Observations on Private Equity in the CIS UIF/Slides/P2_BC_Schaus.pdf · This information is confidential and was prepared by Bain & Company solely for the use of our client; it is

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

Observations on Private Equity in the CIS

Ukrainian Investment Forum

November 11th, 2010

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.Bain Mktg Conferences 101110 PE V01

2

Bain & Company

•Active in CIS since early 90s

-Moscow: 1986

-Kiev: 1993

•Our vision:

-Pragmatic, results-oriented (“not reports”, “results through strategy”)

-Jointly with client team (“business partnership”)

•Culture with particularly good fit with private equity

-RMS 4.5X for large deals in EU/US

-Due Diligence (DD), 100 Day Plan, Full Potential Program (FPP), etc.

-± 50 DD in Ukraine over last 5 years


3

Private equity and corporate M&A work accounts for a third of Bain‟s global business

0

20

40

60

80

100%

Overall

Performance

Improvement

Strategy

Private Equity &

Corporate M&A

Organization & ChangeManagement

Customer Strategy &

Marketing

Private Equity &

Corporate M&A

Portfolio

company

performance

improvement

HF

PE strategy,

screening &

due diligence

Merger integration

Corp M&A strategy,screening & due diligence

Percent of Bain business (2007)

IT JV & Alliances

Private Equity

Corporate M&A


4

Private equity: which industries in CIS?

consumer goods

retail

construction materials

pharmaceuticals

telecommunications, media

oil & gas, energy financial services


5

-50

0

50

100%

Find and invest in high potential targets, which you can find even in unattractive sectors

Total shareholder return by sector between ’00-’01

Note: Sample of companies with sales>$500M in 2007; Shareholder return calculated as ratio of net income to shareholder equity valueSource: Worldscope, Datastream; Company financial reports; Bain analysis


6

Within the CIS four basic investment thesis options could be most attractive in 2009

Find a leader

• Buy an undervaluedleader

• Buy and fix an underperforming leader

A

B

• Drive the build-up of an emerging sector

• Consolidate a still fragmented sector

Find a strong

challenger or platform

C

CIS

D


What are the challenges?

Long term fundamentals very

attractive …

… but difficult to execute in …

… compounding internal hurdles.

• Dramatic growth potential in many sectors

-Retail X 10, industrial services, …

• One of three big emerging markets near EU

-Trade sale potential (exit)

• Fragmented sectors waiting to be consolidated

• Inefficient businesses

• Structural change and turbulence

• Very profitable

• Perception of risk:

-Macroeconomic (growth, currency, etc.)

-Rule of law

-Reputation

-Timing uncertainty

• Difficult to act on assets:

-Lack of talent

-Barriers to control

• Few large targets in focus sectors

• Acquisitions not simple:

-Price expectations of seller

-Chaotic process

-Legal

• Unclear or unrealistic expectations

-Looking for the perfect “beauty queen”

-No vision of focus area

• No solid DD

-“it was cheap”

-“we hadn‟t thought about exit”

-Decision process

• Restructuring plans not executed

-Talent, interest

-Distracted by legal, finance

-Lack of control


8

The best (!) PE firms have hit upon a formula for value creation, generating large returns

Source: Thomson Venture Economics; Bloomberg

-10

0

10

20

30

40

50

60

70%

85 87 89 91 93 95 97 99 01 03 05 07

U.S. buyout fund returns:

Five-year rolling pooled IRR

S&P

All funds

Firstquartilefunds

-10

0

10

20

30

40

50

60

70%

91 93 95 97 99 01 03 05 07

European buyout fund returns:

Five-year rolling pooled IRR

CAC 40

FTSE 100

DAX

All funds

Firstquartilefunds

European buyout fundsU.S. buyout funds

!!

