KKR Private Equity Investment

Committees
Alex Navab
July 17, 2012

Process Overview

Investment Committee
Main decision making forum for all new investments for private equity
Meets formally two times per week Monday and Thursday mornings (NY time)
Iterative process not just the last step
All key decision points should come to the Committee

Meaningful money to be spent on analysis

Initial bid proposal (excluding early stage and exploratory first round bids)

Interim and final bids

Formal approach to company or board

Committee should also be used as sounding board, and we are actively encouraging coming to the
Committee earlier in your evaluation/thinking

Controversial issues

Specific guidance on issues

Quick read before a lot of work done (e.g., minority investment)

Most investments will be discussed with the Committee four or more times before a final decision

Also encouraging using regional heads/other IC members as a sounding board before coming to the
Committee

Memos to be submitted Friday for Monday meeting and Tuesday for Thursday meeting
Email Erika Stadtlander prior to memo submission, copying Alex Navab and Johannes Huth, to get
on the agenda
3

Investment Committee Members

North American
IC

European
IC

Asian
IC

China Growth
IC

Henry Kravis

Henry Kravis

Henry Kravis

Henry Kravis

George Roberts

George Roberts

George Roberts

George Roberts

Paul Raether

Mike Michelson

Mike Michelson

Joe Bae

Mike Michelson

Johannes Huth*

Johannes Huth*

David Liu

Johannes Huth*

Alex Navab*

Alex Navab*

Ming Lu

Todd Fisher

Mike Calbert

Mike Calbert

Alex Navab*

Brian Carroll

Joe Bae

Mike Calbert

Dominic Murphy

David Liu
Ming Lu

* Co-Chairs
4

Guidelines and Logistics

Memo: We encourage concise memos that highlight the key investment thesis, issues,
opportunities, financials, etc. All memos should be in readable font
Early stage ideas and exploratory first round bids (i.e., transactions where we have not met
management and are not spending money) do not require coming to the IC. To keep the IC
informed of deal flow we would ask you however to send a short (one page) note to the IC
describing the transaction that you are working on
Interim updates for a transaction in process or important follow-ups should be no more than 10
pages, including appendices
2nd / Final round bid memos should be no more than 20 pages, including appendices. See
attached for Key Topics to be covered in memos
IC Follow-Ups: To ensure detailed and consistent feedback on each meeting, we have asked a
principal or director in the US, Europe and Asia to assist us by taking detailed notes; highlighting
specific feedback and follow-up items for deal teams
The initial executives are Webster Chua in North America, Edouard Pillot in Europe and Rupen
Jhaveri in Asia
We would expect this role to initially last until year end and thereafter rotate every 6 months
Downside Case / Devils Advocate / Red Team: For each investment that is nearing a final
decision, a member of the team would be assigned a "devils advocate role" to dig deep into the key
issues and concerns of the investment
That person would need to vet those issues with the team in advance of the IC discussion
That person is also responsible for taking the lead in presenting the "devils advocate case" to
the IC including both the qualitative and quantitative aspects of a true downside scenario
Open Discussions: We require all members of a deal team (including the junior members) to
clearly state their position on the investment in question during an IC meeting
Its critical that all team members feel the responsibility and accountability to speak up
5

What to Cover

Suggested Topics and Timeline

Early Stage
Macro /
Industry

1 Macro Perspective
2 Industry Thesis
3 Long Term Industry Analysis and Performance
4 Company Thesis and Long Term Performance

Company / Risk Analysis

5 Competitive Positioning
6 Management
7 Scenario Analysis
8 Exhaustive Risk Analysis / Downside Case
9 Evolution of Cases
10 Exit and Entry Valuation Assumptions
11 Rationale for Investment
12 Disaggregate Source of Returns
13 Financing

Other

14 Cross Function / Geography Involvement

15 Deal Process, Partnership/Consortia & Other
16 Follow Up Items

Mid Stage

Late Stage

Macro / Industry Analysis

Detailed discussion around how macro environment is expected to impact the
sector (to be incorporated with firms macro view)
Include deal teams view on key macro risks and opportunities as part of their
analysis of key investment highlights and considerations
Provide overview of how deal performs under various macro outcomes

Early-Mid

Macro
Perspective

If relevant, highlight correlation to certain key macroeconomic statistics

Respond to the question: Why is it good to invest in the sector today?

