Do Private Equity Investors Do?
PE CyclePE CycleRaise MoneyRaise MoneyBuyBuyTransformTransformSellSell
9
Private Equity Deal Flow and Fundraising
GLOBAL PE VOLUME($ Billions)
BUYOUT FUNDRAISING($ Billions)
Recent deal flow and fundraising environment for buyouts near trough levels
$52 $64$109 $100 $81 $106 $132
$230$336
$760$818
$240$32$23
$66
$33
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1H09
$67$44
$88
$53 $43$28
$64
$238
$292
$205
$159
$36$44$23
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1H09
Source: Morgan Stanley, SDC, Thompson Source: Buyouts.
10
Private Equity
Why the Explosion and Decline in Private Equity?
11
Private Equity Growth of Private Equity
More Big Deals
Strategic Acquirer Behavior
Big Companies were Cheaper
More Public to Privates
Lower Cost of Debt Capital
Entry into New Geographies
12
Private Equity Largest LBOs of All Time
TOP 10 GLOBAL LBOS OF ALL TIME ($ Billions)
$43.8$38.9
$32.7 $31.1$27.4 $25.7
$21.6$17.6 $17.4
$15.0
TXU Equity
Office
HCA RJR
Nabisco
Harrah's Clear
Channel
Kinder
Morgan
Freescale Albertson's Hertz
9 of the 10 largest LBOs of all time have occurred since 2005
Source: Mergermarket and SDC
13
Private Equity Strategic Competition
Strategic competition increasing
PRIVATE EQUITY MARKET SHARE OF M&A(% Market Share)
2.9% 3.4% 3.6%2.8%
3.6% 3.2%
5.3%
10.1%10.7%
13.5% 13.0%
22.7%
19.0%
8.9%
2.9%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
YT
D 2
009
Source: Morgan Stanley
14
Private Equity
0x
25x
50x
75x
100x
125x
150x
175x
P/E
Mul
tiple
March 2000March 2000
Source: ISI Group
Forward PE of the 50 Largest (Market Cap)
Large cap stocks earned premium valuations in 2000…
Private Equity Market OverviewLarge Cap Valuations
15
Private Equity
... but looked relatively cheap in 2006
0x
25x
50x
75x
100x
125x
150x
175x
P/E
Mul
tiple
September 2006September 2006
Forward PE of the 50 Largest (Market Cap)
Source: FactSet
Private Equity Market OverviewLarge Cap Valuations
16
Private Equity Public-to-Privates
US PUBLIC–TO–PRIVATE TRANSACTIONSVolume ($ Billions)
$3.7 $0.6 $0.5 $6.4 $4.2 $4.9 $9.4 $6.8 $14.8 $13.2$3.8 $5.2 $3.4 $10.4
$0.20
$33.6$55.7
$304.8
$278.7
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD
2009
Dramatic decline in public-to private volume over the last year
Source: SDC, Morgan Stanley, S&P
17
Private Equity
High Yield Pricing
6%
9%
12%
15%
18%
21%
.
The market has experienced a dramatic recovery since early 2009
1997 1998 1999 2000 2001 2002 2003 2004 20051996
HY
Inde
x
Era #2“the 12% Era”
Era #1“the 10% Era”
Source: JPMorgan
2006
Private Equity Market Overview
Era #4Era #4““the 11% Erathe 11% Era””??
