Private Equity Investments In the Gaming Industry

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Private Equity InvestmentsIn the Gaming Industry

• Mark A. Clayton, Esq.
• Member, State Gaming Control Board
• October 6, 2007

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What is Private Equity

• Private Equity
• A private equity firm establishes an investment
  fund (limited partnership) with capital from
  investors (limited partners) who are typically
  pension funds, endowments and banks
• The private equity firm acts as the general
  partner
• The general partner uses the funds capital, plus
  borrowed money, to acquire companies that the
  general partner believes are undervalued and/or
  can be improved

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Private Equity Firm Structure
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Investment Results

• Investment time frame 5-10 years
• Investment returns (1980-2005)39.1 for top
  quartile of private equity firms
• Investments trending away from single asset
  acquisitions to partial investment in a gaming
  company to full acquisition of gaming companies
• Colony Capital acquired 4 assets that had to be
  disposed for the Harrahs/Caesars merger
• Station Casinos/Harrahs acquisitions

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Private Equity in the Gaming Sector

• Why is private equity interested in the gaming
  sector?
• Asset-rich business with consistent and quality
  cash flow
• Leverageable operations
• Land premiums/scarcity
• Barriers to entry
• Increasing valuations
• Future value in gaming expansion

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Recent Private Equity Investments

• Completed Transactions
• 1/99Colony CapitalHarveys
• 6/04Colony CapitalLas Vegas Hilton
• 6/06WhitehallLas Vegas Hilton
• 8/06BHREAladdin
• 9/06Oaktree CapitalCannery
• 9/06Investor GroupKerzner International
• 9/07Newport GlobalEldorado

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Pending Private Equity Transactions

• Station Casinos
• 8.9 billion
• Fertitta Colony Partners
• 30 premium paid
• Harrahs Entertainment
• 27.8 billion
• Texas Pacific/Apollo
• 22 premium paid

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Prototype Structure
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Structural Considerations

• Investment is in a publicly-traded or a public
  reporting company
• Split in voting and economic powers
• Licensure required for beneficial owners of the
  voting stock (e.g., control/decision makers)
• Structure cannot be used to avoid licensure

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Nevadas Regulatory Parameters

• Once the control group/Voting LLC is licensed,
  there are further restrictions imposed
• Prior approval required before any private equity
  investor can transfer equity of the Nevada gaming
  company
• Prior approval required before any
  dividends/economic distributions to the private
  equity investors can be made
• Quarterly reports to the GCB re ownership
  positions and any new fund investors
• Full transparency of the investors
• Cursory investigations done on all investors
• Retain discretionary licensing authority over all
  investors

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Regulatory Comparisons