Industry
Thesis(1)

Walk-though how value has been created in the industry historically (including
how private equity has been involved in the sector)
Outperforming and underperforming deals have often captured or missed
potential technological / industry shifts. Include view on ability to create value
through (or defensibility of industry to) technological / industry shifts

Early (Updated
Frequently)

Medium and long-term thesis on industry / sector and why it is attractive

Discuss other big risk areas (regulatory, competition from overseas, etc.)

(1)

Breakdown of underlying growth drivers (volume, price, margin, etc.)

If relevant, include analysis around industry performance as the sector
evolved (evolution of companies as industry matured, new entrants,
substitutes, etc.)
Discussion of supply / demand dynamics of industry (such as customer
concentration, supplier power, input cost trends, etc.)

(1) When presenting the above items, keep in mind guidelines provided by the legal team on the appropriate
language, tone and descriptions to use. Additionally, remember that sensitive topics should be discussed verbally.

Mid

Long Term
Industry
Analysis and
Performance

Incorporate long-term analysis (as available and relevant) on performance of

industry through economic and industry-specific cycles

Company Specific / Risk Analysis Overview and Business Model

Competitive
Positioning(1)

Outline competitive nature of industry, implications thereof and specific value

proposition of Company. Outline Companys competitive advantages (cost,
service, technology, etc.) and the sustainability of the competitive advantage
Provide customers and key suppliers feedback (collected on primary basis) on
customer satisfaction, vendor satisfaction, competitive position, etc.

Mid-Late

Management

Provide full assessment of company culture and management(2)

Provide plan for management team Highlight key weaknesses of
management pool and provide IC with color around certain important roles
(i.e. relative importance of a CEO, COO, CFO, sales leadership, etc.)
If turnaround, include basis for expected improvement of culture and
management
During late stages, conduct and provide update on background checks for key
senior managers (Kroll reports)

Mid (Updated
Frequently)

Historical performance relative to peers and reason for under / over

performance. Outline market share trends of company (include commentary
around shifts in share and drivers)

Mid

Company
Thesis and
Long Term
Performance

Respond to the question: Why is this a good Company?

Historical, projected, comparative ROIC and opportunity to invest behind
Other quantifiable metrics and comparisons
Provide clear description of products and services of the Company
Discuss long-term historical performance of the Company
Include performance through various economic cycles. Include both
general financial metrics (revenue, EBITDA, margins, capex, etc.) as well
as key operating statistics (same store sales, volume/price, etc.)

(1) When presenting the above items, keep in mind guidelines provided by the legal team on the appropriate
language, tone and descriptions to use. Additionally, remember that sensitive topics should be discussed verbally.
(2) Colorful characterizations of management are better handled verbally, as IC decks can be produced in litigation and seen by managers
and descriptions of mangers can be requested by managers in some countries under data privacy laws.

Company Specific / Risk Analysis Projections / Cases

Provide scenario analysis (Base, Upside, Conservative) to provide IC with a
range of potential outcomes
Scenario
Analysis

Key breakout upside opportunities and impact to returns

Key issues that would result in conservative case

Mid-Late

Discussions should include:

Provide summary financials (including cash flow / deleveraging), commentary

and return distributions for each potential scenario
Devils Advocate Case presented to the IC
Create substantive, aggregate review of risks in a deal (assessment of
probability, quantify impact on returns, strategy to diligence risk)
Provide updates to IC at each meeting on status of diligence regarding
key risks

Mid-Late

Exhaustive
Risk
Analysis /
Downside
Case

Construct and present a true downside case

Deal team should be prepared to outline the case not to do the deal

Evolution of
Cases

Include changes in revenue, margin, cash flow, entry / exit multiple

assumptions
Show development of leverage assumptions over time and provide analysis on
supportability of leverage

10

Mid-Late

Explicitly show reasons for movements of forecast cases up and down through
IC process and rationale (only after early stage)

