公司私募股权管理及财务知识分析课件.ppt

PRIVATE EQUITY (PE) FUNDS GLOSSARYCarried Interest – share of the gain on the Fund paid to the Manager Blind Pool – where there is limited visibility on the portfolio to be acquiredExit – realisation of the holdings in an investeeGeneral Partner (GP), PE Manager– management company that raises PE fundsGross IRR – IRR of the investee portfolio only. Net IRR is the return to Investors (see below)Hurdle rate – an annual percentage return received by Investors before the GP gets the carried interestPrivate Equity (PE)– generic term for investing in private companies of which Venture Capital, MBOs and Development Capital are subsetsInterim IRR – IRR of the Fund measured on activity to date, eg actual cash flows +NAV Investee – portfolio company of a PE FundIPEVC – International PE and Venture Capital Group, established main valuation guidelinesIPO – Initial Public Offering (or listing) on a recognised stock exchangeIRR = Internal Rate of Return, the discount rate/%age return where NPV is zero Limited partner (LP) – Investor - surrenders decision making in return for limited liability and (usually) tax breaksMBO – management buy outNet IRR – the IRR actually received by the investor, after all costs of management and fund expensesNet Present Value – the present value of future cash flows when discounted at a set rateSME – Small and Medium-sized EnterprisesSystemic risk – risk to the financial markets or system, as opposed to a participant, which cannot be diversified awayVintage of Fund – the year in which a fund first closes1Barnellan Equity Advice Ltd WHOLE AGENDA – PRIVATE EQUITY (PE) RISK?SESSION 1:vPE as an asset class: history, definitions, use, risk and return, summary risk control vHow do PE funds work? Using structures to mitigate riskSESSION 2:vHow PE is implemented? Using disciplines to control riskvManager selection2Barnellan Equity Advice LtdSESSION 1. Emerging Market Private Equity (EMPE) AS AN ASSET CLASS1.1 History and background•Introduction and History, Risk perspective •Use of PE in portfolios•Returns Break to draw breath and answer questions!1.2. Controlling Risk through the fund structure•Fund structure•How they work•Risk mitigation•Alignment and conflicts•J curve3Barnellan Equity Advice LtdINTRODUCTION AND HISTORYEARLY HISTORYv14th century – Moravian Protestant movement C Europe v15th century Florence – de MediciMORE RECENT HISTORY – 19th centuryvIntroduction of investment trustsvFinancing of US railroadsMODERN HISTORY – 1975 onwardsvGlobal expansion from US, then UK, then EuropevIntroduction of limited partnerships 1970/80svEmerging market PE from early 1990s4Barnellan Equity Advice LtdDefinition of a private equity investor -someone with deep pockets but very short arms! 5Barnellan Equity Advice LtdWHAT IS PRIVATE EQUITY? vEquities not traded on public marketsvPE is generic term covering Venture Capital (early stage/start ups), Expansion and Buy Out capitalvHigher growth smaller companies, agility/flexibilityvHigher risk (smaller firms, cyclical exposure, less defensiveness, management depth)vCan include some large companies as well as SMEsvHolding periods of 3-7 yearsvEM PE is quite a new asset class6Barnellan Equity Advice LtdOVERVIEW OF GENERAL INVESTMENT RISKSCommon to ALL institutional equity investmentvSystemic: ‘uncontrollable externalities’v‘Alpha exposure’ to upside and downsidevStrategic: failure to achieve policy objectives (desired exposure)vFinancial/Counterparty: loss of money/underperformance v benchmark due to investment activity and/or fraud, caused by failings in the management (of company or fund), organization/processvLiquidity: mostly difficult in smallcap or frontier marketsvReputation: risk accepted in the listed arena?7Barnellan Equity Advice Ltd POTENTIAL ADDITIONAL PE RISKHEAT MAP 8Barnellan Equity Advice LtdPE RISK PERSPECTIVEWhat greater risks are we taking (compared to other asset classes)? 1.Liquidity. Cannot realise investment at will. Medium 2.Systemic. Cycle – SME sensitivity to economic and market cycles = more volatile returns. Medium3.Financial: execution in PE more difficult. High 4.