Seminar: introduction to

private equity

1
 Contact
• Antoine Parmentier:
– Antoine.parmentier@aig.com
– +44(0)7809.510.373

2
 Final presentations
• Corporate governance and public debate
over private equity;
• Private equity in emerging markets;
• FIP, FCPI, defiscalisation;
• Investments in infrastructure;
• Private equity post credit crunch;
• Private equity in retail and consumer
goods.
3
 Content
• Introduction;
• Why allocate assets to PE?;
• LBO activity in Europe;
• European fundraising activity;
• The measure of perfromance;
• FoF due diligence: selection of PE managers;
• The world’s biggest private equity firms;
• The mega-buyout era;
• Value creation in private equity;
• The structure of a leverage buyout deal;
• The pros and cons of being private;
• The credit crisis: impact and consequences on PE;
• Case study: Baneasa

4
Introduction to Private Equity

5
 Introduction
• Asset class representing the companies not publicly
traded (vs. public equity traded on stock exchange);

• Medium to long term investment;

• Venture capital, growth capital, buyout…

• PE funds are raised from pension funds, insurance

companies, large corporate, HNWI, etc…;

• Investors in PE funds are called “Limited Partners”;

• PE funds are managed by the “General Partners”

6
• Structure of private equity participations

Insurance Pension Large

LP company fund corporate
HNWI

GP The PE fund Manager

Portfolio Company A Company B Company C Company D Company E Company D

7
 The fuel of private equity
• The debt:
– Acquisitions are made through leveraged buyout
deals (LBOs);
• The investors:
– PE funds managers must be disciplined and patient;
• The managers:
– The success of an investment relies on the
implementation of the business plan;
• The macro environment:
– Acquisition multiple arbitrage can be positive in period
of growth;
8
 A diversified asset class
• Private equity includes a large number of
strategies: venture, buyout, distressed,
secondary…

• Like-minded strategies: mezzanine, clean-

tech/energy, infrastructure, real assets…

9
 Venture capital (1/2)
• Earlier stage: venture investors provide funds for start-up
and early expansion;

• Based on innovative business, development of a new

product, new patent;

• Two sectors: technology or life science;

• Highly skilled professionals and scientists;

• Scalable investments with a lot of failures and few great

successes;
10
 Venture capital (2/2)
• Investment from up to €10m and often pre-
revenues balance-sheet;

• Financing in several rounds (round 1, round 2,

round 3…) with typically clinical test results as
threshold for next round;

• Most of the exits are IPO (NASDAQ, Zurich…);

• Examples: Skype, Google, Apple, Atari, Cisco,

Yahoo, YouTube, LinkedIn, Paypal.
11
 Buyout (1/3)
• The most important strategy of PE;

• Buyout comes after venture and growth capital;

• Taking control of a company through leveraged

buyout (LBO);

• Management team of the company is investing

alongside the PE fund (alignment of interest);
12
 Buyout (2/3)
• Development of a business plan over 4 to 6 years in
order to add value;

• Revenue growth + Margins improvement + deleveraging

= added value;

• Mature companies with leading market position, active

management team, strong cash-flow;

• PE funds provide capital for international expansion,

corporate divestures, succession issues…

13
 Buyout (3/3)
• Buyout starts at €5 million enterprise value
(EV);
• At the bottom end: growth/expansion
capital.
Large cap
€800 million and above

Mid market
€100 million to €800 million

Lower market
€5 million to €100 million

14
 Distressed / Special situation (1/2)
• Investment in debt-securities or equity of a
company under financial stress;

• Distressed companies are in default, under

Chapter 11 (reorganization) or under Chapter 7
(liquidation=bankruptcy);

• Loans are rated BB and below by S&P based on

usual ratio (debt/EBITDA, EBITDA interest
coverage, etc…);
15
Distressed / Special situation (2/2)
• Distressed debt investors try first to
influence the process;
• Debt holders have access to confidential
information;
• Then, as debt holders, they can take the
control of the company;

16
 Secondary (1/2)
• Purchase of existing (hence secondary) commitments
in PE funds or portfolios of direct investments;
• LP selling their portfolio = secondary deal;
• Needs in depth valuation and bidding/auction process;
• Specialized investors: Alpinvest, Coller Capital,
Lexington Partners;
• Booming specialization as most of institutional
investors are seek cash.

17
 Secondary (2/2)

Secondary Insurance Pension Large

LP buyer company fund corporate
HNWI

GP The PE fund Manager

Portfolio Company A Company B Company C Company D Company E Company D

18
 Mezzanine (1/3)
• Debt instrument immediately subordinated to the
equity;
• The most risky debt instrument = highest yield;
• Returns generated by:
– cash interest payment: fixed rate or fluctuate along an
index (e.g. EURIBOR, LIBOR);
– PIK interest: payment is made by increasing the
principal borrowed;
– Ownership: mezzanine financing most of the time
include equity ownership.
19
 Mezzanine (2/3)
• Mezzanine suffered before credit crunch
as senior debt was easy to access;
• Since July 2007 and lack of funding,
mezzanine is back:
– As of 30 September 2008, 70% of PE deals
used mezzanine vs. 48% in 2007;
– Q3 2008 average spread: E+1,042, versus
E+979 in Q2 2008;

20
 Mezzanine (3/3)
Rolling 3-month average spreads of mezzanine
Highest in May 2003: E+1,051.5 bps September 2008: E+1,042 bps
1100

1050

1000

950

900
E+ bps

850

800
Credit crunch: E+780.5 bps
750

700

650

600
Nov-00

Nov-01

Nov-02

Nov-03

Nov-04

Nov-05

Nov-06

Nov-07
Jul-00

Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08
Mar-02

Mar-03

Mar-05

Mar-07
Mar-00

Mar-01

Mar-04

Mar-06

Mar-08
21
 Infrastructure (1/2)
• Among the newest PE-like asset;
• Global needs for infrastructure assets
• Roads, ports, airports, energy plant, hospitals. Prisons,
schools, etc…
• Mix of private investors and governments through PPP
(Public-Private Partnerships);
• Traditional PE funds raised infrastructure funds: KKR,
CVC, 3i, Macquarie;
• Longer term investment, lower return, steady cash-flow
with regular yield;
• French highways or Viaduc de Millau are contracted to
Eiffage/Macquarie;
22
 Infrastructure (2/2)
• A multi trillion market opportunity:
– $1 trillion to $3 trillion annually through 2030;
– US: power industry needs $1.5 trillion
between 2010 and 2030;
– Mexico: a 5-year and $250 billion plan will be
funded 50% by private capital;
– EU: €164 billion to be invested in natural gas
infrastructure by 2030 to facilitate import of
gas to meet long-term shortfall;
– China: close to 100 airports will be needed.
Source: Global Infrastructure Demand through 2030, CG/LA Infrastructure, March 2008.
23
Infrastructure to 2030, volume 2, OECD publication, 2007.
 Real assets (1/2)
• Cash-flow producing asset or pool of assets
privately originated:
– Equipment leasing (shipping, aircraft…): the asset is
purchased and simultaneously leased back to the
seller;
– Agricultural finance (forests, timber lands, etc…):
growing demand from the renewable energy sector;
– Mines, intellectual property rights, financial assets on
the secondary market, etc…
• It is usually not asset-backed securities but a
direct investment in the assets