Era #3“the 8% Era”
2007 2008 2009
18
Private Equity
Significant increase in WACC…
25%35% 40%
2002 2005 2009
Total Debt Equity
WACC =12.4%
Representative Cost of Capital for a Large Transaction(1)
Average Cost of Debt = 8.7%
(1) Large transactions typically reflect below-market average equity contributionSource: TPG Estimates
Bank Debt
High Yield
Bank Debt
High Yield
25% Hurdle
Private Equity Market OverviewIncrease in PE Cost of Capital
Average Cost of Debt = 7.3%
25% Hurdle
WACC = 9.8%
25% Hurdle
High Yield
Bank Debt
WACC = 14.7%
Average Cost of Debt = 7.8%
19
Private Equity
…but lower valuation multiples may allow Private Equity buyers to pay a lower purchase price and earn the same returns
$850
$995
$770
17% premium
Illustrative Deal at 2002 WACC (12.4%)
Lower Multiples Enable Lower Price for Same Returns(1)
(1) Illustrative case assumes 15% EBITDA CAGR, and capital structure per previous slideSource: TPG Estimates
Illustrative Deal at 2005 WACC (9.8%)
Private Equity Market OverviewIncrease in PE Cost of Capital
Illustrative Deal at 2009 WACC (14.7%)
23% discount
20
Private Equity
9586
63
34346
72
175 6
5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 14%+
164313 5
6376 76
21
60
8 3
<=5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 14%+
Shift of Cost of Capital
The buyout opportunity set has markedly declined, but historic M&A cycle suggests it will return
WACCS FOR NON-FINANCIAL S&P 500 COMPANIES – 2007Number of Companies
74%“WACC Eligible”
PE WACC: 8.3%
Source: Bloomberg, McKinsey analysis
<3%“WACC Eligible”
Normalized PE WACC: ~14%
Public After Tax WACC
Public After Tax WACC
WACCS FOR NON-FINANCIAL S&P 500 COMPANIES – 2008Number of Companies
21
Private Equity Asian PE Market is Coming of Age
SPONSOR-LED M&A VOLUME($ Billions)
PRIVATE EQUITY DEAL VALUE AS % OF GDP(2008)
Accelerating growth through 2007
Source: Dealogic
…but still in early stages of development
Source: Dealogic
$4
$9$11
$18
$39 $40
$25
$3
2001 2002 2003 2004 2005 2006 2007 2008
0.4%
0.2%
North America Asia
GDP: U.S. $17 Trillion U.S. $13 TrillionPE Deal Value: U.S. $70 Billion U.S. $25 Billion
2x
22
Private Equity Growth of Private Equity
Big Deals
Strategic Activity
Big Companies PE Multiples
Public to Privates
Cost of Debt Capital
New Geographies
–
Currently
23
Private Equity
(100)
(50)
0
50
100
150%
(60%) (40%) (20%) (0%) 20% 40% 60%
What Explains Rise and Fall of Deal Volumes?
Inside diligence by PE firms drives deal volume growth when work reveals potential performance ahead of expectations
Correlation: 0.82
EarningsActual Earnings Growth Lower than Expectations
Actual Earnings Growth Higher than Expectations
Incr
easi
ngD
ecre
asin
g
Q4 2008
Q2 2005Deals
Get Done
Deals Don’t Happen
PE Deal Volume Growth
It’s All About Expectations
24
Private Equity
Total = $44 Billion
LPs
HedgeFunds
Lead Sponsors Other PE
Banks
Strategic / Other
Note: Selected companies as of May 2007
Supply – Shadow Participants Exit
Non-traditional participants, who contributed ~50% of the equity during peak PE deal flow, have already largely exited
BREAKDOWN OF EQUITY SYNDICATIONSELLDOWN IN LARGE ’05 – ‘07 TRANSACTIONS
4%7%
9%
10%
22%
48%
25
Private Equity
I. HealthcareII. Software
The Next Opportunities
Baby with the Bath Water
Profit-Cycle Opportunities
IV. RetailV. Inventory destockingVI. “Sweat the assets”VII. Capitalizing on latent demand
Macro TrendsVIII. China StimulusIX. U.S. StimulusX. Inflation
III. Chapter 11 is our friend
Restructuring
26
Private Equity
CoreCompetencies:
Return
1985
Ability to do the deal
Three bankersand a Rolodex
Wave 1 Wave 2Ability to find and spot
the value
InvestmentJudgment
