RÉSEAU CAPITAL - CONGRÈS 2005 NEW DEVELOPMENTS PRIVATE EQUITY. 17 November 2005

Transcription

1 NEW DEVELOPMENTS PRIVATE EQUITY 17 November 2005

2 OUTLINE - TOPICAL QUESTIONS ABOUT THE PRIVATE EQUITY BUSINESS I. Are we in the best of times or the worst of times? II. What are investors looking for and what are they worried about? III. What do foreign investors think of the Canadian market? IV. Where are the most attractive market niches? V. Is there good deal flow? Are good deals harder to find? VI. What are key factors to building a successful Private Equity firm? VII. What does the future hold for returns? 2

3 Background on EdgeStone Capital Partners Founded in 1999 by Sam Duboc and Gil Palter with high net worth capital and support of First Marathon (became National Bank) Manages a family of Funds with current focus only on raising Buy-out (III) and Venture Capital (II just closed) Toronto and Montréal based with 34 employees Top decile performer since inception in 2004 generated exits of more than $300M from the buy-out investments Currently in market raising Equity Fund III - target $600 M plus 3

4 The Best of Times - Private Equity has gone prime time Private Equity firms regularly make up a solid proportion of top M&A transactions 8 In the week (Oct 10, 2005) that EBay paid $370M for Verisign s payment gateway: - Kohlberg Kravis Roberts & Co. paid $1.27B for Accellent, Inc., - Bain Capital paid $720M for CRC Health Group, Inc., and; - Blackstone Group paid $687M for Brambles Industries Ltd. 8 Last week speculation re Fairmount Hotels and BCE Emergis Private Equity firms account for the majority of M&A fees paid to Wall Street Firms 8 Seven of the top ten spenders announced in October 2005 are Private Equity firms 8 Each spending more than US$100M per year in fees 4

5 The Best of Times - smart investors have done well by private equity and want more In Oct of 2005 Harvard announced its $26 B Endowment Fund posted an annual 19.2% return Harvard said the strongest results in the most recent year came from private equity investments Not bad - except Yale s $15 B Fund posted 22.3% 8 With historic allocations as high as 25% of assets to Private Equity Yale s entire portfolio generated 17% per annum over 20 years! In the U.S. market private equity investors are on track to commit a record $200 B to Private Equity 8 Will surpass the year % of funds going into Buy-out ( % into Venture) 8 Emergence of mega funds - 7 in excess of $5 B and Blackstone at $11B 5

6 And Canada the land of opportunity? Canadian institutional funds have historically been more tentative than U.S. investors in allocations to alternate asset classes Estimated $1 Trillion in pension assets in Canada 8 Each 1% = $ 10 B in potential new allocations But some traditionally conservative major pension funds are now moving aggressively to grow their PE presence - Eg. Canada Pension Plan Investment Board, PSP Investments Also large notable players like Caisse de dépôt, Ontario Teachers, OMERS continue to grow very successful PE investment programs 8 And continue to add indirect Fund investment relationships and co-invest opportunities 6

7 Good news for investors Canada lags in capital raised US (USD $ bil) $176.3 $200 BUYOUT VC $76.4 $63 $28.1 $ CANADA (Cdn $ bil) BUYOUT VC $3.1 $6.9 $4.2 $5.2 $3.6? Source: Thomson Macdonald; Goodman & Carr Mckinsey Annual Private Equity Survey, Thomson Venture Economics 7

8 And Canada has a minimal overhang of raised but not deployed capital Capital Invested by Buy-out Funds: Canada and US US (USD $ bil) $23.3 $14.4 $19.4 $34.4 $ CANADA (Cdn $ bil) $4.5 $2.1 $2.6 $3.1 NA Source: Thomson Macdonald; Goodman & Carr Mckinsey Annual Private Equity Survey, Thomson Venture Economics 8

9 4% 3% 2% 1% 0% Real Annual GDP Growth ( E) (1) Steady Growth Evidence of Healthy Economy 3.1% 2.9% 2.6% 2.0% 2.0% 1.5% 1.3% Canada U.S. U.K. France Japan Italy Germany Government Budget Balance (% of GDP) (2) Budget Surplus Evidence of Fiscal Responsibility 2.0% 1.1% 0.6% 0.0% (2.0%) (2.5%) (4.0%) (3.2%) (3.2%) (3.5%) (3.4%) (3.3%) (3.8%) (4.1%) (4.6%) (4.2%) (6.0%) (6.4%) (8.0%) (7.7%) 2004 Balance of Trade (% of GDP) (3) Export Oriented Economy with Positive Balance of Trade 10.0% 5.5% 5.0% 5.0% 1.9% 0.6% 0.6% 0.0% (US$ in $ Billions) $500 $400 $300 $ US Trade Data (4) United States Largest Trading Partner Exports Imports (5.0%) (10.0%) (4.1%) (5.2%) $100 $0 Canada EU Mexico Japan China ASEAN Realized cash proceeds of $492 million represents 1.6x total capital invested of $302 million Cultural, Cultural, regulatory regulatory and/or and/or structural structural advantages advantages to to targeting targeting Canadian Canadian businesses businesses 1. & 2. Source: OECD Economic Outlook, December Source: OECD Economic Outlook, December 2004, OECD Macro Economic Indicators, April Source: U.S. Department of Commerce 9

