Professional Documents
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MBA Career
Agenda
Introduction to private equity Fund structure and organization Overview of leverage buyouts Overview of venture capital Deal process/role of an associate Recruiting at Wharton Questions and Answers
MBA Career
Agenda
Introduction to private equity Fund structure and organization Overview of leverage buyouts Overview of venture capital Deal process/role of an associate Recruiting at Wharton
MBA Career
Who can argue with a new model of enterprise that aligns the interest of owners and managers, improves efficiency and productivity, and unlocks hundreds of billions of dollars of shareholder value. Michael Jensen, Harvard Business School
MBA Career
Source: EVCA
MBA Career
a number of incorrect misconceptions and rumours about the industry: It is all about buying at low multiples and selling at high multiples Value creation comes from aggressive over-leveraging In private equity-owned companies, R&D costs are slashed and people loose their jobs The only winners from the private equity industry are the greedy private equity managers - all other stake-holders are losers
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Hence, private equity is today an important function in the global economy providing liquidity and ensuring accelerated industrial development and change.
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"Ange l"
"Ve nture Ca pita l" 2nd & 3rd Round 1-3 years
See d Age of Com pany Sta ge of Com pany Public or Priva te? Equity Re quirem ent Re turn Expe cta tions
1st Round
0 years
0-1 year
Idea
Prototype
2nd or 3rd 1st generation generation product product Private Private or Public $5-20m
Established, Established, slow growth slow growth Private or Public $10 - 250m Private or Public $10 - 250m
Public
Private
Private
Public
$0.2-0.5m
$1-2m
$2-5m
N/A
70%+
50-70%
50-60%
40-50%
25-40%
20-30%
30-50%
30-40%
20%
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efficiency
Outdated/ill-suited ownership structure Need for industrial change and consolidation Experienced management Tax shields from interest costs and leverage on
Venture Capital
New companies and industries
(unproven)
Technology/industry bets New business models with potentially
high margins
Cash flows -
+Time/Maturity -
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Agenda
Introduction to private equity Fund structure and organization Overview of leverage buyouts Overview of venture capital Deal process/role of an associate Recruiting at Wharton Questions and Answers
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Fund structure and organization #1 General Partner (GP) raises a fund of illiquid capital $500M to be spent over seven years #2 Investors (Limited Partners / LPs) often sophisticated institutions (pensions / insurance / finance) or wealthy families #3 GP utilizes unique knowledge / relationships / strategy to invest in companies / securities #4 GP guarantees a minimum return to LPs after which GP splits profits with LP (often 20% / 80%)
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Source: EVCA
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Source: EVCA
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Source: EVCA
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Source: EVCA
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Source: EVCA
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Agenda
Introduction to private equity Fund structure and organization Overview of leverage buyouts Overview of venture capital Deal process/role of an associate Recruiting at Wharton Questions and Answers
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There is a fundamental need for a type of owner that is always flexible, liquid, and hands-on
1850
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Why have the buy-out players been successful? Funded by a number institutions/ investors for 10-year periods the buyout players are always liquid and not affected by individual economic circumstances Buy-out players are temporary owners focused solely on their strategy of implementing their value-enhancing strategies there are no side agendas Buy-out players have explicit competences in their focus areas of change management, sector expertise, financial engineering etc Buy-out players are professionally structured to act as a temporary owner: 10 year funds Clear governance models GP/LP Clear split of value creation
Approach
Temporary holdings are non-core. No clear exit strategies can lead to a very large portfolio and lack of focus Usually, their competences are centred around other issues than being a professional temporary owner No uniform structures exists
Expertise
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Act as a professional temporary owner take a business from one level to the next Develop businesses Create value and make money for the investors There is a need for flexibility and liquidity in the market place for corporate ownership A company can always be taken to the next level! Institutional investors do not have the organisations, know-how or experience to make these investments themselves there is hence a need for buy-out management companies Being private is advantageous in many ways no politics, no distractions, no short-sightedness, only focus on long-term value creation Broad ownership and buy-in of strategies = motivated staff and management Aggressive, continuous focus on all value creation strategies: Strategic re-positioning New growth venues markets, products Sustainable improvements to costs and margins Low hanging fruits on costs Efficiency improvements Leverage - tax efficient, leverage on equity invested Flexibility on exit MBA Career 25
Why needed?
Market Conditions Efficient market place Many MBO firms competing Plenty of financing and financial engineering available Focus of transactions Companies with development potential Create value by building businesses Competitive advantage Industrial competence Willingness to invest in the future Experience of driving change
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Net debt
Equity value
Perceived value of all cash flows from the Company to debt and equity holders. Hence, deducting the future value of all operational costs and tax.
Net present value of net debt undertakings (interest bearing debtcash). Usually = book value of debt.
