Joseph V. RizziJoseph V. RizziAmsterdam Institute of FinanceAmsterdam Institute of Finance

December, 2013December, 2013

Stone Age Bronze Age Silver Age Golden Age Back-to-the-Future

(1974-84) (1985-90) (1990-2000) (2002-07) (2008 - ??)

Cottage Industry KKR Fund proliferation Goes global Shakeout/consolidation

Bootstrap deals High Yield Represents 40% higher equity levels

of M&A smaller deals

Mega Funds Operating improvements

focus. Increase in PIPE

and minority interests

Regulation

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Macro Uncertainty Banks CLO IPO Window

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Volumes – Leveraged Finance Volume < 1-1-13 – 10-31-13

2012 % Mkt 2013 % Mkt YOYΔ

 

LBO Loan Volume 4.0B 7% 18.0B 15% 368%

Non LBO Loan Volume 20.86B 37% 30.5B 33% 90%

Total € 24.9B 44% € 58.4B 49% 135%

Senior Sec Bds 13.3B 24% 28.6B 24% 115%

Senior Unsec Bds 16.6B 29% 26.3B 24% 71%

Subord Bds 0.6B 1% 4.9B 4% 656%

Total € 30.5B 54% € 61.8B 51% 102%

 

Mez € 1.0B 1.8% 0.1B 0.2% <81%>

Total € 56.4B €120.4B 113%

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3 Q 13

Strongest Quarter in 3 yrs Germany leading - € 98 double UK; France and

Sweden weak Springer - BC Partners - € 3.3B ISTA - CVC - € 3.1B CeramTec - Cinven - € 1.49B Pipeline Exits – ATC – Hg Capital € 300 mln trade sale  

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UK 26.5%  Germany 18.2% Netherlands 15.7% France 10.5% U.S. 9.3% Denmark 5.3%  Poland 5.0% Luxembourg 1.7% Sweden 1.7% Norway 2.6% Italy 1.5%   Source Standard & Poor’s Financial Services LLC. All rights reserved

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Most Active Sponsors

Sponsor Share

 

CVC 8.62%

Carlyle Group 8.62%

Bain Capital 6.90%

Advent International 5.17%

BC Partners 3.45%

Cinven Ltd 3.45%

Bridgepoint Capital 3.45%

Kolhberg, Kravis & Roberts 3.45%

Permira 3.45%

Charterhouse Equity Partners 3.45%

PAI Management 3.45%

Joh. A. Benckiser 1.72%

3i plc 1.72%

Golden Gate Capital 1.72%

Insight Ventures 1.72%

Clayton, Dubilier & Rice 1.72%

Silver Lake Partners 1.72%

Pamplona Capital Management 1.72%

EQT Partners 1.72%

Blackstone Group 1.72%

Investcorp 1.72%

OMERS Capital Partners 1.72%

Nordic Capital 1.72%

TowerBrook Capital Partners 1.72%

Cobepa 1.72%

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Europe U.S.

RC 10.7% 16.1%

T / LA 22 % 1.1%

T / LB 62.6% 71.7% 

2L 0.4% 10.9%

Other 4.3% 0.2%

 Source: Standard & Poor’s Financial Services LLC. All rights reserved

   

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Volume (€)

◦ 2000 – 1.35B 2007 – 32.20B◦ 2001 – 5.24B 2008 – 11.18B◦ 2002 – 3.09B 2009 – 0.38B◦ 2003 – 3.68B 2010 – 1.41B◦ 2004 – 5.92B 2011 – 0.86B◦ 2005 – 11.05B 2012 - 0◦ 2006 – 35.49B 2013 (Jan-Oct) 4.83B

 

 

Source: Standard & Poor’s Financial Services LLC. All rights reserved

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Structure and Spreads  Pre Crisis – 70% AAA -< 50 BP

10% AA 3% A

7% BBB Post Crisis – 90% AAA - > 125 BP

Bid / Ask (% of Par) Bid Ask

4 Q 13 100 1014 Q 12 96 974 Q 11 91 94 

Source: Standard & Poor’s Financial Services LLC. All rights reserved

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2013 (9 mo.) 58.9 2012 29.0 2011 43.9 2010 39.4 2009 5.0 2008 69.3 2007 152.3 2006 164.5 2005 110.0

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PE Firm General LimitedSellerFinancing Banks CLO Bonds MezProfessionals Lawyers Accountants Advisers

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Institution Investors 47.4% European Banks 37.3% U.S. Banks 5.5% Securities Firms 5.1% Asian Banks 2.9% Canadian Banks 1.2% Other Banks 0.6%

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Asset Classes Sovereign Corporate Equity AlternativesStyles Value Momentum Carry VolatilityRisks Economic Growth Inflation Liquidity Tail

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Fund manager

Carried interest

partner

General

Partner

LP

A

LP

B

LP

C

US Investors

US Exempt

Investors

Non-US

Investors

FUND

Investment Investment InvestmentInvestment

Hold Co.

