Private Equity. How to unlock the potential of private companies? David Maréchal Private Equity Investment Manager. 18 September 2014 München

Transcription

1 Private Equity How to unlock the potential of private companies? David Maréchal Private Equity Investment Manager 18 September 2014 München

2 Table of contents 1 Private Equity An overview 3 2 Why invest in private equity? 8 3 How to invest in private equity? 12 3 Current environment 17

3 1 Private Equity An overview 3

4 What is private equity? An asset class evolving from private markets A value strategy A highly specialized approach A long term investment strategy Private equity refers to the manner in which funds for investments have been raised, namely the private markets as opposed to the public markets. Private equity is an asset class consisting of equity securities in companies that are not publicly traded on a stock exchange Private equity investors are value investors, buying a non-listed company for a price below its intrinsic or potential value. After a transformational, value-added process, the company is sold generating a profit if the investor s prognostic was correct. Identifying those companies requires a detailed level of due diligence on companies and their respective industries Sustainable value creation in private equity requires a high level of involvement and sophistication in monitoring and managing portfolio companies. In some instances, specialist knowledge of local bankruptcy and debt restructuring laws is needed Improving the financial results and prospects of a company in order to resell it cashing out benefits is a strategy that requires time. The time horizon of an investment in private equity is generally 10 years 4

5 Company size / revenues Private equity investment strategies Private equity strategies offer investors opportunities across the full corporate life cycle of a company Company life cycle and private equity strategies EARLY STAGE LATE STAGE GROWTH MATURITY DECLINE Diverse investment strategies can be deployed depending on where the company is in its life cycle Each stage of a company s life cycle exhibits a certain risk profile and requires a specific set of skills from the private equity manager VENTURE CAPITAL GROWTH CAPITAL & BUYOUT SPECIAL SITUATIONS PAA has not acquired the rights or license to reproduce the trademarks, logos or images set out in this document. The trademarks, logos and images set out in this document are used only for the purpose of this presentation 5

6 Case Study BUSINESS DESCRIPTION Headquartered in Metzingen, Germany, Hugo Boss is the global leader in the formal menswear fashion market with a presence of over points of sale across 129 countries In 2007, Permira Funds took a controlling stake in Hugo Boss through a tender offer on Valentino Fashion Group for an equity investment of EUR 1 171m INVESTMENT THESIS Global leader in menswear positioned in the more accessible segment of the luxury goods market Well diversified portfolio of products (clothing, accessories and footwear for men and women) Global presence with a strong product recognition KEY INITIATIVES Strengthened management, implemented growth initiatives and focusing on the development of individual brands Better pricing & sourcing and shift to higher margin retail-driven model (eliminating EUR 170m of costs) Accelerated growth expected in Asia and the US through new own stores and franchise take-overs Sale of Valentino completed in November 2012 for EUR 170m Increased liquidity and improved capital structure Expanded the presence and brand in womenswear RESULTS Sales and EBITDA increased from EUR 1 496m and EUR 233m EBITDA (LTM December 2006) to EUR 2 451m and EUR 564m EBITDA (LTM March 2014) The Fund received EUR 1 010m (0.9x cost) through several share sales and refinancing. At today s share price (including proceeds received to date) Permira s investment is valued at 2.2x total cost Source: Permira and Hugo Boss 6

7 Three ways to invest in private equity A private equity fund of funds is the best way to mitigate the risks associated with the asset class Direct investment Investment in a unique private company Fund Investment in a fund established by a private equity firm Fund of funds Investment in a diversified portfolio of private equity funds Amount required Diversification Involvement Very high None Very high High Medium High Medium High Low Investor Investor Investor Fund of funds Fund ~20 funds A single company companies > 200 companies 7

8 2 Why invest in private equity? 8

9 % IRR Premium returns over public markets Since 2000, private equity generally outperformed global equities Performance by vintage (as at ) 35.0% 30.0% 31.6% 30.1% 25.0% 25.7% 22.7% 22.1% 22.6% 20.0% 15.0% 10.0% 5.0% 18.3% 7.9% 11.4% 19.4% 8.8% 19.1% 18.3% 14.1% 13.6% 13.9% 13.0% 12.0% 12.0% 10.3% 11.2% 8.2% 8.6% 7.8% 6.7% 5.7% 4.4% 4.9% 20.0% 17.3% 15.8% 13.3% 10.3% 9.7% 0.0% 0.1% 0.2% Private Equity 1st quartile Private Equity Median MSCI ACWI (all country world index) Sources: Cambridge Associates Benchmark Calculator as at (Private Equity Buyout and all regions performance, latest available data) and Reuters DataStream Index returns are being provided in order to represent examples of returns that may be obtained in other asset classes. Private equity differs from equity indices in that, among other reasons, it is an actively managed asset class that bears fees and uses leverage. Private equity global buyouts performance is pooled by vintage MSCI ACWI (all country world total return index) returns are obtained by replicating the private equity pooled average cashflows and ending NAVs on MSCI ACWI total return index (Public Market Equivalent method, as of ) 9

