The document summarizes key aspects of private equity (PE) firms and their business model. It discusses how PE firms make money through leveraged buyouts (LBOs), the typical stages of a portfolio company, and performance measures like internal rate of return. It also outlines the basic structure of PE funds and how capital is contributed and returns are distributed. Key terms are defined and examples of top PE firms are provided.
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P.E.
1. p.e. 101
An ExecuNet Coffee Break
Presented by
Mike Lorelli
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2. EBITDA
Earnings Before:
▬ Interest
▬ Taxes
▬ Depreciation
▬ Amortization
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3. Stages
Idea Up & Running Mature
• Trailing EBITDA
VC PE
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4. Agenda
How the p.e.‟s made/make money
Terminology
Where they are; where their companies are
Some names
The p.e. model*
p.e. compensation
Performance measures
The Funnel
Getting to a p.e.
Know who you‟re getting in bed with
Management Compensation
The p.e.‟s Plan
LinkedIn
Resources
(*The p.e. model)
(Debt and Covenants)
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5. Worse than real estate brokers in Darien, CT
1978: 80 „Leveraged Buyout Groups‟ in US
2008: Estimated 3,000 around the world
- 2,000 U.S.
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6. Private Equity as a % of U.S. M& A Activity
35
30
25
20
15
10
5
0
'90 '95 '00 '05 '09
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7. How They Made Money: ‟70‟s and ‟80‟s and today
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Late 70s Mid 80s Late 80s Early 90s Late 90s Today
Origination Revenue Growth
Financial Engineering Acquisition
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Source: David Offensend, Evercore Capital Partners
9. Terminology
The providers of capital: Limited Partners, or
LP‟s
- who are they?
The fund manager: General Partner, or
GP, or p.e.
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12. Private Equity Firms Portfolio Companies
% of % of
States total States total
1 New York 23.3% 1 California 18.8%
2 California 15.1% 2 Texas 8.8%
3 Illinois 9.4% 3 New York 6.6%
4 Texas 7.4% 4 Massachusetts 5.9%
5 Massachusetts 7.0% 5 Florida 4.5%
6 Connecticut 6.5% 6 Pennsylvania 4.2%
7 Pennsylvania 3.7% 7 Illinois 4.2%
8 Virginia 2.4% 8 New Jersey 3.7%
9 Florida 2.2% 9 Georgia 3.2%
10 Michigan 2.0% 10 Ohio 3.0%
11 Ohio 2.0% 11 Colorado 2.7%
12 Colorado 1.9% 12 North Carolina 2.5%
13 North Carolina 1.9% 13 Virginia 2.4%
14 New Jersey 1.8% 14 Minnesota 2.2%
15 Georgia 1.7% 15 Michigan 2.0%
16 Washington DC 1.6% 16 Washington 2.0%
17 Minnesota 1.6% 17 Connecticut 1.9%
18 Maryland 1.4% 18 Maryland 1.9%
19 Indiana 0.8% 19 Wisconsin 1.8%
20 Wisconsin 0.8% 20 Tennessee 1.8%
Sample Size: 1,000+ private equity firms, 10,000+ portfolio companies
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13. Many ways to categorize the 3,000
By size
▬ Large $1 billion+ revenues
▬ Mid-market > $150 million
▬ Small < $150 million
By sector specialty
▬ Health care
▬ Consumer
▬ IT
▬ Financial services
▬ etc.