Company Specific / Risk Analysis Valuation / Returns / Other

Walk through rationale for purchase multiple and exit multiple assumptions
Support assumptions with risk profile, growth, cash conversion, etc.
Outline shifts in variables above and resulting exit multiples
Compare multiple assumptions vs. relevant comparable transactions
done in the past

Mid-Late

Exit and
Entry
Valuation
Assumptions

Present thinking around exit alternatives (strategic sale, IPO, etc.) as well as
impact of exit alternatives to returns (for example, multiple share sales)
Attractiveness of return opportunity given risk profile
Rationale for
Investment

Walk-through the key value creation drivers, thesis and strategy

Outline key drivers of growth (market growth, market share gain, new
product introductions, margin expansion, etc.) and confidence level on ability
to achieve each driver by the Company standalone and with KKR-involvement
Preliminary views on 100-Day plan initiatives

Early (Updated
Frequently)

Respond to the Question: Why is this a good investment?

Break down returns into value generation components and provide basis for
assumptions
Source of EBITDA Growth: Industry growth, market share gain, pricing
growth, operating leverage, cost takeout / rationalization, etc.
Debt Paydown: Incorporate commentary around changes in operations
(cash flow conversion) and impact of refinancings / recapitalizations

Mid-Late

Disaggregate
Source of
Returns

Multiple Expansion / Contraction: Provide basis as discussed above

Financing

11

Provide a summary of commitment terms (covenants and other limitations)

Provide commentary around risk to achieving assumed capital structure

Throughout

Provide sensitivity of returns to financing assumptions (leverage, flex terms)

IC Process Suggestions

Cross
Function /
Geography
Involvement

Teams should reach out early to relevant executives to review materials

Relevant executives should directly participate in IC discussions
Include KCM, KKR Capstone, Public Affairs, KAM as relevant and address
plans to use them post-deal

Throughout

Include other geographic / industry vertical teams that have had significant
experience in the space and / or cover suppliers or customers of the Company

Any discussion of fees and allocations should be avoided in the IC materials

Provide download on findings of advisors (consulting, accounting, legal, tax,

environment, labor, insurance, govt relations, etc.). For sensitive points that
may be legally privileged, please run by outside or internal counsel in advance

Follow Up
Items

12

Deal teams to respond to each follow-up item from prior session during every
IC meeting

Throughout

Investment Committee to provide deal team with discreet structured follow-up

items

Throughout

Deal
Process,
Partnership/
Consortia &
Other

Teams should be prepared to walk the IC through the following verbally

Overview of process dynamics (including motivation for sellers, other
bidders, potential partners and others)
For consortia, address early who the partners are, partnership dynamic,
and ability to involve other parts of KKR (KCM, Capstone, etc.)

Appendix 1: Sample Macro / Industry Analysis

13

Sample Macro / Industry Analysis 1: Willis (2010)

Specific Opportunity:
Take Private of Willis (3rd Largest Global Insurance Broker)

Objective:
Show impact of broader economy on the insurance industry and
outline a specific thesis on industry growth.
Conclusions:
a) The insurance sector follows the economy over the long-term, but
has industry-specific cycles.
b) Timing the insurance cycle is important to generating attractive
returns in the insurance brokerage space given the tying of the
growth of the broker space to commercial P&C premiums.
c) Q: Why is it good to invest in the sector today?
A: Visibility on hardening cycle in the medium term, opportunity to
enter market before valuations reset when insurance cycle
hardening is more visible.
d) No visible positive or negative technological / industry shifts
expected to impact the industry.
14

Sample Macro / Industry Analysis: Willis (2010) (contd)

Insurance broker organic growth is highly correlated with growth in commercial P&C premiums
Hard Cycle
25%

Comm'l P&C NPW Growth

Broker Industry Organic Growth
Willis Organic Growth

18%

20%

15%

12%

15%
10%

8%

5%

5%

5%

3%

4%

2007

2008

4%

2%

(5%)
1997

1998

1999

2000

2001

2002

2003

2004

Over the long term, P&C premiums grow

in-line with the economy
500
450
400

2006

2009

YTD 6/10

But over shorter-term horizons,

P&C premium growth is highly cyclical
16,000

25%

14,000

20%

4.0%

P&C Net Premiums Earned (Left Axis)