‘Infrastructure’ (financial, bureaucratic, judicial) can be more difficult for private firms. Medium/Low5.Litigation: legal redress sought by creditors, suppliers, governments etc. Low 6.Reputation: damage caused by issues derived from the above. Low9Barnellan Equity Advice LtdWHY BOTHER?vExploit market imperfectionsvSME growth potential vLow correlation with other assetsvReturns reflect the risk?Potential long term high reward for additional risk10Barnellan Equity Advice LtdRISK!11Barnellan Equity Advice LtdSPECTRUM OF RISK - INVESTMENTJudgment Evidence CDO’s/Junk Private E Listed equities Real Est Corp bonds Gov’t bondsJudgement dependant on:?! Analysis! analysis and liquidity credit rating security valueHIGH RISK LOW RISK12Barnellan Equity Advice LtdSPECTRUM OF RISK - PEJudgment Evidence Start ups early stage expansion MBO asset backedJudgement dependant on:Projections market and track record analysis security valueHIGH RISKLOWER RISK13Barnellan Equity Advice LtdSPECTRUM OF RETURN – INVESTMENT (net $ based)12-25% 7-15% 5-12% 3-7% 2-4% Private E Listed equities Real Est Corp bonds Gov’t bondsReturn dependant on:Stage sector/geography sector/geog credit countryHIGH RISK LOW RISKReturns are targeted net to investors based on an approximate history of developed markets 14Barnellan Equity Advice LtdSPECTRUM OF RETURN (GROSS) - PE BY STAGE30-45%25-40% 20-30% 17-25% 12-20%Start ups early stage expansion MBO asset backedDependant on:Projections market and track record analysis security valueHIGH RISK LOW RISKReturns are targeted gross portfolio returns before fund costs15Barnellan Equity Advice LtdCOMPANY LIFE CYCLEEarly stage firms with negative cash flow. Require R&D and start up capital, high risk. >30% IRRGrowth stage, expansion capital, medium risk 20-30% IRRMature phase, buy out and acquisition finance, ex growth, cash generative with debt capacity, lower risk. 17-25% IRRHigh riskLower Risk16Barnellan Equity Advice LtdBROAD DEAL TYPE DEFINTIONS vVenturevExpansion capitalvBuy out and acquisition financingvMezzanine (‘shareholder loans’ to SMEs, or unsecured debt to mid sized/large firms)vTypes of investment instrument – equity and quasi-equity or debt/preference all usedvPrivate Investment into Public Equity (PIPE)Funds may focus on one area or be quite generalist in deal type or sector17Barnellan Equity Advice LtdWHY USE PE IN PORTFOLIOS?vCorrelation low with other asset classesvLong term asset, rather like real estatevStabilising effect of less volatile pricing over short termvPotential higher return 18Barnellan Equity Advice LtdMANAGER SELECTIONvPE requires specialist skills and resourcevFor many institutions this is too expensive vIf so, sub contract management required – use fund of funds vIn South Africa PE industry well developed, favourable conditions, good choice of fundsvRest of Southern Africa, where funds are available, then investment/execution is the key to success19Barnellan Equity Advice LtdNET RETURNS ACHIEVED BY PE FUNDSReturns to 31 March 20103 year5 year10 yearEmerging Markets PE &VC 9.9 13.7 7.7W Europe VC&PE (3.6) 13.5 14.0MSCI EM index(listed equities) 5.5 16.0 10.1MSCI World index (5.4) 2.9 (0.0)vEMPE better than World and close to EM listed indicesvReasonable result given the Crunch (EMPE was top in 2007)vCaveat - not a strong benchmark. EMPE is only 307 fundsvAfrica sample size too small to be included in the statisticsvWide dispersion of PE returns internationally and between quartiles (EMPE top quartile beats MSCI index)Source: Cambridge Associates – pooled end to end $ net returns after all costs20Barnellan Equity Advice Ltd SOUTH AFRICA RETURNSGross returns of independently managed funds in SA from inception to end 2009 (net returns not available): Source : KPMG and SAVCA 2009 SA PE survey21Barnellan Equity Advice Ltd SOUTH AFRICA RETURNS - CONCLUSIONSSmall sample but indicates:v2/3 are producing strong index beating returns (>20% gross IRR)vTop quartile = stellar returns vOnly one may be a failure on present information (<10% gross IRR)vLonger term recorded returns tend to improve as funds are divested (years 6-10 normally)22Barnellan Equity Advice Ltd EVIDENCE FROM THE IFCAll their PE funds since 2000:vDiversified global portfolio including >20% in Africa/MENAvNet IRR to December 2009 = 18% (top quartile)vSME investments not significantly riskier than large ones, except well below $2m deal sizevIRR of minority position deals not significantly different from majority held onesvFirst time funds produced similar returns to non first time ones Contrary to traditional view on PE riskSource: IFC. The Case For Emerging Markets, March 201023Barnellan Equity Advice Ltd BUT….vAlthough good PE fund returns can result from excellent selectionvWHAT IS THE REQUIRED RISK PREMIUM OVER LISTEDS?vIs 15-18% net actually good relative to the riskvWhat is the premium required to persuade Western LPs to invest in Africa. Different from local risk premium?vRisk premium for African LPs to invest in West?!! (Due to recent poor returns in West)24Barnellan Equity Advice Ltd Pre crunch 2006 - 25% net from Africa. Today?Source: EMPEA 25Barnellan Equity Advice Ltd CURRENCY RISK vNot of course an issue for domestic investorvBalance of exporters and domestic businesses good vRegional funds look to diversification and long term nature of funds to mitigatevFunds do not try to hedge, due to cost of long term hedges and uncertain cash flows26Barnellan Equity Advice Ltd SUMMARY SESSION 1.1vPE has additional risks to those of listed equitiesvIt is still early days for the asset class vEMPE has an important role in a portfoliovThe risks can be identified and mitigated, to capture higher returnvOften undertaken by sub contract PE Manager vRisk is concentrated in execution – so selection of right PE Fund Manager is key27Barnellan Equity Advice Ltd SESSION 1. PE AS AN ASSET CLASS1.1 History and backgroundvIntroduction and History, Risk perspective vUse of PE in portfoliosvReturnsBreak to draw breath and answer questions!1.2. Controlling Risk through the fund structurevFund structurevHow they workvRisk mitigationvJ Curve28Barnellan Equity Advice LtdFLOW OF FUNDS DRIVERBusiness angelHNW individualsGovts, agencies (DFIs), Banks/Pension firms, Insurance companiesLimited Partnerships (LP)Private Equity managers (GP)Small and medium enterprises (Investee)Other funds, retailRetailsavings29Barnellan Equity Advice LtdMOST TYPICAL FUND TYPELIMITED LIFE LIMITED PARTNERSHIPS FUNDS – proven to be most effective. WHY?vInvestors reluctant to commit money to one Manager for more than 10 years, but happy with successive funds on good performancevLimited partnership or easily liquidated company structurevCommitment on which annual fee is paid, but capital drawn down as needed (IRR efficiency)vInvestment only allowed for four or five yearsvThereafter capital to be returned as realisation of investments occurvMinimum economic Fund size c $20m and so not suitable for PE deal sizes below c $200,000 (fund economics)vPartnership has tax transparency in many jurisdictions so can pool (‘commingle’) different investor types 30Barnellan Equity Advice LtdSTANDARD FUND STRUCTUREFeesAdvice/mgtCapital/expenses/returnsInvestment/returns Advisory Cttee31Barnellan Equity Advice Ltd HOW DO PE FUNDS WORK 1Initiation vInvestors approached by Manager (General Partner/GP) with Private Placement or Information Memorandum vNegotiate a common shareholder and management agreement vInitial investors make commitment on a single day = First Closing, but draw down is only as requiredvOther investors may join in subsequent closings on ‘equivalent basis’ for up to a yearvGP expected to invest at least 1%vOrganisational expenses of fund up to 1% paid by fund32Barnellan Equity Advice Ltd HOW DO PE FUNDS WORK 2OperationvDraw Downs against Commitment as needed for up to 5 years (Investment Period)vNormally portfolio of 8-15 investments created over the 5 yearsvCapital to be returned by year 10 (Divestment phase)vThis