And those that chase everything that moves
Net-net, sector first; and mid-market; not lower
or upper
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14. Excellent
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15. Top 50 Fund Managers
Rank Firm City Capital
($Millions)
1 Carlyle Group LP Washington $32,000
2 Permira Advisers LLP London $27,388
3 Bain Capital Inc. Boston $26,000
4 Blackstone Group New York $25,000
5 Kohlberg Kravis Roberts & Co. New York $24,300
6 Credit Suisse Private Equity New York $22,100
7 GS Capital Partners Inc. New York $21,500
8 Apax Partners Worldwide LLP London $20,750
9 Texas Pacific Group Inc. Fort Worth, TX $20,000
10 CVC Capital Partners London $18,784
11 Thomas H. Lee Partners Boston $18,000
12 HarborVest Partners Boston $16,800
13 Cerberus Capital Management LLC New York $16,500
14 Welsh Carson Anderson & Stowe New York $16,000
15 Apollo Advisors LP New York $15,000
16 Adams Street Partners LLC Chicago $12,700
17 Lehman Brothers Merchant Banking New York $12,600
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16. Very Respectable Mid-Market
American Capital Fenway Partners
Capital Partners Frontenac
Founders Equity Hamilton Robinson
Mid-Ocean Pegasus
Nautic Partners HIG
North Castle Charter House Group
Riverside Company Gemini Investors
Wind Point Lincolnshire
Goodrich Capital MCG Capital
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17. The LBO model
Purchase Sale
▬ 7.0 X $9m = $63 ▬ 8.0 X 13 = $112
▬ Cash 27 ▬ Debt 32
▬ Debt 36 ▬ Proceeds 80
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18. The LBO model
Purchase Sale
▬ 7.0 X $9m = $63 ▬ 8.0 X 13 = $112
▬ Cash 27
▬ Debt 32
▬ Debt 36 ▬ Proceeds 80
= 3.1 X cash-on-cash
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22. The p.e. / L.P Model Pelosi 2008
Fund
Sale
A D
F
C E
B
F
J
C
A D G I
Purchase B H
E
2008 2009 2010 2011 2012 2013 2014 2015 2016
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23. The p.e. / L.P Model Pelosi 2008
Fund
Sale
A D
F
C E
B
F J
C
A D G I
Purchase B H
E
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Invest Harvest
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25. p.e. Compensation
2% of managed capital
▬ pays salaries, rent, and nominal bonuses
20% carried interest from profits on distributions*
* pre-Obama
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26. Performance Measures
IRR 20% 28% 33+%
Cash-on-cash return 2X 3X 5+X
Hold period years 8+ years 6 years 3 years
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27. Buyout Fund Sample
Capital Capital Dist. As of Net IRR
Partnership/Year Committed (M) Cont. (M) (M) As of (%)
02/28/09 02/28/0
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Endeavour Capital Fund III LP/2000 $25.0 $24.5 $41.9 29.6
Endeavour Capital Fund IV LP/2004 $50.0 $45.6 $16.1 25.2
Wellspring Capital Partners III LP/2002 $75.0 $80.9 $85.4 24.9
TPG Partners III LP/2000 $300.0 $284.5 $549.9 24.5
BDCM Opportunity Fund LP/2002 $50.0 $108.5 $128.1 23.3
Providence Equity Partners IV LP/2000 $150.0 $210.1 $243.9 22.5
2000 Riverside Capital Appreciation Fund/2000 $50.0 $45.9 $68.0 22.4
Green Equity Investors III LP/1999 $50.0 $49.4 $104.1 21.7
Hicks Muse Tate & Furst Europe Fund LP/1999 $99.3 $116.8 $195.9 21.6
Fox Paine Capital Fund II LP/2000 $50.0 $42.0 $47.8 20.0
Castle Harlan Partners IV LP/2002 $100.0 $98.3 $90.7 18.4
KKR European Fund LP/1999 $400.0 $532.0 $737.3 18.1
OCM Principal Opportunity Fund II LP/2001 $50.0 $61.3 $79.4 17.3
Aurora Equity Partners III LP/2004 $50.0 $39.0 $20.8 16.9
Providence Equity Partners III LP/1999 $100.0 $106.4 $157.2 15.6
2003 Riverside Capital Appreciation Fund/2003 $75.0 $72.2 $29.2 15.6
Matlin Patterson Global Opportunities Partners/2001 $75.0 $76.6 $117.1 15.2
OCM Opportunities Fund V LP/2004 $50.0 $50.0 $66.3 13.9
Vestar Capital Partners IV LP/1999 $100.0 $97.6 $101.1 13.9
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28. The Funnel
300 teasers
100 books
7 LOI‟s
2 due diligence
1 close
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29. “ The Capital Call” Pelosi 2008
Fund
Sale
A D
F
C E
B
C F J
A D I
G
Purchase B H
E
2008 2009 2010 2011 2012 2013 2014 2015 2016
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30. Landing in a Portfolio Company
CEO Direct to p.e. Deal Team
(Board Members)*
Direct to p.e. Board
CFO or COO Members and portfolio
company CEO
C-level in „the leverage Direct to p.e. Board
point‟ Members
and portfolio company CEO
Other C-Level Portfolio company CEO
* Check their web site
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31. Who the p.e. wants to meet
Target-Driven
Deal Exec
Thesis-Driven
Deal Exec
Deal Resource
Source: Andy Thompson, Notch Partners Job Seekers
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32. Elements of a Deal Thesis
Clear definition of industry – niche, size, geography, etc.