24
 Real assets (2/2)
• Steady and regular cash flow: 10%-15%
annual cash return;
• Downside protection due to high recovery
value of the assets: loss of value of the
asset is unlikely;
• Uncorrelated assets;

25
Why allocate assets to PE ?

26
 Portfolio management
• Asset allocation is define by returns, risk
(measured by standard deviations of
returns) and correlations;
• Diversification improve returns while
reducing risk;
• Allocation is determined using public
information of traditional asset classes
(equity, bonds, REIT, etc...)
27
 The issue with private equity
• Private market:
• PE funds invest in private companies = no public
market to help set the valuation;
• PE funds are themselves private companies = no
market to value them and no public disclosure
required.
• Quarterly valuation:
• Risk of inconsistency: quarterly marked-to-market
valuation = significant degree of subjectivity;
• Risk of stale valuation: quarterly valuation can
understate the standard deviation and correlation to
other asset classes.
28
 The issue with private equity
• Illiquid investments:
• PE funds are closed-end funds (except secondary
market);
• Time line too long:
• PE funds has a 5-year investment period and a 10-
year life;
• Restricted information disclosure:
• Only LPs have access to the fund’s performance.

Private equity is an inefficient market

29
• However, Allocation to PE increased
significantly over the last years:

• Low correlation to pricing trends of

traditional assets;
• Diversification thus risk reduction;
• Good returns over the years: Average
annual IRR 1986-2005 is 18.3%

30
 Reason to invest in PE
• Adding a risky asset with a low correlation
of pricing trends compared to traditional
asset classes can reduce the risk of an
overall portfolio;

• Relatively good returns of PE over the last

years.

31
LBO activity in Europe

32
 Geography

LBO activity in Europe per value (Q1-Q3 2008) LBO activity in Europe per volume (Q1-Q3 2008)
12% 14%

2% 24%
UK
3% UK 3%
France
3% 36% France 3% Germany
Germany
Netherlands
4% Netherlands 3%
Sweden
Sweden 3% Norway
5% USA 21%
Belgium
Norway 4%
Spain
Belgium
Italy
Other
7% Other
14%
21%
18%

33
 Sectors

LBO value in Europe per sector (Q1-Q3 2008) LBO volume in Europe per sector (Q1-Q3 2008)
16% 19%
23% 23%
Services & Leasing
14% Manufacturing
Manufacturing
Services & Leasing
Healthcare
Building Materials 18%
Retail
Healthcare
3% Food & Beverage
Retail Food & Drug
Chemicals
5% Insurance 3% Building Materials
Chemicals
Computers & Electronics
Oil & Gas 5%
6% Automotive
Other
10% Other
5%
8%
10%
9% 7%
9% 7%

34
 European buyout value

European buyout value: €72 billion in Q1-Q3 2008

35
 European buyout by region
European LBO volume by region (€ billion)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jan-Sep 08

€ 140

€ 120

€ 100

€ 80

€ 60

€ 40

€ 20

€0
UK France Germany Italy Nordic Region Western Europe

36
 PE as a percentage of GDP
• Nordic countries have the most important PE activity;
• Benelux figures are impacted by few mega deals.
Nordic countries German speaking countries Benelux
Southern Europe France UK
Others

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

37
European fundraising activity

38
Funds on the market

39
Seeking capital is becoming difficult

• Number of vehicles seeking capital keep

on increasing;
• But the number of final closing and the
path investors deploy capital has slowed
down dramatically;
• Investors (LPs) are hesitant and
sometimes face liquidity issues;
40
• Distributions are expected to decrease as
well: this won’t ease the fundraising
processes;
• Average fundraising:
– 2008: 14.2 months;
– 2007: 12 months;
– 2006: 11.1 months

41
Average fundraising

42
 State of the market
• Aggregate PE commitments globally are close to
$2,000 billion (vs. $1,000 billion in 2003 and an
expected $5,000 billion within 5 to 7 years);

• Globally: app. 1,200 funds are currently seeking

$713 billion including:
– Buyout: 290 funds seeking $320 billion;
– Venture: 470 funds seeking $85 billion;
– Mezzanine: 25 funds seeking $10 billion;
– FoF: 205 funds seeking $220 billion.

43
 Funds of the market
• Permira: €13.5 billion;
• CVC: €13.7 billion;
• Apax Partners: €11.4 billion;
• Cinven: €8.2 billion;
• Charterhouse: €7.4 billion;
• PAI Partners: €5.5 billion.

44
 Outlook
• PE is set to enter its most challenging time;
• Increasing pressure and difficulties for managers
seeking capital;
• Fundraising take more time;
• Less deals are being signed so there’s no rush to
raise;
• Historical performances and focus strategies will
become key factors in the future: some GPs won’t
survive;
• Some LPs will need to free up some capital and clean
up their portfolio: increase in secondary transactions.

45
 Outlook
• PE AUM has grown steadily since 1996:
• 60% of LPs are expected to increase their
allocation to PE;
• Sovereign wealth funds are a huge source
of capital:
• Represent today $3,000 of assets and are
expected to reach $7,900 billion by 2011;
• Europe accounts for 19% ($580 billion) of
SW funds capital;
46
Fundraising sources

47
• LPs usually invest in home-based funds;

48
• Globally, US is the single largest investor;
• In Europe, UK is ahead of anybody;

49
Profile of the LPs

50
The measure of performance

51
 Track record

N apoca Fund II
Initial
Realized Unrealized Multiple of
A s of 30 December 2007 - $ million Country investment Exit Cost Total value Gross IRR
value value cost
date
Realized investments
Beverage Plus Holdings, LLC US Feb-04 Mar-07 23.3 49.6 0.0 49.6 2.1x 38.0%
Dear Lagoon UK Feb-05 Jul-06 65.6 151.0 0.0 151.0 2.3x 43.0%
Sport Management Arizona US Jun-06 Apr-08 97.7 164.2 0.0 387.7 4.0x 96.0%
Napoca Distressed Credit Other Jul-05 Jan-08 14.6 12.1 0.0 12.1 0.8x -
Total realized investments 201.2 376.9 0.0 376.9 1.9x
Unrealized investments
Fenchurch Street Insurance Bermuda Dec-06 - 130.0 - 131.7 131.7 1.0x -
Alketechnic Germany Jun-06 - 48.2 - 55.6 55.6 1.2x 5.3%
OutSpace Clothing Switzerland Apr-06 - 38.0 - 52.8 52.8 1.4x 26.1%
Avi Construction France Apr-06 - 49.7 - 55.8 55.8 1.1x 5.1%
Hospital Management Holdings US Feb-06 - 46.2 - 46.2 46.2 1.0x -
Pack4Life Belgium Mar-08 - 72.2 - 72.2 72.2 1.0x -
Foxtruck Finance US Mar-08 - 150.0 - 150.0 150.0 1.0x -
Total unrealized investments 534.3 - 564.3 564.3 1.1x -
Total N apoca Fund II 735.5 376.9 564.3 941.2 1.3x 5.3%

52
 Measures of performance
• Multiple of cost:
• Also called Total Value over Paid-In capital (TVPI);
• (Cash distributions + Unrealized value)/capital
invested;
• Cash returned regardless of timing (total return).
• Internal Rate of Return (IRR):
• Discount rate that makes NPV of all cash flows
equal zero;
• Linked to timing: Quick flip = high IRR.

