SlideShare a Scribd company logo
2
Most read
17
Most read
19
Most read
Introduction
           to
Private Equity
   Errol Danziger
 Danziger Capital Partners LLP

         October 2011



                                 1
This Presentation
            covers
        Three Topics…

• What is private equity?
• How does private equity differ from other
  investment models?
• How does private equity boost corporate
  performance and enhance investor
  returns?

                                         2
Wealth Creation through
          Private Equity
• Wealth creation through the private equity
  investment model can be impressive, and
  sometimes even spectacular
• Although average private equity returns
  have been shown to track but not exceed
  the S&P 500, some private equity
  investments have greatly outperformed
  other types of investment

                                               3
KKR’s Acquisition of Duracell

           8                        7.8
           7
           6                              Acquisition
           5                              price
$ billions 4                              Bank deposit
           3                  2.4         at 5%
           2            1.8
                                          Selling price
           1
           0
                       Investor value
    Source: McKinsey



                                                      4
Desai Capital’s Acquisition of
       Sunglass Hut
   100%
   90%
   80%            Operating
                  improvements
   70%
                  Leverage
   60%
   50%            Industry gain
   40%
                  Market gain
   30%
   20%            Cost
   10%
    0%
                  Source: McKinsey
          Value
                                     5
Scale of Private Equity Investment
             Globally



                           Source: TheCityJK




                                         6
Scale of Private Equity Investment
      in the United Kingdom



                           Source: TheCityJK




                                         7
Features of Private Equity
• Target companies are taken private
• Acquisitions are financed with debt capital
• Investors are entrepreneurs, private equity
  specialists, high-net worth individuals, and
  institutions
• Agents are appointed to manage target
  companies
• Private equity is a form of financial
  innovation

                                            8
Objectives of
  Private Equity Investment


• Improvements in operating
  efficiency
• Increases in manufacturing
  and service productivity
• Increases in shareholder value


                                   9
The Private Equity
             Investment Model
• Resolves public company conflicts of interest
• Helps overcome the failure of public company
  controls
• Conflicts of interest in the public company have not
  been controlled by –
   1. Internal controls, including boards of
      directors
   2. Product markets
• but have been controlled to some extent by capital
  markets
• Activist investors have intervened and the result
  has been the development of private equity
                                                    10
The Strategy of Private Equity
Fund founded by specialist
investors
                        Raises debt and
                        equity capital
 Buys out listed
 and unlisted       Takes the listed
 targets            targets private

                                 Restructures
                                 the targets
  Exits through sale or IPO

                                                11
The Structure of Private Equity
The legal and economic structure is made up of
these factors and elements

 1. Funds                 6. Management
 2. Debt                  incentives
                          7. Decentralisation
 3. Partnership
                          8. No cross-
 4. Manager-held equity   subsidisation
 5. Institutional         9. Limited lifespan
    investors             10. Targets taken
                          private


                                                 12
Public Company
                      Structure Diagram
Director pay:
performance
sensitivity is small               Board of Directors

CEO
pay:performance                        CEO
sensitivity is small
                              Corporate Headquarters
Headquarters staff
in the 1,000s
                        Division    Division   Division   Division
                           1           2          3          4
Divisional head
pay:performance
sensitivity is tiny


                                                               13
Private Equity
                     Structure Diagram
CEO
pay:performance            Partnership                   Limited
sensitivity is big        Headquarters                 Partnership
                                                       Buyout Fund
Headquarters staff
in the 10s



                     LBO target   LBO target   LBO target   LBO target
                         1            2            3            4
LBO target CEO
pay:performance
sensitivity is big



                                                                         14
Private Equity Investment Targets
  Private Equity pursues corporate targets that
  are underperforming or are undervalued, and
  that have these features:
         1. Poor management
         2. Under-investment
         3. Over-investment
         4. Strategic neglect
         5. Inadequate debt financing
         6. Excessive debt financing
         7. Incorrect financing mix
         8. Excessive cash holdings
         9. Excessive conglomeration
                                                  15
How Private Equity Boosts
    Corporate Performance

By focusing on the following factors -

1. Assets in place        9. Period of high growth
2. Redeployment           10. Cost of financing
3. Operating efficiency   11. Less discretionary
4. Tax burden             12. Operating leverage
                          13. Financing mix
5. Capital maintenance,
   working capital        14. Matching
                          15. Non-operating assets
6. Expected growth
                          16. Acquisitions
7. New investments
8. Existing assets

                                                     16
Features of
Private Equity Target Performance
  1. Target shareholders gain from leveraged
     buyouts of target companies
  2. Private equity gains are not at made at the
     expense of other constituencies
  3. Leveraged buyouts boost target operating
     efficiency
  4. Private Equity gains are not subsidised by
     tax system through interest deductibility
  5. Private Equity targets taken private are
     seldom taken public again

                                                   17
How Private Equity Achieves
        Outperformance
1. Cash retention is minimised and excess
   cash is distributed promptly to investors
2. Capital structure is optimised to
   minimise cost of capital
3. An operating plan is developed and
   followed rigorously
4. Target company management is heavily
   incentivised to perform
5. Target company directors play an active
   and ongoing role in operational
   management
                                           18
Thank you!