Nominal GDP (Right Axis)

3.8%
3.6%

12,000

350
300

10,000

250

8,000

15%

3.4%
3.2%

10%

3.0%
5%

200

2.8%

6,000

150

4,000

100

2,000

50
-

'67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09

Source: KKR Analysis, Company Filings, A.M. Best, SNL, Bureau of Economic Analysis

15

2005

2.6%

(5%)

NPE Growth (Left Axis)

2.4%

NPE / GDP (Right Axis)

2.2%

(10%)

2.0%

'67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09

Sample Macro / Industry Analysis: Willis (2010) (contd)

Although Commission Rates Have Modestly Grown, Revenue is Driven by Volume Growth (P&C Premiums)
with EBITDA Further Accelerated by Margin Expansion
1997

1998

1999

2000

2001

200

2002

2003

2004

Revenue

2005

2006

2007

2008

2009

EBITDA

YTD 6/10

40

150

30

100
50

20

10

Vol Growth (P&C Prems)

Comm Rate Growth
Broker Revenue Growth

(0.9%)
5.9%
5.0%

Broker EBITDA Margin

16.4%
Broker EBITDA Margin Change
Broker EBITDA Growth
5.2%

(1.8%)
6.0%
4.2%

0.3%
6.5%
6.8%

5.4%
2.4%
7.8%

9.5%
0.3%
9.8%

21.3%
(5.7%)
15.6%

12.8%
(0.7%)
12.2%

7.2%
(6.2%)
1.0%

2.5%
(3.6%)
(1.2%)

6.7%
(3.6%)
3.1%

(0.9%)
3.1%
2.2%

(3.6%)
5.0%
1.4%

(6.9%)
6.4%
(0.5%)

(3.6%)
3.8%
0.2%

16.6%
+0.2%
5.5%

16.9%
+0.3%
8.7%

17.3%
+0.4%
10.3%

18.1%
+0.8%
14.9%

18.7%
+0.6%
19.4%

19.5%
+0.8%
17.0%

20.2%
+0.7%
4.7%

21.0%
+0.8%
2.7%

21.9%
+0.9%
7.5%

23.0%
+1.1%
7.4%

23.2%
+0.2%
2.3%

23.7%
+0.5%
1.7%

24.1%
+0.4%
1.9%

Most Significant Value Creation Event in Recent History Was Willis' Initial Buyout
Broker Ind Rev Growth
20%

6%

15%

4%

10%

2%

5%

0%
(2%)
(4%)
(6%)
(8%)
(10%)

16

Willis Rev Growth

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0%
YTD 6/10 (5%)

- Significant desire by insurance carriers and corporates alike to create a third

option to Marsh & McLennan and Aon, who were the only large brokers of scale
- KKR partnered with insurance carriers in 1998 on the acquisitions
- This was a large driver of shift from underperformer to outperformer

(10%)
(15%)
(20%)
(25%)

Revenue Growth

Wills Out/Underperformance

Willis Out/Underperformance
8%

Sample Macro / Industry Analysis: Willis (2010) (contd)

A Hardening Cycle May Be Getting Closer
Statutory cash flows have deteriorated, indicating
carriers may soon look to raise rates
100
90
80
70
60
50
40
30
20
10
-

And rates may be approaching the unprofitable levels

of the late 1990s

P&C Statutory Op. CF (bn)

Total P&C % of Surplus
Comm'l P&C % of Surplus

22%

12% 12%

25%
19% 20%

18%
6%

5%
3% 4%

13%
8% 7% 7%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

YTD
6/10

But It Is Not Yet Imminent

It took three years of unfavorable reserve developments prior
to the last hard cycle, and we have had none to-date

Underwriting profitability still appears to be

much better than in the late 1990s
125%

20

Cum. Dev't To-Date

2-Year Dev't
1-Year Dev't

15
10

120%
115%

115% 114%
109% 110%

110%

114%

103%

110%

105%

100%
-

95%

(5)

