PRIVATE EQUITY

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PRIVATE EQUITY

• Jay Jodway, Morgan Truscott
• March 20, 2006

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What is Private Equity?

• Large pool of capital
• Buy down-but-not-out companies
• Fix those companies
• Lower their cost of capital
• Improve operations

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Whos investing?

• Wealthy Individuals
• Pension Funds
• Provide 40 of the 600-800b in PE funds
• Corporate pensions with big stake in PE
• Eastman Kodak - 20
• Delta - 13
• GM - 10

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Big Business

• Industry controls 600b-800b in capital
• The big three employ 907,000 people
• Carlyle
• KKR
• Blackstone Group
• Annual returns for PE 20
• SP 500 averages about 5

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PE Big Acquisitions

• Dunkin Brands Inc.
• Neiman Marcus
• MGM
• Toy R Us
• AMC Entertainment
• Linen N Things
• Fairmont Hotels

• MEMC Electronic Materials
• Seagate Technology
• TRW Automotive
• Burger King

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Barbarians at the Gate

• RJR Nabisco (1989) - 31b
• Hertz (2005) - 15b
• TDC (2005) - 12b
• Sungard Data Systems (2005) - 11.4b
• Browning-Ferris Industries (1999) - 9.6b
• Qwestdex (2003) - 7.1b
• Toys R Us (2005) - 6.6b
• Neiman Marcus Group (2005) - 5.1b
• Metro-Goldwyn-Mayer (2005) - 4.9b

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Investment Bank Payday

• How I-bankers benefit
• Collect fees for
• Brokering or advising on tender offers
• Underwriting Bonds
• Arranging bank debt to pay acquisition costs
• Selling off assets to pay back debt
• Taking target firms public again
• Fees collected in 2005 11.8b
• 35b raised from Reverse LBOs
• Blackstone paid out 358m to I-banks in 2005

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IPO Outlook

• Reverse LBO
• Bought out company taken public again
• 40 of all IPOs in 2003 and 2004
• IPOs returning 18 in 2005, 10 so far in 2006
• Profitless IPOs are 40 vs. 80 during tech
  bubble
• Avg. age of IPOs up to 15 in 2002, vs. 4 in 1999

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MONEY AND FREEDOMThe benefits of private equity
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MONEY
Its like Moses brought down a third tablet from
the Mount and it said 2 and 20
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Money

• Partners typically receive
• 2 of assets as management fee
• 20 of returns
• Tax benefit 15 capital gains vs. 35
• Executive compensation
• Allowed to purchase stake in company, sometime as
  much as 20
• Tied to turnaround success
• Long term success, not quarterly results

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FREEDOM
Its the difference between driving a speedboat
and driving an ocean liner. When you want to
turn a speedboat, you turn the wheel. For an
ocean liner, you have to plan two days ahead.
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Freedom

• Less annoyance from SOX
• Public CEOs may have to reveal compensation
• Less costs
• Fundamental nature of PE is different
• CEOs have a freer hand
• Dont have to answer to shareholders
• Can make tough but necessary decisions
• Focus on long-term success, not quarterly
• No activist hedge funds

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Lou Gerstner, former IBM CEO and chairman of the
Carlyle Group, onWhy Private Equity

• Restructuring
• Impact if information and networking
• Excess Capacity
• Eliminate dysfunctional short-term focus
• Longer time frame - build value over time
• Direct alignment of shareholders and management

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Careers
Managers now understand that involvement in the
private-equity world is potentially more
interesting, more lucrative, and less of a
hassle,

• PE firms dont recruit on campus
• PE seen as the new fast track to owning your own
  shop
• Private Equity is hot for B-schoolers
• In the 1980s it was I-Banking
• In the 1990s it was tech-related venture capital