10 Why this outperformance over public market? 1 Illiquidity premium Investors are rewarded from the higher level of risk taken due to the illiquidity and long-term horizon of the investment 2 Value creation through active ownership Private equity managers focus on growing the intrinsic value of the acquired company (e.g. access to new markets, growth by acquisition) 3 No market pressure As non-listed assets, private equity investments are not subject to the short-term pressure imposed by public markets. Private companies have the luxury of time when deploying a long term value creation plan 4 Alignment of interests Private equity has the advantage to align the interest of the three major participants: the private equity fund manager, the company management and the final investor 10

11 Benefits vs. risks Benefits of private equity Risks associated with private equity Attractive long-term return potential over public equity Strong alignment of interests with performance fees on actual cash returns Invest in entrepreneurs and in the real economy with most value created through operational improvements Diversification benefits Illiquidity Broad and diverse range of different Private Equity strategies (buyout, venture, etc.) Exposure to different vintages Investments are locked up for a significant period of time Limited secondary market for investments and restrictions on transferring investments Financial leverage LBO strategies often use a relatively high level of debt to finance transactions Blind pool Fees 11

12 3 How to invest in private equity? 12

13 IRR (%) Large spreads in performance Selection matters more than in any other asset class First, median and bottom quartile by vintage year (all regions buyout funds) Median First quartile Bottom quartile Source: Cambridge Associates Benchmark Calculator, data as of (latest available data) Private Equity Buyout and all regions performance 13

14 Selection is paramount Investors should make sure they have the capacity to select a disproportionate number of 1 st and 2 nd quartile PE funds, which is the only way to capture the performance premium promised by Private Equity Quartile ranking of Pictet recommended PE funds (based on IRR) 7% 33% 1st quartile 22% 2nd quartile 3rd quartile 4th quartile 38% 1 Annualized IRR of all discretionary mandates since 1990 (in USD) IRR of 20.8% 1 14

15 Distinctive investment philosophy Operational Improvements INTRINSIC VALUE CREATION INDEPENDENT MINDS BOTTOM-UP High convictions Control Equity investor Established & Cohesive Teams HUMAN CAPITAL Alignment of interests LONG TERM Support next generation industry leaders Absolute performance through proven track record True partnerships through continuity Risk Management 15

16 Different strategies of private equity & Portfolio allocation Objective Focus mainly on leveraged buyout and other strategies that allow control or significant influence Geography Focus on US and EU with an opportunistic approach with regard to Emerging Markets Risk management Vintage diversification Fund diversification Fund Manager diversification STRATEGY DEFINITION RATIONALE Leveraged buyout Growth capital Special situations or turnarounds Distressed debt for control Strategy of making equity investments as part of a transaction in which a company is acquired from the current shareholders with the use of financial leverage. The companies involved in these transactions are mature and generate operating cash flows Most often minority investments, in growing companies that are looking to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business The investor will provide debt and equity investments, often "rescue financing" to companies undergoing operational or financial challenges Investments in equity or debt securities of financially stressed companies. The investor acquires debt securities in the hopes of emerging from a corporate restructuring in control of the company's equity Strategies allowing control or significant influence Emphasis on operational improvement rather than financial engineering X Venture capital Investments made in less mature companies, for the launch, early development, or expansion of a business High technology risk and a longer term horizon X Mezzanine financing Mezzanine financing is debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back Equity-like risk but with an upside ceiling X Infrastructure Investments in public works that are made as part of a privatization initiative from a government Lower targeted returns but with private equity fee structures 16

17 4 Current environment 17

18 Current Private Equity Environment Buoyant PE supported by strong debt markets Investors regain appetite for private equity Fundraising volume has doubled since 2009 but remains below record levels of 2008 Flight to quality on behalf of investors: general partners demonstrating strong and stable returns over the long term achieve easily their target fund sizes Strong debt markets on both sides of the Atlantic Debt/EBITDA multiples are at a record level since 2007 Easy access to refinancing leading to record levels of distributions through dividend recaps Strong financing markets have pushed prices higher for quality assets Secondary markets remain frothy Sellers expectations and buyers appetite for secondary transactions remain high driven by rising public markets Average secondary prices are close to NAV, with premiums being paid for quality funds 18

19 2014 PE investment themes Strong markets leading to a focus on niche players with a competitive advantage Complex deals - Avoid the premium paid for quality businesses in stable environments - Complex transactions like intricate carve-outs require special skills and attract therefore much less competition Buy and build strategies - Buying a platform company and growing it by acquiring smaller competitors at accretive multiples - Generating synergies and multiple expansion at exit Southern Europe (opportunistically) - Attractive prices with company EBITDAs at inflexion point and lower multiples than Nordic peers - Lower level of competition with less managers and dry powder 19

20 Thank you! 20

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