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Presented By CA Swatantra Singh, B.Com , FCA, MBA Email ID: singh.swatantra@gmail.com New Delhi , 9811322785 , www.caindelhiindia.com, www.carajput.com. Presentation on Private Equity.

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  1. Presented By CA Swatantra Singh,B.Com , FCA, MBA Email ID: singh.swatantra@gmail.com New Delhi , 9811322785, www.caindelhiindia.com, www.carajput.com

  2. Presentation on Private Equity So what exactly do private equity firms do? Rajput Jain & Associates. They buy companies…and then sell them (hopefully) at a profit in a few years.

  3. Quick primer on industry jargon: • Private equity firm = financial sponsor (e.g. The Blackstone Group) • Strategic investor = corporation (e.g. Walmart) • LBO = leveraged buyout

  4. The private equity process • Private equity firms raise ‘funds’ – e.g. ABC Fund I, ABC Fund II • Within each fund, the private equity firm is a General Partner (GP). GP directly invests 1% of the fund • All other investors are Limited Partners (LP) and they invest 99% of the fund • GP – LP is an important distinction both for legal purposes and also for understanding how PE process works • The fund itself is structured as a limited partnership • Funds invest in multiple companies, acquire a controlling stake (usually 100% of equity) • IRR threshold is 20-25% depending on size of the fund • Lifetime of fund is ~ 5-10 years, this means that all companies in the fund must be sold within this period

  5. PE hiring • Private Equity firms usually setup groups based on Industry and/or Geography • Many of the big firms are global • Most firms are small with 50-100 investment professionals • Some firms separate investment team from portfolio management team • At entry level, most PE firms hire investment banking analysts with 2 years of experience • Hard to break into industry, best way to do so is through contacts • Lucrative and better hours than banking • Culture tends to vary by firm – most PE guys are ex-bankers so some similarities in culture

  6. PE exits • Exits can be of the following types: • IPO • Sale to another PE firm • Sale to a strategic investor • “Any fool can buy a company. You should be congratulated when you sell.” • -- Henry Kravis, founding partner of KKR

  7. How do private equity firms make money? • How do Limited Partners make money • Periodic return on capital (e.g. dividends), 80% of profits • Profit on exit, proportionate to investment • How do General Partners make money • Management fee of 2% per annum on raised fund • Carry or Carried Interest, usually 20% of profits • Profit on exit, proportionate to investment

  8. What company makes a good target for a buyout? • Mature Industry • Mature Company • Strong Management Team • Low Leverage • Low CapEx Requirements • Strong Cashflows • Good Exit Options

  9. 3-step IRR calculation for PE deals • Step 1 • Determine purchase price • Determine how much will be paid for using debt vs. equity • What is the entry multiple (i.e. EV/EBITDA of x) • Step 2 • Project company’s cash flows over investment horizon (e.g. over 5 years) • Use any excess cash (after operating expenses and interest has been paid) to pay down debt • Equity holders receive no cash during these years • Step 3 • Assume an exit multiple (i.e. EV/EBITDA of x) • Multiply this with EBITDA in exit year (e.g. in year 5) • You now have EV. EV – outstanding debt = Value of Equity at Exit • Using Equity put in from Step 1 and Equity at exit from Step 3, you can calculate IRR of equity investment

  10. Barneys Case Study • Deal size ~ $950 million • Financed by 30% equity, 70% debt • GPs invest 1% of the equity, LPs invest 99% • Assume 5 year investment horizon • 2% management fees per annum • Profit sharing among GPs & LPs is 20% and 80% respectively • Assume $120mm debt paid down each year & no cash distribution to equity holders during years 1-5 • Assume entry multiple (EV/EBITDA) of 8.0x and exit multiple (EV/EBITDA) of 8.5x • How much money did the General Partners invest initially? • How much money will the General Partners make in management fees on this deal? • What is the IRR earned by GPs?

  11. Barneys IRR (for LPs)

  12. Barneys IRR (for GPs)

  13. Presented By • CA Swatantra Singh, B.Com , FCA, MBA • Email ID: singh.swatantra@gmail.com • New Delhi , 9811322785, • www.caindelhiindia.com, • www.carajput.com

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