53
 The J-curve
• In the early years, low or negative
valuation due to:
• Management fees drawn from committed capital;
• Initial investments to identify and improve
inefficiencies;
The J-curve effect

20 Actual returns

15
Investments valued below
10 its cost:
Value

- Management fees;
5 - Initial investments.

-5
Years
54
 The J-curve
• Fees are charged based on the fund’s
entire committed capital;
• Example:
• Fund size: €100 million;
• Management fee: annual 2% committed capital;
• Organizational expenses: €300,000

→ €2,300,000 expenses/fees called regardless of

any investment made.

55
 The J-curve
• If 5 investments are made the first year for €3 million
each:
• 5 x €3 million = €15 million;
• If 20% of committed capital is called the first year: €20
million;
Capital contributed €20 million (20% of committed capital)
Assets:
Investments €15 million (5 investments at €3 million each, held at cost)
Remaining cash €2.7 million (20-15-2.3 = €2.7 million)
Total assets €17.7 million (= 0.89x the 20 million contributed by LPs)

• Interim value is thus: €17.7 million or 0.89x contributed

capital;
56
 The J-curve
• Underperforming investments tend to be written down
more quickly than successful companies develop;
• Example 2nd year:
• Another 20% of committed capital : €20 million;
• Five new deals at €3 million each: €15 million;
• Two first-year investments are written down/off;
• Annual management fee: €2 million.

Capital contributed €40 million (40% of committed capital)

Assets:
First-year investments €10.5 million (original 5 investments, one written off, one written down to half its value)
2nd-year investments €15 million (another five investments at €3 million each, held at cost)
Cash on hand €5.7 (cash after €4.3 million of expenses(2+2+0.3) and €30 million of investments)
Total assets €31.2 million (=0.78x the €40 million)

57
 The J-curve
• Companies performing well, held at cost or conservative
valuation, understate the value of the portfolio;
• Interim is thus often misleading;
• NAV + cumulative distributions track over time relative to
contributed capital:

58
Fund of Funds due diligence:
the selection of PE managers

59
 Due diligence focus
• Quantitative analysis:
– Past investments and track record;
– Leverage and debt;
– Sources of proceeds.

• Qualitative analysis:
– Team;
– Strategy;
– Market opportunity
60
 Critical items of due diligence
• Track record: what’s behind a bad investment?;
• Unrealized portfolio: lack of recent track record
and ability of current team – look at current
valuation carefully.
• Organization: fund size, multi or single office,
Pan-European, domestic or transatlantic, risk of
spin-off, autocratic management, etc;
• Team: number of Partners, Principles and
Associates, carry split, staff retention and
turnover, motivation in case of large distribution
under previous funds, key man clause,
succession issues.
61
 Reasons to invest
• Attractive track record;
• Experienced investment team;
• Differentiated investment strategy;
• Proprietary deal flow;
• Sector/geographic focus.

• Must be combined with FoF portfolio

management and exposure > seek
diversification.
62
 Track record
• Entry and exit date;
• Realized and unrealized value (part sell off or
recapitalization);
• Multiples of cost and IRR.
N apoca Fund II
Initial
Realized Unrealized Multiple of
A s of 30 December 2007 - $ million Country investment Exit Cost Total value Gross IRR
value value cost
date
Realized investments
Beverage Plus Holdings, LLC US Feb-04 Mar-07 23.3 49.6 0.0 49.6 2.1x 38.0%
Dear Lagoon UK Feb-05 Jul-06 65.6 151.0 0.0 151.0 2.3x 43.0%
Sport Management Arizona US Jun-06 Apr-08 97.7 164.2 0.0 387.7 4.0x 96.0%
Napoca Distressed Credit Other Jul-05 Jan-08 14.6 12.1 0.0 12.1 0.8x -
Total partially realized investments 201.2 376.9 0.0 376.9 1.9x
Unrealized investments
Fenchurch Street Insurance Bermuda Dec-06 - 130.0 - 131.7 131.7 1.0x -
Alketechnic Germany Jun-06 - 48.2 - 55.6 55.6 1.2x 5.3%
OutSpace Clothing Switzerland Apr-06 - 38.0 - 52.8 52.8 1.4x 26.1%
Avi Construction France Apr-06 - 49.7 - 55.8 55.8 1.1x 5.1%
Hospital Management Holdings US Feb-06 - 46.2 - 46.2 46.2 1.0x -
Pack4Life Belgium Mar-08 - 72.2 - 72.2 72.2 1.0x -
Foxtruck Finance US Mar-08 - 150.0 - 150.0 150.0 1.0x -
Total unrealized investments 534.3 - 564.3 564.3 1.1x -
Total N apoca Fund II 735.5 376.9 564.3 941.2 1.3x 5.3%
63
 Benchmark analysis
Venture Economics Benchmark Comparison (as of 30 September 2007)

• DPI: Distributed Paid In Fund by fund basis N apoca Fund I N apoca Fund II

> Proceeds distributed,

Vintage Year 2001 2005
Fund Size $714.0 $1,305.0
Contributed capital $713.8 $611.3

only realized deals; Distributions

Residual value
Total Value
$2,518.5
$67.4
$303.4
$333.7

$2,585.9 $637.1
Gross IRR
55.6% 5.3%
N et IRR

• RVPI: Residual Value

Napoca 42.3% Too immature
Europe US Europe US
Lower boundary of Upper Quartile 17.8% 16.7% 9.7% 9.9%

Paid In > Unrealized

Quartile 1st 1st
DPI
Napoca 3.53x 0.50x

value; Lower boundary of Upper Quartile

Quartile
Europe
1.04x
1st
US
0.94x
1st
Europe
0.18x
1st
US
0.11x
1st
RVPI
Napoca 0.09x 0.55x
Europe US Europe US
Lower boundary of Upper Quartile NA 0.83x NA 1.03x

• TVPI: Total Value Paid

Quartile 4st 4th
TVPI
Napoca 3.62x 1.04x

In: Realized and

Europe US Europe US
Lower boundary of Upper Quartile 1.04x 1.52x 0.18x 1.15x
Quartile 1st 1st 1st 3rd

Unrealized value.