can be extended with partner approval vThe GP can raise sequential fund when current fund is c 75% invested, so they always have capital availablevStructure (or regular fund raisings) is potentially wasteful in GP time, but helps incentive alignment, and reduces blind pool risk33Barnellan Equity Advice Ltd HOW DO PE FUNDS WORK 3ExpensesCostsvManagement fees paid on Commitment (1.75 to 3% - dependant on size)vGP may be able to charge investees certain fees, 75-100% of which is shared with fundvFund carries all other third party costs, eg legal costs, auditing etcvGP gets a ‘carried interest’ (share of gain) of 20% of the returns after Investors received cost and ‘hurdle’ (6-10% pa) back34Barnellan Equity Advice Ltd HOW DO PE FUNDS WORK 4Process vInvestment Committee makes investment decisionsvAdvisory Committee/Board (of LPs) meets up to quarterly to review conflicts/valuationsvReporting quarterlyvValuations at least twice a year, now often quarterlyvCapital or income received returned to Investors immediately (subject to minimums) 35Barnellan Equity Advice Ltd TYPICAL FUND CASH FLOW FOR INVESTORS$100m Fund, $90m drawn down, IRR 20%, 2.25 multiple 36Barnellan Equity Advice Ltd  1.2 HOW DO FUNDS WORK TO MITIGATE RISK AGENDA vFlow of fundsvThe limited partnership structurevHow funds workvHow funds mitigate liquidity, systemic, infrastructure, litigation and reputation riskvJ Curve 37Barnellan Equity Advice Ltd STRUCTURE AND PROCESS Tailor made to mitigate risk38Barnellan Equity Advice LtdLIQUIDITY AND CYCLE/SYSTEMIC RISKSvClosed end fund protects the illiquid assetsv5 years to invest, 10 year life gives room for manoeuvrevCash starts to flow back year 4/5 vOrderly investment/divestment = maximum opportunity to negotiate good entry/exit pricesvDiversification within the fund across sectors/stages (very few sector specific funds in EM)v5 years to invest spreads cycle risk across periods, same for exitvManager does not sit on cashvSecondary market (negotiated basis) – IFC announced $500m fundBut, Investor must accept ‘ring fencing’ committed funds for long period39Barnellan Equity Advice Ltd LIQUIDITY AND CYCLE – SPECIFIC PROTECTIONSInvestment Policy Restrictions and ProtectionsDiversification requirements vSet policyvCountry/sector maximumsvInvestment maximums per investeeOther restrictionsvEnvironmental, Social and Governance vBanned sectorsChange of policy requires investors consentQuarterly ReportingvInvestee by investee detailsvValuations either quarterly or six monthly 40Barnellan Equity Advice Ltd INFRASTRUCTUREPrivate sector facilitation, strength and favourability:vOwnership protectionvLaw of contractvJudicial redress, efficiency and transparencyvCompany’s act and legal frameworkvTax incentives, government supportvLimits on state and bureaucratic interventionvEncouragement of foreign investmentvAvailability of debt, liquidity of public market 41Barnellan Equity Advice LtdLITIGATION/REPUTATIONCORPORATE GOVERNANCEvDelegated investment decisions to avoid investor liability vGP has Investment Committee that may have independents on itvGP takes the liability but indemnified except for negligence/fraudvAdvisory Board of Investors controls conflicts, valuations and audit, and change to investment policyvAbility to fire GP without cause subject to high vote thresholdvOther defaults on ‘key man’ retention, breach of investment restrictions etcvGP restrictions on ability to manage competing funds, over certain types of investment (banned sectors)vUndertaking from GP on environmental, social and governance criteria to be followed42Barnellan Equity Advice LtdPOTENTIAL ADDITIONAL PE RISKHEAT MAP 43Barnellan Equity Advice LtdOTHER MATTERS - ‘J’ CURVEIRR measured each year in the life of a FundSource: CalPERS44Barnellan Equity Advice Ltd SUMMARY SESSION 1vSub contract to professional management is needed – specialist skillsvTo commit resource to the investment process, manager needs capital backing and longer term stabilityvFund pools investors interests and diversifies exposurevStructure