             19

More Related Content

PPT
Private equity PPT
PPT
Corporate Finance: Basic Concept
PPTX
Introduction to Private Equity
PPT
Investment Banking presentation
PPTX
Private equity
PDF
The private equity fund
PPTX
Introduction to corporate finance
PPT
Private equity PPT
Corporate Finance: Basic Concept
Introduction to Private Equity
Investment Banking presentation
Private equity
The private equity fund
Introduction to corporate finance

What's hot (20)

PDF
Private Equity Presentation
PPTX
Investment management
PPSX
Venture capital power point presentation
PPT
Mutual fund
PPTX
PPT
VENTURECAPITAL FINANCING
PPTX
Introduction to corporate finance
PPTX
basics of finance
PPTX
MUTUAL FUND INVESTMENT.ppt
PPSX
Investment ppt[1].pptx [autosaved]
PPTX
Ch 1 II Financial Sector in Ethiopia.pptx
PPTX
Private Equity Funding
PPT
Ppt on Venture Capital And its types
PPTX
1. introduction to corporate finance
PPTX
Private equity
PPTX
Mutual fund ppt
PPTX
Investment Banking in India
PPT
Financial Forecasting & Planning
PPTX
Asset Classes and Market Segments
PPTX
Objectives of investment
Private Equity Presentation
Investment management
Venture capital power point presentation
Mutual fund
VENTURECAPITAL FINANCING
Introduction to corporate finance
basics of finance
MUTUAL FUND INVESTMENT.ppt
Investment ppt[1].pptx [autosaved]
Ch 1 II Financial Sector in Ethiopia.pptx
Private Equity Funding
Ppt on Venture Capital And its types
1. introduction to corporate finance
Private equity
Mutual fund ppt
Investment Banking in India
Financial Forecasting & Planning
Asset Classes and Market Segments
Objectives of investment
Ad

Viewers also liked (17)

PPT
PDF
Introduction To Private Equity Version 2
PPT
Acpt presentation
PPT
The Art Of Business
PPTX
Penggunaan Strategi Militer Dalam Bisnis
PPTX
Principle’s of art war with corporate examples
PDF
16 Strategi Zhuge Liang by Nida
PPT
Sun Tzu Art of War for Work Effectiveness
PDF
101 intisari seni perang sun t zu
PPT
01 Sun Tzu Overview And Key Factors
PDF
Sun tzu art of war
PDF
The Art Of War For Business Analysts
DOC
Sun Tzu Strategies
PPSX
Hypno sex
PPTX
Presentation Sun Tzu (the art of war)
PPTX
Shall we play a game?
PDF
Visual Design with Data
Introduction To Private Equity Version 2
Acpt presentation
The Art Of Business
Penggunaan Strategi Militer Dalam Bisnis
Principle’s of art war with corporate examples
16 Strategi Zhuge Liang by Nida
Sun Tzu Art of War for Work Effectiveness
101 intisari seni perang sun t zu
01 Sun Tzu Overview And Key Factors
Sun tzu art of war
The Art Of War For Business Analysts
Sun Tzu Strategies
Hypno sex
Presentation Sun Tzu (the art of war)
Shall we play a game?
Visual Design with Data
Ad

Similar to Introduction To Private Equity (20)

PPTX
Equity Solutions
PPTX
Finance invest-dividend policy&value creation-april 14 2012_final
PDF
Private Equity and Venture Capital 2
PDF
AAL Investment Forum 2010 - How to attract investors to your AAL company
PDF
Lecture 1 intro
PDF
HBAN - Investing in Private Companies Insights for Business Angel Investors
PDF
Investing in Private Companies Insights for Business Angel Investors
PPTX
Workshop 2, process and documentation
PPTX
3. plenary aavishkaar ii mr.vineet
PDF
Investor Relations Intitiaves
PDF
Private Equity and Venture Capital
PDF
Crédit Suisse introduction
DOCX
Investment project
PDF
Guide for Executives in Working with Private Equity
PDF
10 Year Anniversary Tocqueville Value Europe
PPT
Safeguard Scientifics (NYSE: SFE) Investor Relations Presentation - September...
PDF
Sortis Invest Presentation 20090912 En
PPTX
Venture exit strategy
PDF
corporate finance
PDF
Equity Solutions
Finance invest-dividend policy&value creation-april 14 2012_final
Private Equity and Venture Capital 2
AAL Investment Forum 2010 - How to attract investors to your AAL company
Lecture 1 intro
HBAN - Investing in Private Companies Insights for Business Angel Investors
Investing in Private Companies Insights for Business Angel Investors
Workshop 2, process and documentation
3. plenary aavishkaar ii mr.vineet
Investor Relations Intitiaves
Private Equity and Venture Capital
Crédit Suisse introduction
Investment project
Guide for Executives in Working with Private Equity
10 Year Anniversary Tocqueville Value Europe
Safeguard Scientifics (NYSE: SFE) Investor Relations Presentation - September...
Sortis Invest Presentation 20090912 En
Venture exit strategy
corporate finance