64
 Vintage year performance
Cumulative Vintage Year Performance (Thomson Venture Xpert - as of 30 June 2008)

Number of Capital Lower Lower Lower

Vintage Pooled
funds Average Weighted Maximum boundary of boundary of boundary of Minimum
Year Average
included Average 1st Quartile 2nd Quartile 3rd Quartile
1989 12 5.20 10.60 9.30 23.30 14.30 8.70 -0.10 -24.20
1990 17 11.90 9.50 9.20 35.70 19.50 8.90 3.00 -3.40
1991 15 14.10 14.80 16.90 40.20 23.60 13.20 6.20 -17.50
1992 8 21.70 27.30 27.20 42.80 32.30 22.10 10.20 1.70
1993 12 22.80 18.10 17.30 87.90 26.80 15.70 9.00 -9.90
1994 14 27.20 42.60 42.50 59.80 49.20 16.50 14.60 -1.80
1995 14 27.70 43.30 36.00 107.30 60.10 13.90 1.00 -16.00
1996 20 27.40 14.60 11.40 268.10 21.00 12.80 6.90 -12.40
1997 32 16.70 19.00 14.60 132.80 21.30 6.70 -0.60 -17.40
1998 34 5.90 8.50 8.90 30.20 9.70 4.30 -0.90 -11.10
1999 31 7.10 10.10 11.00 40.80 12.70 6.00 -0.20 -16.40
2000 32 10.00 13.60 14.60 35.00 17.80 8.80 - -9.60
2001 21 15.10 26.40 26.00 64.80 28.20 11.30 - -5.30
2002 27 15.80 20.30 23.30 110.10 27.50 8.30 -0.40 -7.10
2003 17 12.10 20.70 26.50 45.50 22.90 6.10 -1.30 -8.50
2004 15 21.70 28.80 21.90 234.10 17.50 -0.20 -5.10 -19.60
2005 33 5.90 1.90 6.30 82.40 11.50 2.70 -7.10 -50.90
2006 19 -1.50 -13.40 -12.90 91.30 5.60 -4.40 -14.40 -40.10
2007 11 32.30 -0.30 1.80 436.50 12.80 -32.00 -73.80
Average 85.12 23.42 8.97 - 1.3 -15.0
Minimum 23.30 5.60 -4.4 -14.4 -50.9
Maximum 268.10 60.10 22.10 14.60 1.70
Median 62.30 21.15 8.75 -0.2 -11.8

65
 Presentation
• Private equity investors and their
managers: Vivre avec un fond
d’investissement, Les Echos, October
2006

66
The world’s biggest private
equity firms

67
 Carlyle
• Founded in 1987 by David Rubenstein, Daniel D’Aniello
and William Conway;
• Since inception, Carlyle has invested $49.4 billion of
equity in 836 deals for a total purchase price of $220
billion;
• Over $89 billion AUM throughout 64 funds in buyouts
(69%), growth capital (4%), real estate (12%) and
leveraged finance (15%);
• Over 525 investment professionals operating in 21
countries;
• Assets deployed in Americas (59%), Europe (28%) and
Asia (13%);
• Currently: 140 companies, $68 billion in revenues and
200,000 workers.
68
Source: www.carlyle.com
 Carlyle deals
• Hertz
• Zodiac
• Terreal
• Le Figaro
• VNU

69
 Blackstone
• Founded in 1985 by Steven Schwarzman and Peter
Peterson;
• Global AUM $119.4 billion in private equity, real estate,
Funds of Hedge Funds, CLOs, Mutual funds;
• 89 senior MDs and total staff of over 750 investments
and advisory professionals in US, Europe and Asia;
• Blackstone is the first major PE firm to become public:
IPO was in June 2007 at $36 – under water since first
day !
• Currently: 47 companies, $85 billion in annual revenues
and more than 350,000 employees.

70
 Blackstone deals
• The weather channel: $3.6bn in
September 2008;
• Hilton: $26.9bn in October 2007;
• Center Parcs: $2.1bn in May 2006;
• Deutsche Telekom: £3.3bn in April 2006
(minority);
• Orangina: $2.6bn in February 2006;

71
 KKR
• Founded in 1976 by James Kohlberg, Henry Kravis and
George Roberts;
• Total AUM $68.3bn from $25.4bn invested capital;
• Total of 165 deals since inception with an aggregate
enterprise value of $420bn;
• KKR is currently from a “one-trick pony” to a multi asset
manager with infrastructure and mezzanine funds being
raised;
• The $31bn buyout of RJR Nabisco inspired the book
“Barbarians at the gate”;
• Currently: 35 companies, $95 billion in annual revenues
and more than 500,000 employees.
72
 KKR deals
• Legrand;
• Pages Jaunes;
• Tarkett;
• Alliance Boots;
• ProSieben;
• TDC;
• Toys R’ Us.

73
 PAI Partners
• The biggest French PE firms formerly
known as Paribas Affaires Industrielles;
• Since 1998, PAI invested €3.92bn in 36
deals across Europe;
• Last fund raised reach €5.2bn
• Investments include: Kaufman & Broad,
Vivarte, Neuf Cegetel, Panzani Lustucru,
Atos Origin
74
 Private equity deals
• Private equity funds own companies of
“everyday life”…
– Pages jaunes;
– Comptoir des cotonniers;
– Pizza Pino;
– Picard;
– Alain Afflelou;
– Jimmy Choo;
– Odlo;
– Orangina…
75
 Impact of PE on French economy is
overall positive

• 2006-2007 employees growth rate:

– +2.1% (vs. 0.5% for CAC 40);

• 2006-2007 sales growth:

– +5.3% (vs. 4.1% for CAC 40);

76
Source: AFIC/Ernst&Young
 • As of 30 June 2006:
– 55% of PE-backed companies have less than 100
empoyees and 83% have less than 500 employees;

– 79% have less than €50m revenues;

– 4852 PE-backed companies in France;

– Work force of 1.5 million people (9% of total private

employees);

– €199bn in revenues including €128bn generated

abroad.

77
Source: AFIC/Ernst&Young
 Presentations
• KKR
• Blackstone
• Carlyle

78
The mega buyout era

79
 Fund growth
• PE AUM 1980-2006: 24%CAGR;
• 2003-2006: PE commitments increased
260%;
• Cost of debt historically low

→ Global volume of LBOs increased to

$700 billion in 2006 (4x 2003 level);
→ Global volume of LBOs in H1 2007
reached $560 billion (25% of global M&A).
80
• Bigger are the funds, bigger are the target
companies;
• Fund size and deal size are correlated;
• “Club-deals” were required to complete the biggest
acquisitions;
• More cash you have,more cash you need:
• Co-investors such as other funds, LPs or
shareholders of target companies were sought
after;
• Some funds created quoted vehicles to access
permanent capital or listed the management
companies on the public market;

81
 Large funds are getting (much)
larger
• US 12 largest funds raised in the US as of
June 2007 totaled close to $155 billion:
• This represents a 142% increase compared with
their predecessor funds;
• In Europe, the fund-to-fund increase of the 12
largest funds was only 75%;

• In addition, GPs were starting to raise at

shorter intervals.
82
 Rational for larger pools of capital
• Economies of scale in the management of
the fund;
• Higher management fee enable to build
top investment teams;
• Expanded buyout opportunities at the
larger end of the market:
• Higher quality assets;
• Less competition at the upper-end of the market;
• Huge potential returns.
83
 Rational for larger pools of capital
• Ability to pursue a pro-active acquisition
strategy;
• Implement a levered capital structure;
• Flexible (covenant-lite) and low-cost
financing;
• Various exit options (IPO, Corporate
transaction, secondary buyouts...)