PRE CRISIS


9

In the best firms, Investment Committee process is more inclusive and rigorous

Clear investing strategy Structured processes Supporting content

• Clear understanding of firm‟s deal sweet spot

- Divergence from this inherently reduces ability to judge risk and add value post-acquisition

• Regular review of triage and due diligence processes and deal performances to better gauge blind spots and biases in deal evaluation

- Compare deals done, missed and passed on vs. original thesis and performance to indentify patterns (industry/deal characteristics or process issues)

• Prioritization process to ensure resources are focused on most important deals and issues

• Established decision criteria at each step of the IC process

- Early rounds: focus on industry and company position, reasonable deal economics

- Later rounds: focus on value creation opportunities, downside protection

- Sliding dollar allocation scale at each stage based on prioritization of deal, fit with firm‟s style, ability to get ahead/pre-empt deal

• Standardized IC pack for each step

• Culture that enables strong challenges to deal theses and colleagues

- E.g. create “devil‟s advocate” role in meetings, which improves thesis and leads to fewer zeroes

• One team member drives to a conclusion on what topics are the focus of the next meeting

- Team member can differ from firm to firm, but single MD decides key issues for follow-on work/meetings

• Every meeting has “must-have” analyses that tie to firm‟s strategy, e.g.:

- Detailed cycle analysis (has the company had positive ROIC over last several downturns?)

- Detailed customer concentration analysis including impact of losing top customers

- Detailed assessment of pricing trends based on inflation and competitive environment

- Point of view on operational levers, particularly those in which firm has expertise

• Have specific, non-negotiable “deal breakers”, e.g.:

- Never pay more than 6X

- Never buy in unless management rolls at least 2/3rd of their own money in

Source: Benchmarking through Bain partner interviews


10

Focus on the few things that drive value

“The only thing that matters is what will drive a big increase in the equity value of the business 3-5 years out. That’s what you come to work every day to do.”

CEO of PE-backed business

“We don’t look at last year’s earnings plus x%. We want to know – what could this business really deliver – what are the 2 or 3 things which will drive a big increase in its value?”

Leading PE Executive


11

LeverageMultiple

expansionOperational improvement

The smartest PE firms focus on creating operating value within their portfolio

• The best PE firms have realized the only way to reliably earn differentiated returns is to create operating value

• They are doing so in a way that is more systematic, focused and aggressive than most other PE firms and companies


12

Post-acquisition activism drives top return performance – the earlier the better

0.0

1.0

2.0

3.0

4.0X

Mean of all

exited Bain

portfolio work

Industrymean

1.4X

Mean of "late"intervention

2.5X

Mean of "year 1"intervention

3.6X

Deal return multiple

Note: Represents gross returns; includes all exited deals supported (n=77); analysis completed August 2009 with return data as of Q1 2009; industry mean based on 1996-2006 funds; industry mean for Q1 funds is 2.2X

Source: Bain analysis


13

LPs are lukewarm about PE firms‟ portfolio management capability

0

20

40

60

80

100%

Are you satisfied with the level

of portfolio management ability

demonstrated by GPs in today'srecessionary climate?

No

Neutral

Yes

Percent of LPs

… only 40% of LPs are satisfied withGPs’ portfolio management ability

While 69% of PE firms believe they differentiate on operational expertise…

0

20

40

60

80

100%

Differentiateon operational

expertise

69%

Differentiateon industry

expertise

55%

Percent of PE firms

Source: Gotham Consulting Partners (4th Annual PE Survey, March 2009); Private Equity International (LP Survey 2009, conducted March-April 2009)


14

Top activist firms have implemented rigorous, systematic processes

First 100 days Ongoing ownership

On-boarding process

• Set operating principles between fund and management

• Finalize management and comp plans

• Agree on baseline, key metrics and targets to monitor the business

• Assign senior portfolio resources from fund

• Assemble value-added board

Value creation plan / blueprint

• Share due diligence findings and investment thesis

• Define „full potential‟ for the business and set target equity value – agree on the facts

• Prioritize 3-5 initiatives to reach target

• Build actionable roadmap – specify accountabilities, timing, milestones, metrics and targets for each initiative