90%

(10)

85%

97%

96%
93% 95%
92%

80%

(15)

1996

(20)
1987

1989

1991

1993

1995

1997

1999

2001

2003

Source: KKR Analysis, SNL, The Council of Insurance Agents and Brokers

17

100%

95%

2005

2007

2009

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Reported Combined Ratio

Combined Ratio ex. PY Reserve Dev't

2008

2009

Sample Macro / Industry Analysis: Willis (2010) (contd)

The Next Hard Cycle May Not Be As Amplified As The Last Without A Large Catastrophe
Industry capitalization levels remain robust

The '00-'03 cycle was magnified by the tech bust and 9/11

NPW / Surplus (Left Axis)

Change in Stat Surplus

P&C Industry Surplus / GDP (Right Axis)

150%

30%

4.0%

25%
129%
126%
125%

20%

109%

87%

7%

0%

3.0%

89%
85%

83%

87% 87%

-5%
-10%

75%

3%

9%

5%

98%

100%

12%

9%

10%
106%

103%

100%

15%

12%

15%

3.5%

115%

19%

24%

2%
(1%)

Tech Bust /
Sept. 11th

(5%)

Katrina /
Rita / Wilma

(7%)

-15%

2.5%

1996

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

(13%)
2007

2008

2009

YTD
6/10

Based On This Analysis, We Have Formed Three Cases For P&C Cycle Assumptions
Conservative Case: Pricing does not harden, but flattens over three years; volumes grow at 2%
Base Hardening Case: '11-'13 same as Conservative Case; '14, '15 and '16 grow at 10%, 10% and 7%, respectively
Aggressive Hardening Case: '11-'12 same as Conservative Case; '13-'16 replicate growth in '01-'03 (10% / 21% / 13% / 7%)
Projected P&C Industry Net Premiums Written:
25%
20%
15%

Aggressive Hardening Case

10%
5%

Base Hardening Case

Conservative Case

(5%)
(10%)
1997

1998

1999

2000

2001

2002

2003

Source: KKR Analysis, SNL, Bureau of Economic Analysis

18

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Appendix 2: Sample Preliminary Competitive

Positioning Analysis

19

Preliminary Competitive Analysis: Supervalu (2011)

Specific Opportunity:
Take Private of Supervalu

Objective:
Outline key competitors, positioning and relative trends.
Conclusions:
a) Share trends for grocery channel and Supervalu troubling and
unlikely to moderate.
b) Importance of banner / market level operating performance and
regional market share.
c) Meaningful investments in price likely needed across most
banners.

20

Preliminary Competitive Analysis: Supervalu (2011) (contd)

Banner Overview, Rank and Key Competitors
Banner

# of Stores

Share/Rank

Key Locations

Regional Competitors

Traditional Food Retail (40,000-60,000 sf / store)

125

#1
(2010)

Philadelphia (PA, MD, NJ)

ShopRite (co-op)
Stop&Shop (Ahold)

463

#3-4
(2010)

NV, Northwestern United

States, and Southern CA

Kroger
Safeway

78

#2
(2010)

Minneapolis/St. Paul

Rainbow Foods
(Roundys)
Wal-Mart

44

#2
(2010)

Richmond, VA; Elizabeth

City, NC

Kroger
Wal-Mart

--

ND and MN

Sunmart Foods (Private)

Wal-Mart

182

#1
(2010)

Chicago, IL

Dominicks (Safeway)
Wal-Mart

--

Southern CA

Kroger
Safeway

194

#2
(2009)

Boston, MA; New England

Stop&Shop (Ahold)
Hannaford (Delhaize)

41

#4
(2010)

St. Louis, MO

Schnucks (Private)
Wal-Mart

62

#3-4
(2010)

Baltimore, MD, N. Virginia,

Washington D.C.

Giant (Ahold)
Safeway
Costco

Midwest (east of MS river),

Eastern Seaboard , Texas

Wal-Mart
Dollar Stores

Smaller, Value Concept (15,000 sf / store)

1,188
(333
owned)
Note: Per Company website.