Introduction To Private Equity

  • 1. Introduction to Private Equity Errol Danziger Danziger Capital Partners LLP October 2011 1
  • 2. This Presentation covers Three Topics… • What is private equity? • How does private equity differ from other investment models? • How does private equity boost corporate performance and enhance investor returns? 2
  • 3. Wealth Creation through Private Equity • Wealth creation through the private equity investment model can be impressive, and sometimes even spectacular • Although average private equity returns have been shown to track but not exceed the S&P 500, some private equity investments have greatly outperformed other types of investment 3
  • 4. KKR’s Acquisition of Duracell 8 7.8 7 6 Acquisition 5 price $ billions 4 Bank deposit 3 2.4 at 5% 2 1.8 Selling price 1 0 Investor value Source: McKinsey 4
  • 5. Desai Capital’s Acquisition of Sunglass Hut 100% 90% 80% Operating improvements 70% Leverage 60% 50% Industry gain 40% Market gain 30% 20% Cost 10% 0% Source: McKinsey Value 5
  • 6. Scale of Private Equity Investment Globally Source: TheCityJK 6
  • 7. Scale of Private Equity Investment in the United Kingdom Source: TheCityJK 7
  • 8. Features of Private Equity • Target companies are taken private • Acquisitions are financed with debt capital • Investors are entrepreneurs, private equity specialists, high-net worth individuals, and institutions • Agents are appointed to manage target companies • Private equity is a form of financial innovation 8
  • 9. Objectives of Private Equity Investment • Improvements in operating efficiency • Increases in manufacturing and service productivity • Increases in shareholder value 9
  • 10. The Private Equity Investment Model • Resolves public company conflicts of interest • Helps overcome the failure of public company controls • Conflicts of interest in the public company have not been controlled by – 1. Internal controls, including boards of directors 2. Product markets • but have been controlled to some extent by capital markets • Activist investors have intervened and the result has been the development of private equity 10
  • 11. The Strategy of Private Equity Fund founded by specialist investors Raises debt and equity capital Buys out listed and unlisted Takes the listed targets targets private Restructures the targets Exits through sale or IPO 11
  • 12. The Structure of Private Equity The legal and economic structure is made up of these factors and elements 1. Funds 6. Management 2. Debt incentives 7. Decentralisation 3. Partnership 8. No cross- 4. Manager-held equity subsidisation 5. Institutional 9. Limited lifespan investors 10. Targets taken private 12
  • 13. Public Company Structure Diagram Director pay: performance sensitivity is small Board of Directors CEO pay:performance CEO sensitivity is small Corporate Headquarters Headquarters staff in the 1,000s Division Division Division Division 1 2 3 4 Divisional head pay:performance sensitivity is tiny 13
  • 14. Private Equity Structure Diagram CEO pay:performance Partnership Limited sensitivity is big Headquarters Partnership Buyout Fund Headquarters staff in the 10s LBO target LBO target LBO target LBO target 1 2 3 4 LBO target CEO pay:performance sensitivity is big 14
  • 15. Private Equity Investment Targets Private Equity pursues corporate targets that are underperforming or are undervalued, and that have these features: 1. Poor management 2. Under-investment 3. Over-investment 4. Strategic neglect 5. Inadequate debt financing 6. Excessive debt financing 7. Incorrect financing mix 8. Excessive cash holdings 9. Excessive conglomeration 15
  • 16. How Private Equity Boosts Corporate Performance By focusing on the following factors - 1. Assets in place 9. Period of high growth 2. Redeployment 10. Cost of financing 3. Operating efficiency 11. Less discretionary 4. Tax burden 12. Operating leverage 13. Financing mix 5. Capital maintenance, working capital 14. Matching 15. Non-operating assets 6. Expected growth 16. Acquisitions 7. New investments 8. Existing assets 16
  • 17. Features of Private Equity Target Performance 1. Target shareholders gain from leveraged buyouts of target companies 2. Private equity gains are not at made at the expense of other constituencies 3. Leveraged buyouts boost target operating efficiency 4. Private Equity gains are not subsidised by tax system through interest deductibility 5. Private Equity targets taken private are seldom taken public again 17
  • 18. How Private Equity Achieves Outperformance 1. Cash retention is minimised and excess cash is distributed promptly to investors 2. Capital structure is optimised to minimise cost of capital 3. An operating plan is developed and followed rigorously 4. Target company management is heavily incentivised to perform 5. Target company directors play an active and ongoing role in operational management 18