84
 Target companies
• Very large companies are attractive
targets:
• Mature companies need restructuring effort to get
rid of the “fat”;
• The value-addition is thus often obvious an
obvious path;
• Usually less competition among the buyers.
• Public market offer a lot of opportunities:
• PE investors add value to the company they invest
in as opposed to passive public shareholders.
85
 Rise of Club-deals
• Club-deals are iconic of the concentration
trends of private equity;
• 91% of US buyouts of over $5 billion were
club-deals...
• ... but also 38% of P-to-P valued between
$250 million and $1 billion were club
deals:
• Many firms shared the risks and pooled resources.

86
 Disappearance of club-deals
• Collusion charges;
• Difficulties to share informations;
• Tendency to monopolize the control the
control;
• Ego-issues.

87
 Examples of mega club deals
Target Value Buyers
Hospital Corp, of $32.7 billion Bain Capital, KKR,
America Merrill Lynch
Harrah’s Entertainment $27.4 billion Apollo, TPG

Clear Channel $25.7 billion Bain, Thomas H Lee

Kinder Morgan $21.6 billion Carlyle, Riverstone,

Goldman Sachs
Freescale $17.6 billion Blackstone, Carlyle,
Semiconductor Permira , TPG
Hertz $15.0 billion Carlyle, CD&R, Merrill
Lynch
TDC $13.9 billion Apax, Blackstone, KKR,
Permira, Providence 88
 Presentations
• Caveat Investor / the uneasy crown, The
Economist, Feb 2007;
• Who’s next, The Deal, July 2008

89
Value creation in private
equity

90
 Value creation drivers
• EBITDA generation
• Multiple expansion
• Debt reduction

91
 EBITDA generation
• EBITDA is generated by:
– Sales expansion;
– Margin improvement;
– Add-on acquisitions;
– Organic growth (=GDP growth)

92
 Multiple expansion
• Multiple: EV/EBITDA;
• Based on comparable transactions;
• Multiple expansion: Difference between
entry and exit multiple;

• =Multiple uplift x Exit EBITDA

• Multiple uplift:
=Exit EV/EBITDA – entry EV/EBITDA
93
 Debt reduction

• = Entry net debt – exit net debt

94
 Example

EV creation
€ 61.0 € 1,493.7
€ 323.6

€ 345.1

€ 764.0

Entry EV EBITDA generation Multiple expansion Deleveraging Exit EV

95
 What to understand from EV
creation
• If most of the value comes from:
– EBITDA increase: growing industry and/or
company, possibly in a young market or efforts
mainly on sales force;
– Multiple expansion: margin increased over the
holding period; the investors rationalized and
optimized the production, cut costs, disposed of
non core assets, arbitrage strategy, etc…
– Deleveraging: usually the last factor to be
implemented; Debt reduced by cash not reinvested.

96
 Entry Exit
EV EBITDA Net debt Multiple EV EBITDA Net debt Multiple
Company A 1,275.0 150.0 45.0 8.5 1,972.0 210.0 5.0 9.2

EBITDA generation: 1,275.0 = Enty EBITDA x Entry multiple (1)

1,785.0 = Exit EBITDA x Entry multiple (2)
510.0 = (2) - (1)

Multiple expansion: 0.7 = Multiple uplift (exit EV/EBITDA - entry EV/EBITDA) (3)
210.0 = Exit EBITDA (4)
147.0 = (3) x (4)

Debt reduction: 45.0 = Entry net debt (5)

5.0 = Exit net debt (6)
40.0 = (5) - (6)

Total value creation: 697.0

Exit EV: 1,972.0 = Entry EV + Total value creation

97
 Value creation chart

Debt reduction: Exit EV:

Multiple expansion:
EBITDA generation: € 40.0 € 1,972.0
€ 147.0
€ 510.0

Entry EV:
€ 1,275.0

Entry EV EBITDA generation Multiple expansion Debt reduction Exit EV

98
 Factors of value creation
• Changing business and driving growth:
• Taking advantage of market cycles (buying cheap,
selling at better price) and financial engineering are
no longer enough;
• Objectives must be well defined;
• Management is incentivized: alignment of
interest between Board members and
shareholders;
• Must create value for the next acquirer: PE
is not necessarily short term focused.
99
 Other factor: Industry
characteristics
• Stability, low cyclicality;
• High margins (or potential for
improvement);
• Strong operating cash-flows:
• PE businesses are cash-flow driven rather than
earning driven: need to pay down the debt
• Industry-wide revenue growth;
• Potential for overall efficiency
improvements.
100
 Other factor: The GP makes the
difference
• Managers contribute to value creation:
• Select the right target companies;
• Undertake appropriate changes;
• Experience of the GPs/prior buyout experience
• Focus on few sectors generates better returns:
• Industry-focus strategy generate better returns…;
• … but moderately diversified approach generates better
returns;
• Focus strategy exposes to industry cycles but good industry
expertise;
• Example of bad deal in the wrong industry:
Foxton deal “The deal of the century”, FT
101
• Recruitment/management;
• Buy-and-build;
• New investments to develop to new
markets;
• Optimization/cost cutting;
• Divesture of non core business(es)

102
 Primary source of value creation (%)
• Almost 2/3 of the value generated comes from company
outperformance: Companies’ fundamentals are key
drivers of growth.
Sample: 60 deals from 11 leading PE firms

Arbitrage
5%

Market/sector
appreciation, plus
financial leverage
32%

Company
outperformance
63%

Source: McKinsey & Company 103

• Five features of a leading-edge practice:
• Expertise and knowledge: insights from the
management, trusted external source;
• Substantial and focused performance incentives:
top management usually owns 15-20% of the
equity;
• Performance management process: initial
business plans are subject to continual review and
revision;
• Focused 100-day plan: deal partners must devote
most of their time to a new deals to build
relationship, detail responsibilities and challenge
the management;
• Management should be changed sooner rather
than later

104
 Presentation
• Foxtons: The sale of the century, FT
magazine, June 2008

105
Structure of a Leverage
Buyout transaction

106
 Structure of a leverage buyout
• Deal structure:
– Equity
– Debt

• Debt is either:
– Unsecured
– Secured

107
 LBO structure
Nine-year average: E+284.5;
Nine-year median: E+287.5;
Senior debt
Nine-year minimum: E+249.5 in June 2007;
Nine-year maximum: E+287.5 in June 2008*.

2nd lien have disappeared with the credit crunch; they

Secured 2nd lien
were seen as cheap mezzanine.