works to mitigate risksvSelection of PE fund manager is key (wide return range between top and bottom quartile)45Barnellan Equity Advice LtdSESSION 2. IMPLEMENTATION AND RISK MANAGEMENT46Barnellan Equity Advice LtdWHOLE AGENDA – PRIVATE EQUITY (PE) RISK?SESSION 1:vPE as an asset class: history, definitions, use, risk and return, summary risk control vHow do PE funds work? Using structures to mitigate riskSESSION 2:vHow PE is implemented? Using disciplines to control riskvManager selection47Barnellan Equity Advice LtdRISK MITIGATION REVIEWvPolicy and diversification – portfolio construction, diversification and investment limits/allocationvLiquidity – diversification across vintages/fund typevCycle – diversification across vintagesvFund selection – pre and post investment disciplines and procedures (this Session) vTax and jurisdiction – offshore locationsvCurrency – diversification by country if regionalvLiability – fund structures are limited liability partnershipsvReputation – delegated decision making 48Barnellan Equity Advice Ltd  VIEW OF PE RISK CHANGED FROM…49Barnellan Equity Advice Ltd ….TO?50Barnellan Equity Advice Ltd POTENTIAL ADDITIONAL PE RISKHEAT MAP – NOW THE HOTTEST BIT! 51Barnellan Equity Advice Ltd PE EXECUTION How PE is implemented? •Definition of execution/counterparty risk•The main issues for Fund of Funds•Alignment and conflicts•Fund of Fund level risk control•Main issues for Direct PE•Direct Investment risk controlPE Fund Manager selection•Focus on the people side52Barnellan Equity Advice LtdEXECUTION OR IMPLEMENTATION RISKOverall Risk definition:The potential to make poor investment decisions, and to fail to negotiate strong financial packages, add value, secure a good exit, and so not make a risk adjusted returnApplies both at fund of fund and at the portfolio level53Barnellan Equity Advice LtdTHE MAIN ISSUES ENCOUNTEREDFOR THE FUND OF FUNDS INVESTORFinding: vExperienced managers with good and long recordsvStable teams with a balance in terms of skills (entry, add value, exit), experience, and incentivesvTeams who adapt to change but still stay with their core competencevAligned interests 54Barnellan Equity Advice Ltd ALIGNMENT AND INCENTIVESPrinciples:vSome cash exposure from Manager, min 1%?vFocus that comes from limited lifevFocus from restrictions on other activitiesvManager incentivised by share of gain after all Investors money back plus hurdlevInvestors ultimately have control through ‘no fault divorce’55Barnellan Equity Advice LtdGENERAL ALIGNMENT SOLUTIONS 1Key alignment issues:1.Strategy – GP and LPs to share same objectives because: -Fees set so manager is viable but not excessively profitable-no new funds until this one invested, restrict other activities-no ‘fault divorce’. Super majority of investors can close the fund without cause2.Risk sharing -Carried interest only after Investor’s cost is returned -’Significant investment’ in fund from GP3.Short Termism – discouraged by:-All deal income of any sort 100% to the fund-Proper step down of management fee after investment Period56Barnellan Equity Advice Ltd GENERAL ALIGNMENT SOLUTIONS 23.Staffing flexibility – limited by:-key man clause. Breach of contract if key managers leave GP-individual carried interest allocation 5. Costs controlled:-cap on organisational costs,-fund administration cap-strict control on Manager charges to the Fund 6. Incentives aligned:-economics mostly go to key Managers who deliver for the fund -first time funds the sponsor role/backing involves GP ownership-later funds should see GP ownership and carry shift to ManagersHowever, alignment requires the right attitude and sense of responsibility, cannot be achieved by Terms only57Barnellan Equity Advice Ltd TWO DECISION LEVELS1. Fund of fund level/fund investor level execution2. PE fund level executionManager/fund selectionFoF levelInvestee selectionPE Fund levelManager qualities, processes,Pipeline, fund structure, terms Investee quality: markets, competition, product/service USP, management, reporting, valuation, deal structuring, value add58Barnellan Equity Advice LtdLEVEL 1. ADDRESSING THE FOF RISKS59Barnellan Equity Advice Ltd SELECTION PERFECTION!How to assess PE fund excellenceOperational Risk= Management team, competence, balance, incentives, alignment, track record, process and disciplines (50% weight?) Market Risk= nature of the opportunity, deal flow, pipeline, competition, networks (20% weight?)