21

--

Preliminary Competitive Analysis: Supervalu (2011) (contd)

Market Share Analysis

Nearly all new food retail formats have consistently gained share from traditional grocers in recent history
SVU and SWY have been the largest share donors by size, while Kroger has been able to keep its share
However, recent trends seem to indicate donation of share seems to be slowing, although alternative format share
growth remains strong
The primary driver of this has been slowing store growth at Wal-Mart and others
It is unclear whether traditional retailers are narrowing the gap in terms of traffic

Food at Home Market Share by Retailer

SVU(w/
Save-A- 11%
Lot)
SWY 8%
KR 11%
Other
large 23%
grocers
WMT

6%

Club stores 10%

Alternative
4%
s
(TJ, WF, Aldi,

Market Share Change

10 vs. 06
share

9%

8%

7%

7%

-1.1%
flat

8%

8%

8%

7%

10%

11%

11%

11%

-4.4%

0.4%
0.6%

Alternatives

0.3%
0.7%

Clubs

0.4%

WMT
22%

22%

22%

-0.7%

9%

10%

11%

11%

+5.3%

11%

12%

12%

13%

+2.3%

4%

5%

5%

6%

+2.1%

26%

24%

24%

24%

-3.7%

22%

1.6%

0.1%

All other
majors

-0.2%

-0.4%
-0.2%

SWY

TGT)

All other 28%

SVU
2006

2007

2008

2009

-0.6%
-1.3%

'06-'09 Avg

2010

-2.0%
22

'09-'10

-1.0%

0.0%

1.0%

2.0%

Preliminary Competitive Analysis: Supervalu (2011) (contd)

Consumer Positioning Analysis

Strong

So-Cal

Weak

Relative Performance (non price)

Consumer surveys suggest that Acme, Albertsons, and Shoppers (~50% of Supervalu grocer revenue)
elicit strong customer loyalty Jewel and Shaws currently score weak on customer loyalty and relative
(non-price) performance

Nor-West

Low

High
Customer Loyalty

Note: Arrow indicates trending of relative performance according to consumers; Relative performance measured on 28 attributes based on
topics such as convenience, service, merchandising

23

Preliminary Competitive Analysis: Supervalu (2011) (contd)

Financial Benchmarking Analysis
ID Sales Trend (Annual)

ID Sales Trend (Last 4 Appx. Calendar Qtrs)

8.0%

6.0%

4.0%
2.7%

2.4%

5.6%

5.3%

5.0%

2.0%

2.4%

1.2%

4.0%
3.4%

3.3%

2.1%

2.0%
0.8%

(2.0%)

(2.0%)
(2.5%)

0.5%

0.4%

(3.1%)
(4.0%)

(2.0%)

(1.2%)

(4.1%)

(2.5%)
(4.9%)

(6.0%)

(4.0%)

(6.5%)
(5.1%)

(6.0%)
2006

2007
Kroger

2008
Safeway

(6.4%)

(6.8%)

(7.2%)

(8.0%)

2009

Q409

Q1 10

Supervalu

Q2 10
Kroger

EBITDA Margin

Safeway

Q3 10

Q4 10

Supervalu

EBITDA Growth (CY 2007 LTM CAGR)

7.5%

(0.1%)

7.0%

6.9%

7.0%
(2.0%)

6.7%
6.5%

6.3%

6.5%

6.0%

6.1%

6.0%

(4.0%)

5.5%
5.5%

5.4%

(6.0%)

5.6%

(5.9%)

5.1%

5.4%
5.2%

5.0%

(8.0%)

5.0%
4.5%

4.7%
(10.0%)

4.0%
2006

2007

2008

2009

LTM

(11.3%)

(12.0%)
Kroger

24

Safeway

Supervalu

Kroger

Safeway

Supervalu

Appendix 3: Sample Management Analysis

25

Management Analysis: Company X

Organizational Chart and Management Overview
The quality of the management team was an important part of our investment thesis on Company X
Based on our assessment to-date, the Companys senior leadership talent is of high quality
and is capable of operating a much larger company
As a result, it will be critical for us to ensure that each of the key members of the management
team remains highly motivated and is provided with sufficient responsibility and upside
opportunity
CEO successor potential
In question
Resigned