• Set and launch program management office and tools – with clear roles and governance

Ongoing support

• Support program management office and meet regularly with management

• Support targeted initiatives

• Provide resources (internal and/or external) where needed

• Revisit investment thesis and re-fresh value creation plan when company or industry situation has changed; re-diligence to find out what has changed

Monitoring

• Regularly and actively track progress of initiatives and financial/operational results using customized dashboards

• Use an early warning system

• Deploy resources quickly and proactively when progress/results go off track

• Incentivize fund portfolio resources and portfolio company management to drive value creation


16

Work your way down to a detailed roadmap, the who, what, when, where and how

Initiative: New unit growth Pre-launch Testing Post-launch

Objectives and priorities Resources EBITDA target Overall status

• Objective is to systematically select and develop those new units that will provide the greatest return to the company and to ensure a steady pipeline for development in future years

Sponsor: Dirk/Bill/TBD Full run rate:TBD

GreenOwner: Richard Renninger

Other resources: Tim Martin (John Cooper), Billy Grimm (Jeff Smith), Carl Jenkins, Tom Swift (Skip Fox), Jon Ahrendt (Steve Shlemon)

2008: TBD

Key milestonesEst comp.

datePhase Status Risks/areas for escalation

• Determine appropriate owner for market evaluation tools going forward

9/15/2007 In progress Green • Include testing of new units or more steps on pipeline development? Site selection?

• Train market evaluation tool owners, where necessary

10/21/2007 In progress Green

• Create process for site evaluation and roll-out to JVPs


• Define capital investment and decisionmaking roles and responsibilities


• Determine timeline for updating the new unit development plan on consistent basis

10/16/2007 In progress Green • Should correspond/relate to future capital committee meetings

• Confirm new CapEx spending minimum cash IRR threshold

10/16/2007 In progress Green • Also confirm "point" where location is considered in the pipeline

• Present development prioritization plans for each concept

1/20/2008 In progress Green • Will develop by 11/20/2007

Suggested key metrics Suggested target Suggested key metrics Suggested target

• Average cash IRR on new units 20% • Minimum cash flow - % of sales 5%

• New units in pipeline/expected new units per year

125% - 140% • Capital committed/Budgeted CapEx %

Actions & milestones Resources

Key metrics

Risk mitigation


17

Watch the vital few metrics

Low

High

Degree of operational-

ization(actionability/accountability)

Finan-cial plan

Blueprint

~20 vital few metrics

Top ~50 metrics

Drill-down metrics(operational, process/function-specific)

Cash

Opera

tional


18

People matter

“Of course we look for expertise and track record. Equally important, we want people who really want to make a difference - not play corporate politics.”


“The single most important thing is to make sure you have the right leadership for the business.”



19

“Results orientation” qualities are correlated with success

Note: Success based on PE firms‟ appraisalSource: Steven Kaplan, Mark Klebanov & Martin Sorensen, University of Chicago, “Which CEO

Characteristics and Abilities Matter?”, March 2007

0.0 0.2 0.4 0.6

Organization and planning 0.33

Analytic skills 0.36

Moves fast 0.40

Follows through on commitments 0.44

Proactive/initiative 0.45

Efficiency 0.45

Attention to detail 0.45

Aggressive but respectful 0.46

Top-grade management 0.47

Sets high standards 0.48

Holds people accountable 0.52

Persistence 0.55

Correlation coefficient between characterisitics of

CEOs involved in PE-backed companies and success


20

Conclusions

• Human resource challenge single biggest issue (both fund and portfolio)

• Very professional approach required (strategy, DD and decision process, performance tracking and management, etc.)

• Need to be flexible (plan “B”, timing, etc.)

• Don‟t overestimate risk, don‟t underestimate execution challenge


21

Documents

Observations on Private Equity in the CIS UIF/Slides/P2_BC_Schaus.pdf · This information is confidential and was prepared by Bain & Company solely for the use of our client; it is