Mezzanine benefits from the credit crunch;

Mezzanine reimbursement has cash and PIK
Mezzanine components;
H1 2008 cash spread: E+414.7
H1 2008 PIK spread: E+535.3

Unsecured debt Unsecured debt usually bonds

Unsecured
Equity contribution
10-year minimum: 29.6% in 1997;
Equity 10-year maximum: 42.9% in H1 2008;
10-years median: 35.9%;
10-year average: 36.0%

108
 Equity
• Common equity, preferred equity, shareholder
loan;

• Equity is unsecured and the most risky and

rewarding tranche;

• Equity is held by the shareholders: private equity

fund, management, various investors, often debt
mezzanine providers, sometimes intermediaries.
109
 Mezzanine debt
• Secured debt but subordinated to senior debt;

• Mezzanine is provided by mezzanine funds and sometimes hedge funds;

• Reimbursement after the senior debt but has priority over the equity holders

• Reimbursement is cash or PIK;

• PIK note: payment made in additional bonds or preferred stocks which

increase the performance of the investment;

• Mezzanine is usually reimbursed at exit if not refinanced before.

• H1 2008 cash spread: E+414.7bps

• H1 2008 PIK spread: E+535.3bps

110
 Second lien
• Developed pre-July 2007 and does not
really exist anymore: as of Q3 2008, 12%
of LBOs used 2nd lien versus 52% in 2007;

• Reimbursement in cash, priority level

between senior debt and mezzanine;

• Second lien was seen as a cheap

mezzanine.
111
 Senior debt
• Negotiated for a period of time between 7 and 9
years usually based on expected cash flow;

• Tranche A is first reimbursed. Other tranches (B

and C) are usually reimbursed in fine;

• Tranche D is a revolving credit to refinance

previous debt of the target company;

• H1 2008 spread: E+337.48bps

112
 Capital structure
Nine-year average: E+284.5;
Nine-year median: E+287.5;
Senior debt
Nine-year minimum: E+249.5 in June 2007;
Nine-year maximum: E+287.5 in June 2008*.

2nd lien have disappeared with the credit crunch; they

Secured 2nd lien
were seen as cheap mezzanine.

Mezzanine benefits from the credit crunch;

Mezzanine reimbursement has cash and PIK
Mezzanine components;
H1 2008 cash spread: E+414.7
H1 2008 PIK spread: E+535.3

Unsecured debt Unsecured debt usually bonds

Unsecured
Equity contribution
10-year minimum: 29.6% in 1997;
Equity 10-year maximum: 42.9% in H1 2008;
10-years median: 35.9%;
10-year average: 36.0%

113
 The loan market:
in 2008
• Average leverage of European LBOs: 4.5x in Q3
2008 vs. 7.0x in Q3 2007;
• Average equity contributions: 43% in Q3 2008
vs. 34% in Q3 2007
• European Senior loan in Q3 2008: 450-550bps
(compared to 225bps-275bps in early 2007) –
partly offset by lower base rates;
• Mezzanine margins have increased to 1100 –
1300bps plus warrants or equity co-invest
(compared to 750-900bps with little call
protection and no equity participation in 2007);

114
Average LBO equity contribution

Less debt available = more equity required to close a deal

Average LBO equity contribution

50%
44.9%
45% 42.0% 42.8%
37.6% 38.6%
40% 37.3%
35.9%
33.7% 33.7% 33.6%
35%
30%
25%
20%
15%
10%
5%
0%
2001 2002 2003 2004 2005 2006 2007 1Q08 2Q08 3Q08

115
 Loan volume dropped significantly
Banks’ lending capacities are dry !
Q1-Q3 2008 loan volume: €46.6 billion
Q1 2007 loan volume: €45.75 billion

Annual senior loan volume (in € bn)

€ 150

€ 130

€ 110

€ 90
4Q
€ 70 3Q
2Q
€ 50
1Q

€ 30

€ 10

-€ 10 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

116
Evolution of capital structure

Back to the classic structure: Senior Debt + Mezzanine

Evolution of capital structure over years

100% 1.6%
9.3%
15.9%
90%
28.7% 27.9%
80%
51.6% 50.0%
70%
34.9%
20.4%
60% Sr + 2nd Lien + Mezz
33.2% 68.5%
50% Sr + Mezz
4.8%
11.7%
40% 23.9%
Sr + 2nd Lien
10.7%
30% Sr Only
48.4%
43.7%
20% 37.5% 3.7%
27.5% 27.9%
10% 18.5%

0%
2003 2004 2005 2006 2007 1H08
117
 Cost of debt

Cost of debt increased significantly in 2008

LBO cost of funding in bps

500.00
445.97
450.00
400.00
350.00
309.23 2003
300.00 2004
250.00 2005
200.00 2006
2007
150.00
Jan-Sep 08
100.00
50.00
-
Senior debt Senior debt + Mezzanine

118
 LBO spread
Average spread for initial and secondary buyouts
E+344.58 in
June 2008

340

320
E+298.39 in E+301.56 in
August 2001 January 2004
300

280

260
E+253.78 in
Sept. 2000 E+249.58 in
240 June 2007

220

200
0 0 0 1 1 1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 7 8 8
n -0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0 p- 0 n-0 y-0 p-0 n-0 y-0 p-0 n-0 y-0
Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma Se Ja Ma

119
 The loan market
• Loans started to fall below “par value” (100) in June
2007;
• Secondary market became depressed (less liquidity,
decline in value, etc) but presents some good buying
opportunities;
• Default rate at its lowest level although was expected to
increase in 2008;
• A lot of new investors (incl. traditional PE funds) entered
the loan market in H1 2008 with levered vehicles;
• They did not anticipate that the loan market will decline
even more sharply in 2008 = BAD
• Sponsor-backed credit is usually poorly valued
regardless of the company’s performance

120
 Consequences
• The market is stuck:
• sellers have not yet adjusted their price;
• Buyers don’t want/cannot pay high price.

• Deals are negotiated at cheaper:

– EBITDA multiples are lower
– More equity and less debt = more
conservative structure

121
 EBITDA multiples

Average LBO purchase price (EBITDA multiple)

12.0x 10.9x
10.5x
9.7x
10.0x 8.8x 8.7x
8.2x 8.3x
7.7x 7.6x
8.0x 7.3x 7.3x 7.1x 7.0x 6.8x

6.0x

4.0x

2.0x

0.0x

997 998 999 000 001 002 003 004 005 006 007 08 08 08
1 1 1 2 2 2 2 2 2 2 2 1Q 2 Q 3 Q

122
 Purchase prices
Secondary buyouts are the most impacted as:
• They were traditionally the most expensive transactions = price adjustment;
• Sellers are very likely forced to sell so accept lower prices.

Purchase price per deal type

11.0x
10.5x
10.0x
9.5x
9.0x
All Buyouts
8.5x
Sponsor to Sponsor
8.0x Corporate
7.5x Public to Private

7.0x
6.5x
6.0x
2002 2003 2004 2005 2006 2007 YTD 2008

123
The pros and cons of being
private

124
 Results of a 2008 McKinsey
survey:
• Private equity Boards are overall more efficient
than public equity Boards:
• Better financial engineering;
• Stronger operatonal performance.
• Pros and cons of public equity Boards offer
some:
• Superior access to capital and liquidity;
• More extensive and transparent approach to
governance and more explicit balancing of
stakeholder interests.
125
 Public versus Private: differences in
ownership structures and governance
• Public companies have arm’s length
shareholders:
• Need for accurate and equal information among shareholders
and capital market (audit, remuneration, compliance, risk);
• Management development across the board.