Strongno issues
Under strengthto leave
New

Person 1
Chief Executive Officer

Person 2
Chief Operating Officer

Person
4
Unit A

Person
5
Unit B

Person
6
Unit C

Person 3
Chief Financial Officer

Person
7
Unit D

Person
8
Unit E

Person
9
Unit F

Searches in Progress
Position

26

Timing to Fill

Open Position 1

ASAP

Open Position 2

Not Urgent; When Larger Company

Management Analysis: Company X (contd)

Senior Management Assessment

27

Executive

Position

Roll % /$

Early Assessment

Concerns/Action

Person 1

CEO

[ ]% / $[ ]mm

Strong, sales-oriented CEO. Has

command and respect of his people

Need to mentor on softening

leadership style

Person 2

COO

[ ]% / $[ ]mm

Highly talented, execution focused COO.

Overqualified for role

Need to monitor to ensure

being provided with enough
responsibility

Person 3

CFO

[ ]% / $[ ]mm

Capable and detail oriented. Good at

blocking and tackling

Need to push to be more

strategic

Person 4

Unit A

[ ]% / $[ ]mm

Long tenure at Company. Capable

steward of Unit A franchise but not a
high-powered leader

Responsibility scope
declining as other leaders
step up. Not sufficiently
aggressive/commercial to
drive Unit A

Person 5

Unit B

[ ]% / $[ ]mm

Extremely valuable to the franchise.

Directly responsible for growth of Unit B

Need to ensure she

continues to be motivated

Person 6

Unit C

[ ]% / $[ ]mm

Capable leader of Unit C segment and

has been able to grow the business
meaningfully

Need to ensure he continues

to be motivated

Person 7

Unit D

[ ]% / $[ ]mm

Highly talented young leader of Unit D.

Important to the growth of the segment

Need to ensure he continues

to be motivated

Person 8

Unit E

[ ]% / $[ ]mm

Overqualified for the core Unit E job.

Good at thinking of operational and
strategic implications of technology to
Company X

Need to keep motivated as

he is critical to the Company

Person 9

Unit F

[ ]% / $[ ]mm

Very capable salesperson want to see

more significant desire to achieve more

Need to monitor ability to

execute on new wins and if
right person going forward

Appendix 4: Rationale for Investment /

Sources of Return

28

Rationale for Investment / Sources of Return

Rationale for Investment
Value Driver

EBITDA

Key Assumptions

Risk Level

At Acquisition

$200

Industry Growth

+$32mm

3% estimated industry growth, 2% from general macroeconomic

growth and 1% from secular growth

Macro
Secular

Market Share Gain

+$11mm

1% addnl growth via share gain vs historical outperformance of 3%

Op Leverage

+$31mm

Flow-through rate of revenue growth based on variable cost analysis

Cost Takeout

+$30mm

Already identified cost initiatives; supplemented by Capstone review

Subtotal

$304mm

Implies 9% EBITDA CAGR

Cash Flow /
Deleveraging

$716mm
cash flow

Based on historical capex levels and assumed working capital

optimization initiatives

Acquisition Information
Acquisition TEV (w/ Fees)
$1,700
EBITDA Multiple (Current)
8.5x
EBITDA Multiple (Forward)
7.8x
EBITDA - Capex (Current)
9.2x
EBITDA - Capex (Forward)
8.4x

Capitalization Information
Debt Funding
$1,200
Leverage
6.0x
Interest Coverage
2.1x
Equity Requirement
$500
% Equity
29.4%

Net Return Profile

3-Year
Base Case
25.6%
Upside Case
36.3%
Conservative Case
18.9%
Downside Case
(2.4%)

5-Year
22.9%
32.2%
16.7%
1.2%

We believe that Company X represents an attractive investment opportunity given the return
profile of the investment relative to the risks
We have a high confidence level on most of the drivers of value (both controllable and
uncontrollable)
The upside opportunity is meaningful while our conservative case (which we have high
confidence we can exceed) still generates an attractive return profile
Finally, in a severe downside scenario, our capital investment is still preserved
29

