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Exits from Public Stocks. Effectively Administering Private Equity Funds Harvard Club, New York, NY. May 19, 2005. Conning Capital Partners (“CCP”).

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slide1

Exits from Public Stocks

Effectively Administering Private Equity Funds

Harvard Club, New York, NY

May 19, 2005

slide2

Conning Capital Partners (“CCP”)

  • Roots go back to founding of Conning & Company in 1912, as broker-dealer serving individuals and institutions in Hartford (e.g., insurance). Merchant banking practices expanded and institutionalized with formation of the first private equity fund in 1985, separate management in 1990, and spin-out from the sponsor in 2003.
  • The current active funds are Fund V and Fund VI, with $530 million in commitments. Twenty-one total employees, 23 portfolio companies.
  • Investment focus is on financial services and healthcare services. Seeking to invest $5 to $20 million in companies with revenues of $5 to $100 million, targeting a 20% to 30% IRR with a minimum 2.5x returns.
  • Over eight years CFO has conducted exits from a dozen public positions. Block trades, currency hedges, option exercise, collar transactions, et al.
slide4

The Three Points to Remember

  • It’s not an exit until it’s cash.
  • Nobody does it better.
  • Good partners make for good experiences.
slide5

Exiting from Large and/or Illiquid Public Stock Positions

  • Shares are received from:
  • IPO
  • Shares of the acquirer of a portfolio company
  • PIPE
  • Follow-on investments post-IPO

}

Positions are frequently in thinly traded, small or even micro cap stocks

  • Common tools:
  • Dribble it Out
  • Block Trades
  • Stock Distributions
  • Secondary Offerings
  • Uncommon / New Tools:
  • 10b5-1 programs
  • Option overwrite / covered calls
  • Currency hedging
  • Collars
  • Basket hedges
  • Block with upside

- 5 -

slide6

Sample Exit Using ZCF

Portfolio Company

Ownership

40% Cash

40% Stock

20% 1-Year Escrow

Small-Cap

Tech Co.

Investors

Price

Per

Share

$18 Deal Announced September 2003

$25 Shares Valued and Deal Closes November 2003

$27 December 2003

Shares are subject to a 6-month lockup which prohibits hedging.

Acquiror has positive EBITDA, but negligible net income.

slide7

Sample Exit Using ZCF Con’t.

  • Working through alternatives, basket hedging rejected.
  • Developed a brief on how our hedge would benefit the acquiror, who then agreed to allow this one amendment to our lock-up. No other investor pursued the possibility of hedging.
  • Low trading volumes forced a hedge in two tranches.

Tranche

#1 / #2

$28.33 / $27.77

Hedged

Value

Opportunity

Cost

Call Ceiling

{

VC retains

Price

Volatility

+/- about 10%

of average price

$23.15 / $22.72

Put Floor

Eliminate

Risk

Stock Price

slide8

Final Pricing is the Result of an Actual Short Position

ABSOLUTELY ESSENTIAL CHINA WALL

I

N

F

O

R

M

A

T

I

O

N

B

A

R

R

I

E

R

Private

Client

Services

Institutional

Trading

Desk

Monetization

Services

Group

Institutional

Sales

Traders

Investment

Banking

Division

slide9

Results

  • Economics
      • Market price after expiration of lock-up $15
      • Market price at expiration of hedge $17
      • Weighted average floor price $23
      • Incremental gain $3.4 million
  • Hedge began in January, closed in December, avoiding hedge accounting
  • Throughout 2004, able to promise investors a year-end distribution. Early termination available at negotiated pricing.
  • The $3.4 million hedge gain was 22% of 2004’s total gains.
slide10

Picking an Equity Trading Partner

  • Over eight years, four different equity trading partners. Our experience:
  • We need wide-ranging products and services with an expert team. At the same time, we do few transactions.
  • We hold volatile small cap stocks where our trades can move the market.
  • Good execution adds 2% to 5% to the value realized on exit.
  • Good relationships grow.
  • Deal partners are rotten traders.
  • Cut through the sales pitch:
  • Fast execution – weak compliance department.
  • Best pricing and best traders – inadequate China wall.
  • Not the major market maker – access to the potential block buyers.
  • China Wall not optional.