• Private equity companies have more efficient

processes:
• Stronger strategic leadership;
• More effective performance oversight;

• Manage only key stakeholders’ interests.

126
 Rating of public and private Boards
of Directors
Private equity Boards Public companies Boards

4.8 4.8
4.6
4.3 4.2
4.1
3.8 3.8
3.5
3.3 3.3
3.1

Strategic leadership Performance Development/succession Stakeholder Governance (audit, Overall effectiveness

management management management compliance and risk)

127
Source: McKinsey Quarterly, The Voice of Experience Public vs. Private Equity
 Strategic leadership in PE
companies
• Joined efforts of all Directors;
• Usually, defined and shaped dring the due
diligence (prior acquisition);
• Boards approve management strategic decision
(in M&A for example);
• PE funds stimulate management’s ambition and
creativity;
• Executive management reports on the progress
of the latest strategic decision implemented.
128
 Strategic leadership in public
companies

• Boards only oversee, challenge and shape

the strategic plans, accompanying the
management in the implementation;

• The executive management takes the lead

in proposing and developing it; it is mainly
a formal reporting.
129
 Performance management in
private equity companies
• Private equity have one focus: realisation
of their investment;
• Consequently, PE Boards have a
« relentless focus on value creation
drivers »;
• Performance indicators are clearly defined
and focus on cash metrics and speed of
delivery.
130
Performance management in public
companies
• High level performance managment, no real
detailed analysis;
• Focus on quarterly profit targets and market
expectations;
• Need to communicate an accurate picture of
short-term performance;
• Budgetary control, short-term accounting profits;
• Public companies Boards focus on information
that will impact the share price.
131
 Management development and
succession in private companies

• PE companies mainly focus on top

management (CEO, CFO) and replace
underperformers very quickly;

• Very little efforts deployed on long-term

challenges such as development of
management, succession, etc
132
 Management development and
succession in public companies
• Efficient thorough management-review: top
management and their successors;

• Focus on challenges and key capabilities for

long-term success: management development
and remuneration policies;

• However, public Boards have weaknesses:

• Slow to react and their voice is more (perceived as) advisory
than directive;
• Remuneration decisions sometimes more driven by
public/stakeholders expected reaction than performance

133
Stakeholder management in private
companies
• Executive management can clearly identify a
majority shareholder;
• PE funds are locked-in for the duration of the
fund;
• PE fund represent a single block and are much
more involved and informed than public
shareholders;
• Less onerous and constructive dialogue;
• No or little experience dealing with media and
unions (see Walker report and debate over PE in
2007)

134
Stakeholder management in public
companies
• Shareholding struture is more complex and
diversified than private companies:
• Institutionals, minority individuals, growth investors,
long-term strategic, short-term hedge funds.
• Different priorities and demands: CEOs
need to learn to cope with this very diverse
range of investors;
• In case of P2P, HF can block the
privatization (95% threshold to delist): Alain
Afflelou purchase by Bridgepoint.
135
 Governance and risk management
in public companies
• Where public companies score the best: consequences of
Sarbanes-Oxley legislation and Higgs Report;

• Several subcommittees to scrutinize remuneration, audit,

nomination, etc…

• Overall Board supervise and can rely and decide on the sub-
committees’ recommendations;

• Important factor of investor confidence;

• Downside: expensive, time-consuming, inefficient sometimes (“The

focus is on box-ticking and covering the right inputs, not delivering
the right outputs”)

136
Governance and risk management
in private companies

• Lower level of governance than in public

companies: only audit committees are
needed in PE’s approach;

• More focus on risk management than risk

avoidance;

• Not perceived as a pure operational factor.

137
 Top priorities
Private equity Boards Public companies Boards
Sample of 20 UK-based directors who have served on the
18 boards of both private and public companies, most with an
EV of >£500 million.

11

9 9

5 5 5 5
4

0 0 0 0
Value creation Exit strategy Strategic initiatives External relations 100-day plan Governance, compliance Organization design and
(inclu. M&A) and risk succession

138
Source: McKinsey Quarterly, The Voice of Experience Public vs. Private Equity
 Survey’s conclusion
• Public companies Directors are more focus on
risk avoidance than value creation:
• They are not as well financially rewarded as PE Directors by
a company’s success but they can still lose their hard-earned
reputations if investors are disappointed.

• Greater level of engagement by nonexecutive

Directors at PE-backed companies:
• In addition to formal meetings, PE nonexecutive Directors
spend an additional 35 to 40 days a year to informal
communication with the management.

139
 Credit crisis: impact and
consequences on private equity

140
 Before July 2007 (1/3)
• Growth of the institutional loan market, CDOs and second lien
loans;
• Intermediaries/brokers underwrote debt to sell to other investors for
syndication fee: became less demanding in terms of potential
risk/reward;
• Multiplication of highly rated structured credit products
(CDOs/CLOs) although their inherent value was increasingly
complex to calculate;
• Increasing interest from investors for LBO funds led to higher
leverage;
• New loans were issued as “covenant lite arrangements”:
DONNER DES EXEMPLES DE COVENANT A
RESPECTER DANS UN LOAN TYPE

141
 Before July 2007 (2/3)
• Increasing leverage loan activity but
decline of credit quality of the new debt
due to:
– Covenant lite;
– Rising ratio of debt to earnings for US
and EU LBOs;
– Mid and large LBO debt/EBITDA ratios
were at all time high in 2007 (and were
even higher for large than mid LBOs).
142
 Before July 2007 (3/3)
• Three indicators of a bubble:
– Debt/EBITDA ratio at all time high in 2007: a
decline of operating performance will expose
the company to the risk of default;
– Companies under LBOs have less liquidity to
serve their debt;
– Interest coverage ratio decreased since 2003
reaching a ten-year low of 1.7x in 2007.

• More equity + more debt = bigger deals and

bigger leverage;
143
 After July 2007 (1/5)
• Sudden increase in credit spreads makes the
debt more expensive and more in line with the
real risk held by the debt holder;

• Banks and debt underwritters could not

distribute their debt to other investors: had to
keep it on their balance sheet while their value
was declining;
– A number of transactions collapsed and could
not be closed;
– Banks that did not distribute their debt had to
report significant losses on their books.

144
 After July 2007 (2/5)
– Slowing buyout activity in US and Europe
(almost no activity in 2008);

– Debt was repriced and more difficult to

access;

– Default rate was historicaly low as of July

2007;

– Meant to rise sharply since then, starting with

construction, airline and retail industries as
global recession is impacting our economy; 145
 After July 2007 (3/5)
– Increase in the issuance of junk bonds: in the
past four years, almost half of the newly
issued bonds have been rated as “junk” at
their outset;

– Default risk (according to Moodys and Edward

Altman (NYU Salomon Center)):
– CCC 4-year default risk: 53.6%;
– CCC 10-year default risk: 91.4% in 10 years;
– B default risk: 25.2% after four years.

