Veritas Financial Group

1. Veritas Financial Group Introduction to the Financial Universe Week 3 – Venture Capital & Private Equity

2. Today’s Agenda – Private Equity • What is Private Equity? • How do PE firms make money? • What is leverage? • How are PE firms structured? • Who are the big players in PE? • What is an ideal target for a PE firm?

3. The Private Equity Market Global Assets > $2.0 trillion $949 billion of funds available for investment Global market Industry agnostic

4. What is Private Equity? • Private equity investments can be made by: • A private equity firm • A venture capital firm • An angel investor • Common private equity investment strategies: • Leveraged buyouts (and management buyouts) • Distressed investments • Recapitalizations, PIPEs • Venture capital • Growth capital

5. What is Private Equity? • Private Equity is an investment strategy consisting of owning equity that is not traded on an exchange • Private Equity funds are pools of money that are used to: • Take Privates:Buy all outstanding shares of a public company • Private Buyout:Purchase the equity of a private company (family business, from another PE firm, etc.) • Rollup:Acquire multiple companies and combine them • Corporate Spinout:Acquire a division of another company

6. How do PE firms make profitable investments? • Increase Profits (Operational Improvement) • “Top Line” (Revenue) • Acquire other business • Introduce new products • Sell more to existing customers • Expand geographically • Improve pricing • Increase Profit Margin • Reduce Costs (Manufacturing location, headcount) • Capital Structure/ Fees • Valuation (Multiple Arbitrage)

7. What is leverage? • Leverage is the ratio of debt to equity • A company has $100 in assets • $20 belongs to investors • $80 belongs to creditors • How levered is the company?

8. What is leverage? • Leverage is the ratio of debt to equity • A company has $100 in assets • $20 belongs to investors • $80 belongs to creditors • How levered is the company?

9. Why would a company use leverage? • Will starts a company and invests $100. It makes $10 in the first year. What is the return on equity? • Bobby starts a company and invests $10. He then borrows $90. The company makes $10 in the first year. What’s his return on equity?

10. Why would a company use leverage? • Will starts a company and invests $100. It makes $10 in the first year. What is the return on equity? • Bobby starts a company and invests $10. He then borrows $90. The company makes $10 in the first year. What’s his return on equity?

11. Downside of leverage • It’s about risk/reward • Leverage increases return on equity • However, taking on debt can be expensive (have to pay interest) • A drawdown can cause serious problems

12. Downside of leverage • It’s about risk/reward • Leverage increases return on equity • However, taking on debt can be expensive (have to pay interest) • A drawdown can cause serious problems

13. Management Total Assets Return Fee Performance Comp. Mutual Fund $2B 20% $20M $0M $20M PE, VC, Hedge F $2B 20% $40M $80M $120M How are PE firms structured? • Limited Partners – provide capital to the private equity fund (firms run many funds) • Receive a “limited” share of the profits (i.e. what is left after general partners are paid) • General Partners – make investment decisions and collect fees • Receive payment “off the top” (usually 2% of total investment + 20% of profits) • Sometimes get to keep interest in the target company instead of cash (carried interest)

14. What is the ideal target for a PE firm? • Attractive valuation • Stability of earnings and high cash generation • Significant growth potential • Significant profitability improvement potential

15. LBO Model (macabacus.com/lbo-model/basic-inputs)