[Infrastructure Risk (country/region) = contract and judicial, liquidity, business, physical, political/economy, exit potential (10% weight?)]Fund Specific Risk = investment policy/strategy, projected returns, fund terms, conflicts, structure, tax, currency (20% weight?)60Barnellan Equity Advice Ltd PE FUND ASSESSMENT PROCESS 1.PPM or Information Memo received2.Questionnaire issued by Investor 3.Initial meetings or screening (may occur as stage 2)4.If passed screening, intensive review of PPM5.Acquire access to data room6.Take up initial references 7.Due diligence visit drilling down into data areas, interviewing the partners (individually), meeting other staff8.May visit investees of a prior fund or pipeline companies9.Finalise references10.Go for approval11.Legal stage 61Barnellan Equity Advice Ltd OVERVIEW OF INVESTMENT PROCESS(VERY SIMILAR TO DIRECT)Sourcing Desk based reviewS&W and key risks, agree termsheetScreening ICAnd DD focusDD visit and Drill down into Key risksIC approvalRisk mitigationTerms finalisation and completionAdvisory Cttee?Monitoring Portfolio realisationPOST DEALPRE DEAL62Barnellan Equity Advice LtdPE FUND RETURNS - ANALYSISVarious measures used, as IRR in early years is not indicative (J Curve effect)vInvestment rate – amount of capital paid into fund v commitmentvDivestment rate – amount of capital returned v paid invValue of portfolio v paid in (based on IPEVC guidelines)vTotal value of investors interest v paid in = cash back + portfolio value eg Multiple on CostvAlso look at the rate of loss = written off portfolio as proportion of paid invLook at portfolio companies to assess their state of healthvIRRs (gross and net)Possible to build a good picture of progress even in the early years 63Barnellan Equity Advice Ltd CASE STUDYPan African fund of 1998 vintage – first ‘free standing’ fund for the Managerv$477m raisedvManager established 4 African officesvInvested across a range of industries – 9 deals, most successful were telecoms and financial servicesvBy 2007 90% exited and $1097m returnedvEquivalent to 2.3 x multiple on costvGross IRR of portfolio 28%vNet IRR to investors 21%64Barnellan Equity Advice Ltd TWO DECISION LEVELS1. Fund of fund level/fund investor level execution2. PE fund level executionManager/fund selectionFoF levelInvestee selectionPE Fund levelManager qualities, processes,Pipeline, fund structure, terms Investee quality: markets, competition, product/service USP, management, reporting, valuation, deal structuring, value add65Barnellan Equity Advice LtdLEVEL 2. ADDRESSING DIRECT INVESTMENT RISK vInvestees are always incorporated entities (limited liability)vProfessional fund manager’s processvIntensive due diligencevProtective deal structures (downside protection)vShareholder protections, minority controlsvCreation of corporate governance structurevBoard and Fund manager review of progress at least quarterlyvRegistration of investment instruments with authorities66Barnellan Equity Advice Ltd THE MAIN ISSUES ENCOUNTERED- DIRECT PEvFinding transparent and dynamic entrepreneurs with sound ideas and able to penetrate growth markets and make a profit!vEntry value disaggreement with the management/sponsorvManagement teams who lie about their exit motivationvSecuring a ‘good’ exit, limited IPO potential or strategic attractionvVolatile conditions for smaller companies, eg currency if exporting, commoditised markets and pricing power, cash flow, debt availabilityvConflicts, related party transactions, ‘informal’ management practice, misunderstandings by entrepreneur who owned 100% before the deal vManagement information delays Good PE Manager