Private EquityApril 2014

Structure

Limited Partners

• Public Pension Funds • California Public Employees’ Retirement System (CalPERS)

• Corporate Pension Funds• Boeing Company Pension Fund

• Endowments/Foundations• USC

• Banks & Financial Services• Wells Fargo

• Insurance Companies • MetLife

• Corporations• General Motors

• Wealthy Individuals / Family offices• Intermediaries / Fund of funds

PE Funds

• Blackstone Group

• Carlyle Group

• KKR

• Silver Lake

• CVC Capital Partners

• Warburg Pincus

• 3i

• Bain Capital

• Sequoia Capital

• ABRY Partners

• GTCR

• Harvest Partners

• CIP Capital

Companies

• Private equity

• Venture capital

• Hedge fund

• Debt / Mezz fund

Raise a fund

• Research

• Investment bankers

• Conferences

• Networking

Find an investment

• The offer

• Haggling over terms

• Getting financing / loans

• Equity / ownership / control

Deal

• Targets are set

• Leaving their mark: processes, new initiatives, new products etc.

• Hand picked management

• Partnerships, M&A

Value creation

• Recapitalization

• IPO

• Sale to financial or strategic buyer Return

Later Stage / Large

Companies

Development Stage / SMBs

Early State / Startup

Family / AngelVenture Capital

Middle Market

Private Equity

Mature Stage / LBO

Publically Traded

• Early stage businesses without proven technology or distribution channels

• Limited if any profitability• Diverse portfolio to include

multiple “zeros”

• Proven business models with positive cash flow

• Typically single shareholder or family-controlled businesses without resources to execute on range of growth initiatives

• Attractive valuations

• Established businesses with limited ability for significant growth or operational improvement

• Stable cash flow

Different types of Stage Funding

Investment by IndustryB2B Information

ManagementMarketing Services

Knowledge Services

Business Process Outsourcing

CIP Capital

Receive an initial teaser or Information memorandum (“CIM”)

Submit a tentative/ nonbinding Indication of Interest (“IOI”)

Perform detailed due diligence on target

company

Exclusivity / Third Party Diligence

Final Binding

offer

• Value proposition / Customers

• Industry

Market Opportunity

• Competitors

• Barriers to entry

• Product differentiation

Competitive Landscape /

Market Share

• Geographic expansion

• New product / market entry

• Acquisitions

Growth Opportunities

• Track record

• Macro drivers

• Pricing Profitability

• Organization

• Post-Closing execution planOperations

Deal Sourcing & Closing Business Diligence

Value Creation

Provide “large company” expertise, investment and resources that were previously unavailable given their small / middle-market size

Accelerate the achievement of strategic initiatives

Geographic market

expansion

Market priority analysis / product

suitability launch

Introduction of new product lines

Buy vs. Build Prioritize rolloutIdentify

customer demand

M&A

Identify Targets and Approach

Targets

Due diligence & Close

Transactions

Tactical initiatives

Efficiency improvements in sales, marketing and operations

Identity new sales and marketing channels

Organization build out

Third party resources

Construct financial reporting metrics to

track progress

Report findings on daily, weekly

and monthly basis

• You buy a company for 10.0x EBITDA multiple

• You raised 30/70 debt to equity; Debt costs 10%

• Company generates $50 million in revenue with a 40% EBITDA margin

• Revenue is expected to increase by $12.5 million every year

• Capital expenditures are 10% of sales; Depreciation is $5 million every year

• Tax rate is 40%

• You’d like to exit in five years

Uses: Sources: % of Total

TEV $200 Equity $140 70%

Debt $60 30%

Total $200 Total $200

Ending EBITDA $45

Multiple 10.0x

TEV $450

Less Debt $8

Equity Value $442

MOC (x) 3.2x

IRR 33%

$ in millions Year 1 Year 2 Year 3 Year 4 Year 5 CAGR

Income Statement

Revenue $50 $63 $75 $88 $100 19%

COGS $13 $16 $19 $22 $25 19%

Gross Profit $38 $47 $56 $66 $75 19%

Fixed (Rent) $5 $5 $5 $5 $5 0%

Variable (Payroll) $13 $16 $19 $22 $25 19%

SG&A $18 $21 $24 $27 $30 14%

EBITDA $20 $26 $33 $39 $45 22%

Margin% 40% 42% 43% 44% 45%

D&A $5 $5 $5 $5 $5

Interest (@10%) $6 $6 $6 $6 $6

EBT $9 $15 $22 $28 $34

Taxes (@40%) $4 $6 $9 $11 $14

NI $5 $9 $13 $17 $20

Free Cash Flow

EBITDA $20 $26 $33 $39 $45

Less:

Capex $5 $6 $8 $9 $10

Cash Taxes $4 $6 $9 $11 $14

Cash Interest $6 $6 $6 $6 $6

Free Cash Flow $5 $8 $10 $13 $15

Debt $60 $60 $60 $60 $60

Cumulitive Cash $5 $13 $24 $37 $52

Return: Illustrative LBO example

• Investment in the target company

• Capital investments, operational changes etc.

• May well take many years

J-Curve Effect

Returns since 1986

Questions?