Wave 3Ability to improve
the value
OperatingValue Add
Wave 4Ability to build and
sustain a firm
FirmBuilding
1995 2005 2007
Art of the DealArt of the Deal Sector ExpertiseSector Expertise Active Transformation Active Transformation of Companiesof Companies
Replicable, Replicable, Sustainable ModelSustainable Model
FirmPrivate Equity Firm Building
27
Private Equity
“Buy” decision
Public MarketPublic Market
“Sell” decision
Private Equity OverviewRelative Tool Kits: Public vs. Private Investors
28
Private Equity
“Buy” decision
“Sell” decision
Private EquityPrivate Equity
“Buy” decision
The “Deal”
– Purchase negotiations
– Structure
Financial leverage
– New debt
– Restructuring
Management control
– Incentives
– New Management
– Cost cutting
Strategic direction
– Business model changes
– Growth
“Sell” decision
– Public or private
Public MarketPublic Market
Private Equity OverviewRelative Tool Kits: Public vs. Private Investors
29
Private EquityPrivate Equity Required Skill Set
InvestmentInvestmentJudgmentJudgment
Industry knowledge
Themes
Top-down/bottom-up
Deal SkillsDeal Skills
Financing
Negotiation
PortfolioPortfolioManagementManagement
Value-added
Strategic direction
Turnarounds
Build all skill sets to optimize performance
Private Equity Overview
30
Private EquityPrivate Equity Return Drivers
Revenue growthMargin improvement
Buy cheapImprove strategic positioning
Leverage important, but riskyRequires focus on cash generation capability (working capital, capex, etc.)
Earnings/EBITDA GrowthEarnings/EBITDA Growth
Multiple ArbitrageMultiple Arbitrage
Debt PaydownDebt Paydown
or
or
One is probably okay, two is great, three is a home run
Private Equity Overview
31
Private Equity
Sales
EBITDA
margin
TEV Multiple
Leverage Multiple
Total Enterprise Value
less: Net Debt
Equity Value
$1,000
200
20%
5.0x
3.0x
$1,000
600
$400
At Investment
10% CAGR
10% CAGR
No Expansion
No Debt Paydown
Change During5 Year Hold Period
$1,611
322
20%
5.0x
1.9x
$1,611
600
$1,011
At Exit
IRR = 20%
Private Equity OverviewPrivate Equity Return Drivers
32
Private Equity
$1,000
200
20%
8.0x
3.0x
$1,600
600
$1,000
No Growth
No Growth
3.0x Multiple Expansion
No Debt Paydown
Sales
EBITDA
margin
TEV Multiple
Leverage Multiple
Total Enterprise Value
less: Net Debt
Equity Value
$1,000
200
20%
5.0x
3.0x
$1,000
600
$400
At InvestmentChange During
5 Year Hold Period At Exit
IRR = 20%
Private Equity OverviewPrivate Equity Return Drivers - Multiple Arbitrage
33
Private EquityPrivate Equity Return Drivers - Debt Paydown
$1,000
200
20%
5.0x
0.2x
$1,000
41
$959
No Growth
No Growth
No Expansion
Debt Paydown fromCash Flow
Sales
EBITDA
margin
TEV Multiple
Leverage Multiple
Total Enterprise Value
less: Net Debt
Equity Value
$1,000
200
20%
5.0x
3.0x
$1,000
600
$400
At InvestmentChange During
5 Year Hold Period At Exit
IRR = 19%
Private Equity Overview
34
Private EquityPrivate Equity Return Drivers - the “Trifecta”
$1,611
322
20%
8.0x
nm
$2,577
(206)
$2,783
10% CAGR
10% CAGR
3.0x Multiple Expansion
Debt Paydown fromCash Flow
Sales
EBITDA
margin
TEV Multiple
Leverage Multiple
Total Enterprise Value
less: Net Debt
Equity Value
$1,000
200
20%
5.0x
3.0x
$1,000
600
$400
At InvestmentChange During
5 Year Hold Period At Exit
IRR = 47%
Private Equity Overview
35
Private Equity
Management Fees
– 1-2% per year of committed capital
– Ratchets down after investment period
Transaction Fees
– Ability to charge varies with deal
– GP usually allowed to keep 20-50% with balance going to LPs
Carried Interest
– 15-30% of profit subject to 8-20% LP hurdle rate
– Based on total fund performance
– Funds typically target 20-30% IRR’s
General Partners Compensation