Outline of value-creation opportunities
Outline of plan for pursuing those sources of value
Explanation of why you/ your team are ideally suited to lead
such an effort – include description of team if applicable
Roster of 5-20 target companies
Status of discussions with target companies (if any)
Thoughts on likely exits
Source: Andy Thompson, Notch Partners
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33. Management Compensation
CEO $150K - $300K 50-75% 5.0% equity*
CFO/COO $125K - $275K 40-50% 1.5% equity
VP $125K - $225K 25-33% 1.0% equity
* and opportunity to co-invest
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34. Know Who You‟re Getting in Bed With
Professionals
▬ results with class
Sharks
The tell-tale signs of people who re-use dental floss
$150K base
Low bonus
Minimal equity
No contract
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35. The Plan
Fleshed out approach for how value will be created
▬ Strategic and operational blueprint
Rapid change principles
▬ 80/100 rule: an 80% solution that‟s ready to go now,
beats a 100% effective, theoretical solution, ready to go in 4
months
Make capital work hard
▬ Re-deploy underperforming assets
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36. Buyout Example Economics
Investment (Example)
• Acquire a business for 5.5x EBITDA
• Over 5 year horizon
Sales grow at 7% annually
Margins improve from 14% to
15.5%
• Sell business in year 5 for 5.5x EBITDA
WPP/Co-Investors Results CEO
• Assuming
• 30% IRR
• 3.7x cash-on-cash return CEO co-invest of $750k
CEO gets 7.5% of common
• CEO receives over $10 million
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ExecuNet 2010 All Rights Reserved Courtesy: Wind Point Partners
37. Components of Equity Value Creation
As EBITDA grows, the value of the enterprise increases.
At the same time, free cash flow reduces debt.
At Close Y1 Y2 Y3 Y4 Y5
EBITDA 25.2 27.5 30.1 32.9 35.9 39.1
Exit Value (5.5x EBITDA) 138.6 151.5 165.5 180.7 197.2 215.2
Cash Available for Debt Pay down 7.9 9.6 11.5 13.6 15.8
Net Debt 100.8 92.9 83.2 71.7 58.1 42.4
$ millions
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ExecuNet 2010 All Rights Reserved Courtesy: Wind Point Partners
38. The Three Primary Return Drivers
Leverage
Value Improvement: EBITDA Growth
Exit Multiple Expansion
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ExecuNet 2010 All Rights Reserved Courtesy: Wind Point Partners
40. APRIL 23, 2010
Blackstone Rides a Better Portfolio
By PETER LATTMAN
NEW YORK—More signs of strength emerged in the private-equity business Thursday, as Blackstone Group LP reported solid first-
quarter earnings results. The firm said the value of its private-equity portfolio rose 16% in the first quarter and its real-estate
holdings increased 12%. Its hedge-fund business, which has about $50 billion under management, also posted good performance.
Shares of Blackstone fell 11 cents, or 0.74%, to $14.84 in 4 p.m. New York Stock Exchange trading.
The report from New York-based Blackstone, the industry's largest player, came as its private-equity peers struck a flurry of
leveraged buyouts in the $1 billion range, underscoring the recovery of the large banks that provide the corporate loans to fund
such deals.
Blackstone Chairman Stephen Schwarzman sees 'concrete signs of economic improvement in our portfolio.„
The private-equity business has settled into a "new normal" after a volatile period. After a buyout bubble during the middle of
last decade defined by record-size acquisitions and reckless lending practices, the financial crisis brought the industry to its
knees. After a sharp recovery, today's environment is characterized by fewer headline-grabbing deals and more-conservative
financing packages.