Equity_valueExit
Factors affecting valuation of the equity
Top-line growth
Without a doubt, top-line growth and margin improvements are the most important value drivers
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Drivers of the growth of private equity in international regions Continuous corporate restructurings Private company ownership succession issues Large public equity market with some inefficient pricing of smaller/odd shares Significant share of mid-sized companies with ambitions and potential for geographical expansion Privatization
Nordic region, 1,4% ~12 years Germany, 0,4% ~7 years China, < 0,1% ~4 years Years of professional and sophisticated buy-out market
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Management
Board of Directors
Appoint and evaluate key managers and supplement managers when needed Define and monitor strategic plans Share and expand network
Oversee strategic development and evaluate new initiatives Appoint and evaluate the Board and evaluate performance of Company Appoint new Board members if necessary Constant focus on impact on exit and ensuring maximum value Initiate and lead the exit process Assisting management in financing processes and M&A work
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Agenda
Introduction to private equity Fund structure and organization Overview of leverage buyouts Overview of venture capital Deal process/role of an associate Recruiting at Wharton Questions and Answers
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Source: Macquarie
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10x
1985-1997
2003-2010
Company Value
1997-2003
5x
1x
10
11
12
$80
$58.8
$60
$50.5
$40
$26.9 $17.1 $12.7 $2.8 $6.7 $5.4 $7.0 $13.1 $9.2 $17.8 $18.8
$20
$0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
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$80
$60
$49.5 $36.2
$40
$22.0
$20
$4.2 $6.4 $9.2
$17.9 $13.1
$19.1
$21.3
$20.2
$0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*
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Valuation movement
Recent Increase in Private Company Valuations
$30
$20
$15
$10
$5
$0 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05
Source: VentureOne
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Source: VentureOne
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= Venture-backed M&A
600
= Venture-backed IPOs
500
Number of Transactions
400
300
200
100
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
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Agenda
Introduction to private equity Fund structure and organization Overview of leverage buyouts Overview of venture capital Deal process/role of an associate Recruiting at Wharton Questions and Answers
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Auditors Auditors
Attorneys Attorneys
Portfolio Company
Employees Employees
Investors Investors
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q q q q q q q q q q q q
Source deals and initially screen opportunities Meet with management team of potential investment Partner meeting and further screening Due diligence begins Prepare formal Investment Memorandum Partners meeting and investment decision Term Sheet submission Legal negotiations Co-investor syndicate selection Due diligence checklist completed Investment closing Active investment management
Week 1
Months 2-4
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Source: BVCA
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7. Analyst Interviews a. Assessment of the company - Strenghts and Weaknesses b. Market opportunity c. Competetive landscape d. Hurdles to success e. Exit opportunities - who might acquire the company 8. Management a. Detailed resumes for each member of management team b. Management interviews - determine prio experience, track record c. Open positions that need to be filled i. When will they be filled ii. Who are the candidates, type of candidates d. References i. From the management team ii. Other references from past co-workers at other companies 9. Previous Round a. Term Sheet b. Due Diligence c. Conversation with previous round investors i. From last round to this round ii. Future value inflection points 10. Sales Assessment a. Review of current accounts i. Nature of relationship, stage - e.g. pilot, beta, etc. ii. Revenue potential b. Current pipeline c. Backlog 11. Technical Assessment (if applicable) a. Determine appropriate person to do technical assessment b. Key questions i. Does it work as advertised? ii. Will it scale? iii. What are the alternative technologies iv. How much of a lead, if any, does the company have? 12. Legal Due Diligence 13. Company Specific Due Diligence
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Source: EVCA
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Agenda
Introduction to private equity Fund structure and organization Overview of leverage buyouts Overview of venture capital Deal process/role of an associate Recruiting at Wharton Questions and Answers
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Composure
Able to interact as peer with senior professionals
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The class of 2006 received 74 full-time offers in private equity. 46 of these offers were accepted. The class of 2007 received 75 summer internship offers. 57 of these offers were accepted.
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Firms that came on campus to recruit: 17 Firms that did a resume drop through CareerPath: 18 Firms that posted to the MBA Job Board: 69 Firms that bought the resume book: 32
*this list is mutually exclusive, so each company is only counted in one category Total PE firms recruiting at Wharton: 136
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PE Hiring Funnel
There was a backup in the market
2000-2001 analysts / associates stopped leaving for b-school 2002-2003 MBA graduates took any P/E job
Now looking to upgrade - limiting opportunities for current MBAs
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Educates members on private equity industry; assists members in their job search Works closely with MBA Career Management Club events with companies (main form of company contact with students after EISs) are sometimes scheduled through the Private Equity Club Club receives weekly emails from MBACM with updated information on EISs, job postings and major recruiting updates/changes
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13%
6% 13%
30%
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Agenda
Introduction to private equity Fund structure and organization Overview of leverage buyouts Overview of venture capital Deal process/role of an associate Recruiting at Wharton Questions and Answers
MBA Career
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