10 Foreign Investors see the Canadian opportunity Canada has been discovered as a solid performing (export led) economy with a healthy fiscal situation (stable currency) 8 In past Private Equity investors have focused on U.S. and European markets With a less competitive environment among Private Equity Firms And natural barriers to outside competition especially for complicated mid-market deals 8 Provincial - federal laws / Local banking / Management changes harder to manage from distance While on exit there is an arbitrage opportunity for North American growth platforms 10

11 And everywhere in Canada more Canadian entrepreneurs are getting ready to sell 20% of business owners will retire in the next 5 years 50% within 15 years $1.2 Trillion in business assets to change hands by % of entrepreneurs aged 55 to 64 have yet to think of exit plans Only 15% plan to transfer within family Source: Are Canadian Entrepreneurs Ready for Retirement?, CIBC Small Business, Dated February 1,

12 And Quebec an even more distinct opportunity? Natural linguistic barrier to some outsiders Market history of strong local institutional players (now being moderated) Many opportunities emerging with succession from first and second generation entrepreneurs / well trained and stable labour forces But some with some challenges: 8 management succession often an issue 8 Building and maintaining a competitive position with: - Less favourable tax / fiscal situation - more restrictive labour environment can limit investment in new productivity 12

13 Average purchase prices have increased: The challenges purchase prices have risen especially for bigger deals EV / EBITDA MULTIPLES BY TRANSACTION SIZE YEAR < US $50 M > US $50 M x 6.5 x x 6.8 x 7.4 x 8.3 x Supported by access to greater leverage at lower cost - but leverage and costs are different for different size deals Exit opportunities differ according to size and strategy of the business: 8 IPO markets are selective - Need minimum size (also have favoured Income trusts now under review) - Increased governance costs of IPO option 8 Industry buyers will only pay premium for a business with a growth platform or strategic value Source: Houlihan Lokey, Purchase Agreement Study

14 The challenges - sellers agents are driving more auctions Auctions usually two or more steps 8 First - Indication of interest and range 8 Then short list for management meetings, due diligence and final offer 8 Followed by only confirmatory due diligence This approach is leading to more gamesmanship by Funds as they manage risk of absorbing costs of losing the auction 8 Funds can game the first step so agent relations important for discipline 8 Funds avoiding auctions or passing more quickly if process seen as hyper competitive 8 Or increasingly will "walk-away" quickly if issues arise 8 Leading to more broken auctions? 14

15 What Are Investors Worried About? Perceived Greatest Threats To Returns Other Governance costs / risks 5% 13% New competition from Hedge Funds 18% 45% Funds getting too big 19% L.P.'s investing too much Source: Dow Jones Private Equity Analyst NYC Conference

16 In this environment what are investors looking for? Track record - solid consistent returns (20% or better is strong) Experienced teams have worked together / committed capital Focused right sized strategy Ability to source good deals (credibility and networking) Senior level skills to add value to portfolio companies No succession issues on the horizon 16

17 How will the Market Segment Does Fund Size Matter? Examples of Later Stage/Buy-out Funds Greater than $1 B $500 M - $ 1 B $200 M 500 M Under $ 200 M Onex KKR Yellow Pages, Shoppers Drug Mart Bain Bombardier Recreation, Dollarama J.W. Childs - MAAX *(announced) Institutional Funds - CDP, Omers, Teachers Birch Hill ($850 raised) EdgeStone (in market for $600 plus) Borealis CAI CIBC Clairvest Kilmer Oncap NovaCap Richardson Scotia/Roynat Torquest Tricor Pacific Triwest *Canterbury Park *Genuity Bedford Champlain Latitude Partners Polar Prairie Sverica Whitecastle 17

18 Skills To Build Value In Today s Market Canadian Investor Habits Develop deep knowledge during due diligence research and networking 77% Using performance incentives and having management investment 54% Actively develop a value creation plan 100 day plan 33% 8 Ability to significantly change or adapt the management plan Intense involvement of senior partners in 100 days after closing 80% 8 With management / operational experience to evaluate and change Strengthen management teams quickly (100 days) Source: The McKinsey & Company Report on Private Equity Canada 2004 (Volume 2) 29% 18

19 Case Study Skills To Grow A Business In Today s Market BreconRidge Manufacturing in Ottawa An opportunity in a tough business 8 Outsourced manufacturing (circuit boards) global competitors 8 With local customer dependency 8 And growing movement to lower cost (Chinese) sourcing Putting in place a new management team (from outside the Company) Need to restructure operations new HQ in Ottawa / restructure Europe / open new U.S. operations / joint venture and acquire in China Build distinctive capabilities to compete (engineering design) and improve production processes to add new customers Results (in 2 years): 8 Revenues increased by more than U.S. $75 M 8 EBITDA up 4 x and growing 19

20 What should we expect for returns? The most recent returns table Fund Type 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr All Venture 18.1 (2.7) (1.2) All Buy-outs Canadian Venture 0.3 (6.8) (2.4) 3.6 N/A Canadian Buy-outs / Mezz N/A Difference between top and lower quartile performance is 20% or more! Source: Thomson Macdonald; Goodman & Carr Mckinsey Annual Private Equity Survey, Thomson Venture Economics 20

21 MERCI BEAUCOUP! THANK YOU!