can address all of these to some extent67Barnellan Equity Advice Ltd RISK CONTROL IN DIRECT PE- MANAGER’S ROLEvInvestment processvDue diligencevDeal structuring vInvestment protections and agreementsvCorporate governancevManagement information systemsvAdded value post investmentvExit management68Barnellan Equity Advice Ltd THE INVESTMENT PROCESSvSourcing of dealsvScreening for the potential best prospectsvInitial approval from Investment CommitteevDetailed negotiation of termsvHeads of Terms agreedvFull Investment Committee approvalvDue diligence undertakenvCompletionvMonitoring, added value and supportvPreparation for exitvNegotiation of exit (IPO, sale to trade investor, or MBO)vexit69Barnellan Equity Advice LtdSIX KEY FACTORS FOR SUCCESS OF INVESTMENT1.Due diligence2.Negotiating a good deal 3.Securing investor protection4.Securing good flow of management information from investee5.Adding value to the investee6.Exit management70Barnellan Equity Advice Ltd 1. DD - SOMETHING HIDDEN UNDERNEATH?2. NEGOTIATING THE DEAL 72Barnellan Equity Advice Ltd 3. INVESTMENT PROTECTION73Barnellan Equity Advice Ltd 4. MANAGEMENT INFORMATIONLike pulling teeth!74Barnellan Equity Advice Ltd 5. ADDING VALUE(power boost your humble sofa?) 75Barnellan Equity Advice Ltd 6. EXIT MANAGEMENT76Barnellan Equity Advice Ltd CELTEL CASE STUDY vIn May 2000, Investment $50 million by group of PE fundsvPan-African mobile GSM telecommunications provider, founded in 1998 vDeregulation, privatization and expansion plan in AfricaLead investor and PE group:vRestructured board, new external directors, improved corporate governancevAdvised on and helped to mould strategyvProvided additional capital to support the acquisition of KenCell from VivendivSupported management in disputes with regulatorsvRegularly advised Celtel on acquisitions and financing strategiesvKey role in finding and developing strategic partners with exit potential77Barnellan Equity Advice Ltd CELTEL CASE STUDY (Continued)vBy exit in March 2005, the Celtel had almost 4 million subscribers in 13 countries: niche strategy targeting smaller countriesvLargest mobile network in Africa, from nothing in 1998vCeltel's licenses covered over one third of the African continent and 28% of the populationvEBITDA of $200 million by end 2004vAverage revenue per user was $252vCeltel employed 5,000 people, 99% of which in AfricavAcquired by Kuwaiti telecoms company MTC for $3.4 billionvThe sale resulted in initial PE investors receiving 4.3x invested capital and 37% IRR78Barnellan Equity Advice Ltd PRE INVESTMENT CONTROLSDEAL STRUCTURING Principles of deal structuring:vAlignment with management motivations, ‘partnership’vManagement/sponsor must have money on the table vFocus on the exit incentivesvUpside exposure, but downside protection (self liquidation)vIncome orientation in mature companiesvUse of debt to match cash generation potential and securityEvery deal unique, no ‘one size fits all’79Barnellan Equity Advice Ltd MANAGEMENT MOTIVATION SPECTRUMManagement exit type/ deal structureMotiveproximity Lifestyle/trade sale self liquidateFamilyunlikely. Sale to debt proportion largesponsorsMixed/uncertainpossible trade debt/equity/warrants/sale convertible/prefCapital gaintrade sale/IPO Equity and/orOrientatedlikely preference 80Barnellan Equity Advice LtdPRE INVESTMENT CONTROLS CORPORATE GOVERNANCE vBoard structurevIndependent directors, and/or appointment from the Fund ManagervBoard routines, set and regular meetings, agendavConflict declaration vClarification of roles and organisation structure vEstablishment of full management information system, rapid reportingvAppointment of main stream auditor81Barnellan Equity Advice Ltd POST INVESTMENT CONTROLSvEnsuring governance provisions are adhered tovConflicts supervision and resolutionvAssisting with implementing strong financial controlsvStrategic advice and assistance on all aspects of the businessvInput to and authorisation of capital expenditure or acquisitionsvAdvice and encouragement towards an exitvOften