Hold Co.

Operating Entity

Bank

Bridge finance

Syndicate participants

Leverage finance

syndicate participants

Nominee

High Yield

Investors

Mezzanine

InvestorsFLL

SLL

CLO

Hedge funds

15Amsterdam Institute of Finance

December, 2013

Now In 5 yrs

EBITDA of Acquired Firm 125 188 (c)Sale value @ 8 x EBITDA 1,000 1,500

Financing Plan: Equity @ .20 200 Debt @ .80 800

Total Capital Raised 1,000

Fees 30 50

Net Sale Proceeds on Exit 1,450

Original Debt 800 Less: Debt pay down over 5 years 260Debt at end of 5 years -540 540Return of Original Equity -200Net gain to be allocated 710 10% to mgmt options 71(a) 20% to general partner 142 70% to limited partners 497 (b) Total 710

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(a) Share to CEO 2% points or $14.2 x 1 = $14.2Share to next 4 senior officers 1% points or $ 7.1 x 4 = $28.4 Share to next 8 key players 1/2% points or $ 3.6 x 8 = $28.4 Total Management share $71.0

(b) Equals a 28.4% compound annual rate of return on investment.(c) Assumes $12 taken out of cost structure immediately and 6.5% growth/year in EBITDA thereafter.

Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions TransactionHarvard Business School case 9-206-1 Rev 10/16/06

- $ millions -

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Tax – Legal – Accounting Knowledge

Network Management

Industry Expertise

Corporate Finance Delivery

FundRaising

Investing Managing/Monitoring

Exit

VALUE

• Increased Debt (lower taxes)

• Bargain Purchase

• Operating Improvements

• Improved Governance

• Bondholder Value transfer

• Opportunistic Sale

• Restructuring Skills

18Amsterdam Institute of Finance

December, 2013

Focus on return: what is the maximum price I can pay based on given set uf projection and earn X% return?

Tradition Valuation =Projected cash flowsDiscounted rateTerminal value

LBO Prespective = IRR (Equity discount rate)Projected cash flowsPurchase PriceSale Price (Terminal Value)

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DCF

Net Income+ Dep/Amt+/_ Change in deferred taxes+/- Other noncash items+/- Change in working capital Cash flow from

operations+After tax interest- CAPEX- Unleveraged FCF

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CFADS

Net IncomeDep/AmtChange in deferred taxesOther non cash changesChange in working capitalCash flow from operationsNo interest expense adjustmentCapexCFADS

IRR Equivalent MOC Over 6 Years

10% 1.8X20% 3.0X30% 4.8X40% 7.5X50% 11.4X

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Bull Market Menu Bear Market Menu

As the credit curve shifts, the menu that is availableto Issuers / Arrangerschanges

• Holding Company PIK• Tranche Term Loans• Covenant Light• High Yield Debt• Bridge Loans• Second Lien • Hybrid Preferred• Cross Lien Facilities• Asset Carve-outs

• OPCO/PROPCO• Recapitalizations

• Stretch Senior• Seller Notes• Senior Notes• Private Placements• Equity • R/C Lite • Mezzanine• Smaller• floors• Sweeps• Prepayment penalties• covenants

Issuer Friendly

Investor Friendly

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Fixing the Broken Deal – Price and Structural Flex

Increase spread

Original issue discount

Eliminate PIK

Reduce debt

Add a subordinate tranche

More equity

Add covenants

Reduce Price

Seller Paper

CreditAccountingTaxRegulationExcess CapacityFundraisingFund StructureReturnsLPsPublic GPs

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Fundraising Dry Powder 2013 (9 mo) 69 190 201264 175 201150 175 201044 175 200965 200 2008 111 200 2007 - 190 2006 - 150

Source: Standard & Poor’s Financial Services

 Amsterdam Institute of Finance

December, 2013 25

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Deal marketDisappoint returnsImpacts fundraising

Deals chase money Superior returns Attracts capital

Capital chasings deals

Macro

Financial Markets