If there's one concern across the industry, it's the pushback private-equity firms are receiving from their investor base of
pension funds and sovereign-wealth funds. These investors, called limited partners, are arguing for lower fees and greater
disclosure from buyout shops. Fund raising remains difficult; Blackstone is raising its sixth flagship buyout fund and expects to
raise $12.5 billion, according to a person familiar with the fund, down from its $21.7 billion fifth fund.
The private-equity business is certainly heating up again. In particular, firms announced several deals in which one group of
private-equity owners have acquired a business from another private-equity group. Such transactions are less complicated than
selling a business to a public company or via a public offering. Some private-equity investors frown upon the practice, as they
can create the perception that these deals are being done for expediency rather than maximizing value.
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41. A word on covenants
Max Capital expenditure $1.5 million
Min LTM EBITDA 11.0 million
Fixed Charge Coverage 1.00x
Total Deb Leverage 3.75x
Maximum Senior Leverage 4.50x
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42. The trades . . .
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43. A few words about
Have a killer handle
- Premium Brand Building CEO - Idea Monitizer
- Rapid new revenue streams for brands
Work hard at your keywords . . . ask the recruiter!
Refresh your „Activities‟
A business picture, not a tourist photo
Reco‟s matter . . . 25+
Don‟t be “unconnected” . . . 250+
Consider having it professionally prepared
Claim your personal URL and put on your resume
www.LinkedIn.com/in/mikelorelli not www.LinkedIn.com/in/02264lorelli9946
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44. Resources
▬ Private Equity Info
www.PrivateEquityinfo.com
Andy Jones
ajones@privateequityinfo.com
(512) 771-3943
▬ Galante‟s
▬ E-blasts: Solutions Marketing:
- Llew Smith (203) 655-2601
- LSmith@SolutionsMktg.com
- 2,700 p.e.‟s/VC‟s $499
- 2,700 search + 2,700 p.e.‟s $699
▬ LinkedIn: Jan Wallen
Jan@LinkedInWorks.com
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45. Good luck!
Mike Lorelli
CEO and Chief Passionate Officer
WaterJel Technologies, Inc.
(201) 806-3110
MLorelli@WaterJel.com
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46. Michael K. Lorelli
Mike Lorelli‟s 30-year career spans a wide range of consumer products and services, and B2B
categories, with responsibilities for both domestic and international units. His years as a line-
operating manager have largely been with Fortune 100 companies: PepsiCo and Bristol Myers
Squibb. For the last decade, as CEO, he has led revitalizations and turnarounds for private
equity firms. For example, Dr. John Rutledge, Chairman of Rutledge Capital, will say: “I would
invade China with Mike alone in a rubber boat.” He is presently CEO of Carlstadt, NJ based
WaterJel Technologies, the leader in burn care products. WaterJel is a Riverside Company.
Previously, he led the growth of Latex International, a Pouschine-Cook company. Mike has also
led CEO engagements for Rutledge Capital, and Cerberus.
Mike‟s assignments at PepsiCo included Executive Vice President – Marketing, Sales and R&D
for Pepsi-Cola North America, President of Pepsi-Cola East, a $1.5 Billion operating company,
and President for Pizza Hut‟s International division where he led a “global or bust” charge,
resulting in expanding the Company‟s presence from 68 to 92 countries, surpassing McDonalds
in country count. During his PepsiCo tenure, he is given credit for authoring the soft drink
company‟s “Big Event Marketing” strategy, which coupled the product with leading- edge events
Michael K. Lorelli in entertainment, sports, consumer electronics, movies and home video.
15 Norman Lane
Darien, CT 06820
Office: 203 655-2444
Mike holds a Bachelor of Engineering degree in Industrial Engineering from New York University,
FAX: 203 655-6916
and an MBA in Marketing from NYU‟s Stern Graduate School of Business. He has traveled to 54
Email: miklorelli@aol.com
countries, is an avid runner, claims to excel at no sport, is an active private pilot, member The
Website: www.Lorelli.net
CEO Trust, former member of YPO, and author of the childrens‟ best-seller “Traveling Again,
Dad?” with profits donated to childrens‟ charities. Mike is a Director of iMedicor (Ticker: VMCI).
He resides in Darien, CT with his wife Nancy.
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