– In reality, the default rate over the last years is

much lower that those predictions; 146
 After July 2007 (4/5)
– Reasons for the low deafult rate:
– Given the lareg amount of liquidity, bonds that
would have defaulted have been refinanced;
– The rise of covenant lite means that any event
short of a failure to pay interest would not result
in a default;

– Private equity deals should be seriously

impacted very soon;

– Deals signed in 2005, 2006 and H1 2007 are

the most risky deals; 147
 After July 2007 (5/5)
• The crisis opens doors to new investment
opportunities:
– Distressed debt and special situation funds;
– Need for leverage should benefit mezzanine
funds;
– Credit dislocation funds: purchase loans at a
discount from lenders;
– Small to mid-market buyout funds will benefit
from desaffection for mega buyout firms;
– Secondary funds: some large institutions need
cash.

148
 Consequences
June 2007
Top of the cycle
• Prices are too high
• Risk levels are extraordinary
• Liquidity is driving behaviour
• Seller’s market
• No distressed opportunities
June 2008
Recession
• Prices are falling. More to go
• The risk profile has changed
fundamentally
• Lack of liquidity is driving behaviour
• Buyer’s market but must proceed
carefully and beware the falling knives
• Some interesting distressed situations
(and even more to come)
149
 Crisis = opportunities
• Recession years have produced the best vintages for
private equity;

• Although some LPs are facing liquidity crisis, more

money should be deployed now and in 2009 !

• Recession years considered to be 1991 + 2 years and

2001 + 2 years.

150
Recession years are usually good vintage years

151
Recession vs Non-recession

152
Case study: Baneasa

153
 Investment rationale
• Market leader in French retail (#1 in Footwear and #2 in
clothing);
• Experienced management team: Bogdan Novac has a
long standing experience of the sector and the group;
• Strong financial performance and strong growth in sales
expected over the next 3 years;
• Resilient business model: lower end of the market and
diversified range of products;
• Diversified offering: geography (city centre or out of
town, France and overseas, apparel and footwear);
• Potential growth prospect: organic growth (new stores
openings) and consolidation (fragmented industry).
154
• Banesa is #1 • Fragmented industry,
footwear retailer with gives M&A
14.4% of the French opportunity/growth by
market and #2 acquisition
clothing retailer in
France with only 3.7%
of the French apparel
market

155
• 45% of OOT footwear • Indication about
market and 24% of OOT competition: Zara, H&M,
clothing market Mango, etc… are city
centres = Baneasa has a
dominant position where
those competitors are not
present. Zara, H&M,
Mango, etc… are thus the
main city centre
competitors;

156
• Historically, Baneasa • First mover
has always been advantage
active in OOT:
created suburban
discount shoe stores
in 1981 with Osier
Chaussures; and in
1984 with Osier
Vetements

157
• Clothing business: • Well balanced, similar
44% sales and 43% EBITDA margins in
of EBITDA and both segments
• Footwear business:
56% sales and 57%
EBITDA

158
• France: 93% sales and • Baneasa is diversified
95% EBITDA; (but maybe not as much
• Out Of Town: 68% sales as the investor thinks);
and 72% EBITDA • Sales and EBITDA
indicates that city centres
and overseas stores are
more expensive (lower
margins, Baneasa has
lower performances
abroad and in city centres
where is the tough
competition)

159
• Bogdan Novac was • Good management
CEO of Baneasa from team // experienced
2000 to 2003 and CEO
2004 to today.

• EBITDA has grown • Strong performance

from €231m to €365m over the last years
(a CAGR of 16.4%) (since 2003)

160
• Nataf estimates sales and • Nataf and Berrilio offer
EBITDA in the financial potential margin
year to 28 February 2007 improvements as the
of €237 million and €23 margin is 9.7% and 7.3%
million respectively (9.7% respectively versus
margin). 16.1% margin for
• Berrilio had sales in the Baneasa.
12 months to 30
September 2006 of €64.5
million and EBITDA of
€4.6 million (7.3%
margin).

161
• French clothing • The actors must gain
market has been market share to grow:
stable since 2000 with no organic growth
0.2% CAGR resulting from industry
growth

162
• Average prices have
decreased by 1.5%
CAGR. Price-volume
elasticity is high with
declines in average
prices driven by the pass-
through of purchasing
gains from lower-cost
sourcing (Asia) to end-
customers and from the
increasing development
of value retail.
• Pressure on cost,
margins are difficult to
increase and can only be
increased through cost
reduction (rather than
price increase): price
pressure on Baneasa +
tough competition + need
to keep production cost
low (cost cutting and
tough negotiation with
suppliers)
163
• Womenswear • Womenswear is the
represents the core business
majority of the French
market with 51% of
sales. It was the
strongest growing
segment as well as
the most competitive
and innovative until
2002.
164
• Menswear has • Menswear is a new
experienced fast growth business with high growth
rates in recent years due so absolute need to be
to the introduction of active
semi-annual collections
and has increased its
share of the total French
clothing market (from
31% in 2002 up to 35% in
2004).

165
• Baby and • Children wear is a
childrenswear are good market with
expected to remain higher consumer
broadly stable, with spending
upside coming from
increased spend per
child and the
emerging trend of
higher-priced
designer baby and
childrenswear.
166
• Between 2001 and 2003, out-of- • Potential decline of
town banners saw their market OOT/inconsistent growth rate:
share decline from 11.9% in 2000 risk.
to 10.9% in 2003. This reflected
the impact of hard discount
retailing and the growth of city-
centre banners. Since 2003,
however, OOT specialised chains
have regained share and have
returned to 11.7% market share,
growing by 3.9% in 2004 and
4.7% in 2005, to €3.1 billion. This
dynamism has been driven by new
store openings and volume
increases supported by increased
price-competitiveness.

167
• Specialist out-of-town • Footwear: OOT has a
(OOT) distribution has
seen the strongest growth
in share (2.3% growth per
annum over 2003-05 and
3.2% over 1998-2003)
and continues to gain
market share on the food
retailers and the lower-
end city-centre players
due to a broad product
range and low prices.
strong growth in share;
OOT is where Baneasa is
the best with 45% market
share (with Osier
Chaussures, Velo and
Blue Shoes) while the
closest competitor has
only 10%.
168
• The Spanish footwear market • Spanish market: active market
is more dynamic than the at the time of the investment
French one (3.9% p.a growth (quid now?) but city centres
since 2000) but experiences have more market shares than
the same volume and price OOT (risk: Baneasa is better in
trends with volumes up 6.5% OOT).
p.a while prices decreased by
2.6% p.a largely driven by
growing Asian imports. The
market is still dominated by
independent city centre stores
(40% market share vs 15% in
France) and OOT footwear is
gaining share (8.4% p.a
between 1998 and 2003).

169
• Suburban stores are • OOT stores need high
typically large format volume sales to be
value stores and profitable // city
account for the great centres are more
majority of sales and fashionable products
profits, whilst city so potentially higher
centre stores are margins although
more fashionable probably higher costs
premium stores. (including marketing
costs)
170
• Over 2003-06, gross • Indicates that
margin has grown at Baneasa has grown
a 9.5% CAGR and organically and by
EBITDA at 16.4% acquisitions but
CAGR while sales acquisitions are the
CAGR was 5.8%, of main growth factor.
which like-for-like
sales growth of 3.7%.

171