Rationale for Investment / Sources of Return (contd)

Disaggregate Sources of Returns
EBITDA EBITDA
Revenue EBITDA Margin Multiple
At Acquisition

Net
Debt

Equity
Value

in Eq
Value

% of
Total

5-Year
IRR

$1,000

$200

20.0%

8.5x

$1,700

($1,200)

$500

Revenue Growth - Industry

$1,159

$232

20.0%

8.5x

$1,971

($1,200)

$771

$271

22%

9.0%

3% estimated

Revenue Growth - Share Gain

$1,217

$243

20.0%

8.5x

$2,068

($1,200)

$868

$98

8%

11.7%

1% estimated

Operating Leverage

$1,217

$274

22.5%

8.5x

$2,327

($1,200)

$1,127

$259

21%

17.6%

2.5% margin e

Cost Takeout

$1,217

$304

25.0%

8.5x

$2,585

($1,200)

$1,385

$259

21%

22.6%

2.5% margin e

Sub-total Revenue/EBITDA Growth $1,217

$304

25.0%

8.5x

$2,585

($1,200)

$1,385

$885

73%

22.6%

$1,217

$304

25.0%

8.5x

$2,585

($716)

$1,869

$484

40%

30.2%

Sub-total Growth and Cash Flow

$1,217

$304

25.0%

8.5x

$2,585

($716)

$1,869

$1,369

112%

30.2%

Multiple Expansion / Contraction

$1,217

$304

25.0%

8.0x

$2,433

($716)

$1,717

$1,217

$304

25.0%

8.0x

$2,433

($716)

$1,717

Cash Flow / Deleveraging

Total Sources of Value

Management Options Package
Sponsor Carry
Net IRR

30

TEV

($152)
$1,217

(12%)
100%

28.0%

$15mm annua

Sale at 8.0x LT

28.0%

(1.4%) 7.5% managem

(3.7%)
22.9%

Rationale for Investment / Sources of Return (contd)

Operational

Revenue and Cost Opps

General

Preliminary 100-Day Plan

Initiative

Description

Management
Restructuring

Review of responsibility distribution among senior management with CEO/COO

Need to allocate more responsibility to younger but talented managers
Need to find right talent for Role 1 and Role 2, which are currently empty

High

Execute on current momentum to win more significant customers

Initial focus on Segment 1 then secondary focus on Segment 2
Execute on identified cross-selling opportunities

High

Execute on identified cost opportunities during diligence (primarily G&A and IT)
Implement KKR Capstone procurement program across expense base
Initiate more significant KKR Capstone efficiency review

High

Customer Wins
Action Plan

Cost Initiatives

Impact

Key
High
KKR
Capstone
Focus
High
Areas

Other
Opportunities

Review new product portfolio to identify real opportunities

Identify resources needed to commercialize highest opportunity products

Sales Force
Effectiveness

There has historically not been a focus on professionalizing the sales force organization
Need to review current practices and monitoring/optimization methodologies

International
Market Entry

International is a critical area for growth given growing activity

Method of entry is critical and management of resources is a key focus

Mid

IT Initiatives

Several key IT initiatives are currently underway

Implementation with Customer A: Top priority is to execute deployment
CRM Platform Upgrade: New CRM platform has had setbacks in development. New version
is close to completion
Datacenter Migration: Need to focus on effective consolidation of datacenters as part of
cost initiative in order to ensure no/minimal commercial disruption
Data Sources: Insourcing of certain data in order to reduce reliance on vendors
Other: Secondary priorities that will need to be initiated over the next 100 days include, a)
Segment 2 platform upgrade and b) initiating initiatives in Segment 3

Mid

Monitoring

Current operating / monitoring packages are incomplete and lack true metrics/KPIs
Need to identify critical historical and forward-looking (i.e., pipeline) drivers and implement

Mid

M&A

(FY12 priority) Establish prioritized action-list of desired add-on opportunities

Pursue combination with Company Z after key customer wins

31

High