An introduction to private equity
Milan - November 2007
What is private equity?
Essentially private equity is an alternative
way of owning a company
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What is private equity?
Benefits
•
Works closely with management teams to ensure more efficient capital
structures are in place
•
Away from the dividend requirements and short-termist gaze of the
public sector, it allows meaningful strategic and operational changes to
be made that benefit the longer term interests of the company
•
Provides facility to acquire businesses to merge with other portfolio
companies, benefiting from cost efficiencies
•
Management’s long term interests are more closely aligned with the
other private equity owners
•
Rewards are directly linked to the value created through
buying, building and ultimately selling businesses
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What is private equity?
Common Myths and the Reality
(…at least of the type of firms we invest with)
1. Private equity buys companies on the cheap, strips the assets and then
sells them on for a quick profit
Creates value for investors by buying at a fair price and building
businesses, not stripping them down
2. Private equity leverages up companies with unsustainable levels of debt
Ensures businesses can pay interest payments required based on the
level of earnings the company produces on a deal by deal basis
3. Private equity operates in a shadowy and secret world
Maybe true of yesteryear but firms are becoming more open
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What is private equity?
Categories of investment
Private equity broadly refers to equity investment in companies that
are not traded on public stock markets
•
Buy Outs/Buy Ins: either providing the capital to enable current
operating management to acquire an existing business or enabling an
external manager to buy into a company
•
Venture Capital: investments made at an early stage in a company’s
life
•
Development Capital: financing provided for the growth or
expansion of a company
•
Mezzanine Debt: typically debt capital giving the lender rights to
convert to an ownership or equity interest if the loan is not
paid back in time and in full
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Private equity
Outperformed other key asset classes over last five years
300
260
LPX50
MSCI World
Lehman Global Aggregate Bond
220
Credit Suisse/Tremont Hedge Fund
180
140
100
60
Aug-02
Feb-03
Aug-03
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
30 August 2002 to 31 August 2007. All Figures in USD.
Source: Reuter’s Hindsight
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Growth of private equity
•
The asset class has grown rapidly in recent years, with estimated
global commitments increasing from USD18 billion in 1990 to around
USD365 billion in 2006
•
Record breaking deals over the last year – HCA, Equity Office, TXU
•
These mega-deals topped previous record of KKR’s USD31.3 billion buy
out of RJR Nabisco in 1989
Source: Private Equity Intelligence; Financial News – Private Equity News
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What the credit crunch means for private equity
•
Problems arose in higher risk credit markets causing a serious
mispricing of risk.
•
Risk Repricing
–
Credit spreads widening
–
Significant backlog of loans to be cleared
–
Further corporate activity is halted until backlog is cleared
–
Fewer buyouts (particularly the larger ones)
–
Refinancings limited and exits may take longer than recent times
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What the credit crunch means for private equity
•
Private equity firms can no longer rely on just cheap debt
–
•
Leverage is still available (selectively!)
–
•
Think innovatively
Small to mid sized deals can still be done
What of deals agreed prior to the “crunch”?
–
Not so much of an issue for the private equity investors
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Private Equity – post credit crunch
•
2005 and 2006 are considered vintage years for the sector, so has a
peak in the cycle been reached?
•
Many of the factors behind the sector’s success in the last two years still
apply:
–
company balance sheets remain healthy
–
further global economic growth is forecast
–
equity valuations still not expensive on a historical earnings
basis
•
Opportunities can now be found in other parts of the capital structure
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The extent of leverage
Level of gearing
•
The amount of debt being put into
buyouts has been increasing
BUT
•
It is not near the highs of the 1980s
1987 debt to equity ratio – 93:7
2006 debt to equity ratio – 70:30
•
Interest coverage has improved
•
Interest rates are still historically low
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Invest with the best – and know the market
•
Avoid private equity firms involved in over aggressive/unrealistic
leverage and those paying too much for companies
•
Get a greater understanding of the whole market
• From the lenders point of view – fixed income fund managers
• From sellers point of view – public equity fund managers
•
A diversified approach is all important
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Core Holding Example – Candover Investments plc
•
•
Leading European house
Largest Holdings:
In addition to portfolio of private
equity, Candover Investments
wholly owns Candover Partners
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Strong track record and portfolio
Receives fee income on all other funds
Candover Partners runs
A growing fund management business
in itself
Ferretti
Gala Group
DX SMS
Dakota, Minnesota & Eastern Railroad
Hiding Anders
23
22
21
•
Focuses on larger European buyouts
Purchase
Purchase
Purchase
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Purchase
•
Has enjoyed successful realisations
since purchase
19
18
17
•
A good spread of investments by
vintage and sector and successful
refinancings prior to credit crunch
06
07
07
07
07
07
07
07
07
07
07
2/
1/
2/
3/
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5/
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9/
0/
/1
/0
/0
/0
/0
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/0
/0
/0
/0
/1
4
4
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4
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4
4
0
0
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Satellite Holding Example – Evolvence India Holdings
•
A fund of Indian private equity
funds and co-investments
•
Experienced locally based team with
hands on approach
•
Focus on mid-sized companies
•
Well diversified by vintage and
geography
Largest Holdings:
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GW Capital India Value Fund II
Barings (India) Private Equity Fund II
IL&FS India Leverage Fund
IDFC Private Equity (Mauritius) Fund II
New York Life IM India Fund II
1.11
Purchase
1.09
Purchase
•
Major sectors of investment include:
Infrastucture
Engineering & Automotive
Construction
Technology
Life Sciences
1.07
1.05
1.03
Purchase
1.01
0.99
07 /07 /07 /07 /07 /07 /07 /07 /07 /07 /07 /07 /07 /07 /07
3/
4
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5
5
6
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9
0
/0 5 /0 9 /0 3 /0 7 /0 1 /0 4 /0 8 /0 2 /0 6 /0 9 /0 3 /0 6 /0 0 /0 4 /1
2
2
0
1
0
1
3
1
2
1
2
0
2
0
2
0
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How to invest in private equity?
•
Private equity funds are generally difficult to access for the everyday
investor
•
Like hedge funds, investors face a series of obstacles: lack of access to
funds, size of entry, ability to diversify and lack of investment expertise
•
Moreover, liquidity is extremely restrictive in this arena with private
equity funds commonly implementing long lock-ins in excess of 3 – 5
years
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Forsyth Partners
Regulatory matters
This presentation is by Crosby Capital Partners Ltd, which is authorised and
regulated by the Financial Services Authority in the UK, and which
manages a range of offshore funds (“the Funds”). Application for
shares in the Funds can only be made on the basis of the current
Prospectuses. The Funds are unregulated collective investment
schemes in the UK and their promotion by authorised persons in the
UK is restricted by the Financial Services and Markets Act 2000. The
price of shares and the income from them can go down as well as up
and the value of an investment can fluctuate in response to changes in
exchange rates.
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