includes help with strategy, opening new markets, finding JV partners or even potential acquirers 82Barnellan Equity Advice Ltd CONCLUSION - EXECUTIONvFor a Fund of Fund there are two levels of executionvDisciplined process needed for both fund and direct investment selectionvFund Manager/GP role is keyvSpecialised tools for managing risk in direct investmentvA well managed PE programme will be of great benefit to an institutional portfoliovThe asset class is old enough for the lessons to have been learnedvRisks exist but they are manageable83Barnellan Equity Advice Ltd PE EXECUTION How PE is implemented? •Definition of execution risk•Alignment and conflicts•Fund of Fund level risk control•Direct Investment (Fund level) risk controlPE Fund Manager selection•Focus on the people side84Barnellan Equity Advice LtdPE MANAGER SELECTIONIts all about people!85Barnellan Equity Advice Ltd TYPICAL PE MANAGERvInitially often a division of a financial institutionvHowever does not always fit well with other investment activitiesvUsually becomes a separate ‘partnership’ organisationvNeeds skilled transaction orientated professionalsvWork in teams but individually motivatedvNeeds a mix of skills, financial, accounting, and businessvIf successful tends to become focussed just on managing successive PE fundsvBest model in an emerging economy is generalist investor86Barnellan Equity Advice LtdMAIN TEAM JUDGEMENT CRITERIAKey criteria for selecting right PE fund team:vIndividual capabilities and track recordvTeam dynamicsvIncentives and alignmentvProcess and discipline87Barnellan Equity Advice Ltd TEAM v INDIVIDUAL, GENERALIST v SPECIALISTIndividualsvPeople judgment, analytical, relational, deal doersvCommercial but not greedy, self motivated but team player, deal orientated but long term ‘partner’ to investeevIntegrity and network of relationships in business communityTeam vTend to have individuals/small teams doing everything, from sourcing though to aftercare/exitvTherefore assessment is key – does the team have depthvTeam ‘players’ essential, with balance of skills (not all accountants!) vIn Emerging Markets relationship-forming skill is a necessity – poor legal redressvTeam must have spread of financial, and operational skills88Barnellan Equity Advice Ltd GP ORGANISATION CRITERIA ?vFlat structure - hierarchy is for large organisations, PE is project drivenvOpen and inclusive structure, partnership or similarvMulti disciplinary skill usevDynamics – must not be bunch of individualists vCreative tension OK, but internal competition and politics is wastefulvMinimal distraction from other clients89Barnellan Equity Advice Ltd INCENTIVESAlignment principles:vFocus on team should be share of capital gain alongside Investors (carried interest) vPay competitive but not higher than other financial servicesvManagement company operates close to break even/small profitvCarried interest should be well spread amongst the key partners and principals 90Barnellan Equity Advice Ltd MANAGER SELECTION CONCLUSION vPE is a people businessvThe ideal GP structure is unusualvMany of the skills involved are specific to PE vSelecting the best in class PE investment managers is keyvRetention, incentives, alignmentvUltimately partnership attitude within GP, and with LPs is fundamental91Barnellan Equity Advice Ltd WE’VE ARRIVED!92Barnellan Equity Advice Ltd CONTACTGeoff BurnsBarnellan Equity Advice Ltdgeoff@gburns.freeserve.co.uk 93Barnellan Equity Advice Ltd DEFINITION OF THE ‘J’ CURVE ‘The tendency for PE Funds to display falls in net asset value per share and Interim IRR in the early years of a limited life, draw down vehicle, followed by a recovery in the later years’. Drivers:vBlind pool with fees charged on Commitment from Day 1vOrganisational (1%) and other expenses carried by the Fund from day 1vTime taken to build a PE portfolio (typically 3-5 years at least)vProvisions taken at once if underperformance occurs – ‘the lemons ripen early’94Barnellan Equity Advice Ltd J CURVE AND VINTAGE95Barnellan Equity Advice Ltd。