Private Equity: A Practitioner s Perspective Edward J. Mathias
Private Equity A Practitioner s Perspective The Carlyle Group Overview The Fundamental Case Investor Activity Private Equity Investment Criteria Advantages Issues Prospects 2
Overview of the Carlyle Group One of the World s largest Private Equity Firms North America: Offices: Charlotte Denver El Segundo Los Angeles Mexico City New York (2) Newport Beach San Francisco Washington Funds: Buyouts Venture Capital Energy & Power Real Estate High Yield Mezzanine Distressed Debt $54.5 billion under management in 48 funds 751 employees; 401 investment professionals, operating in 27 offices in 16 countries More than 1,000 limited partner investors from 61 countries Outstanding Performance 33% gross IRR on realized investments over 20 years Top quartile returns across multiple categories: buyouts, real estate, venture capital, energy An Unmatched Global Platform Europe: Offices: Barcelona Frankfurt London Luxembourg Milan Munich Stockholm Paris Funds: Buyouts Venture Capital Real Estate High Yield Asia: Offices: Beijing Dubai Hong Kong Mumbai Seoul Shanghai Singapore Sydney Tokyo Funds: Buyouts Venture Capital Real Estate 3
Gross Market Returns: 3/15/00 3/30/07 Peak To Current S&P 500 2.1% NASDAQ (47.2%) 10 Yr Treasury 59.1% 30 Yr Treasury 70.3% Trough To Current ** 82.9% 117.4% 12.3% 20.1% NASDAQ Peak To Trough: (75.7%) S&P 500 Peak To Trough: (44.2%) ** Stock market trough on 10/9/02 4
Expected Returns Investor s Concern: A Low Return Environment Portfolio Structure Common Stocks Domestic Foreign Fixed Income Alternatives Diversifying Assets Est: 6% - 10% 2% - 4% 8% - 25% Inflation?% 5
U.S. Buyout Has Outperformed Public Markets (IRR %) 1 Year 3 Year 5 Year S&P Total Return 10.8 12.3 7.0 U.S. Buyout All Quartile U.S. Buyout Top Quartile 21.0 14.5 8.8 35.7 24.8 20.0 Source: Thomson Venture Economics, PE data as of 9/30/06 and for partnerships and investment bank affiliate or subsidiary partnerships; Bloomberg, market data as of 9/30/06 6
Performance by Fund Type (1996 2006) 30% 25 20 15 10 5 0 7 Seed VC Early-Stage VC Balanced VC Later-Stage VC All Venture Small Buyouts Mid-Market Buyouts Large Buyouts Mega Buyouts All Buyouts Mezzanine Other PE All PE IRR % Source: Venture Economics, 2006. Small buyouts is defined as fund sizes under $400 million and Mid-Market Buyouts is defined as funds between $400 million and $1 billion.
PE Distributions to LPs 90 80 $80 70 $70 60 $57 US$ in Billions 50 40 30 $24 20 $18 $15 $19 $18 $20 $18 $16 10 $3 $4 $6 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Venture Economics, Cambridge Associates. 8
Commitments to LBO Funds $250 200 150 9 US$ in Billions 100 50 $15 $13 $11 $11 $8 $13$16 $2 $3 $3 $5 $0 $0 $1 0 Source: Thomson VentureXpert. $22 $30 $41 $56 $87 $71 $102 $82 $44 $58 $78 $176 $224 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 2001 1998 1999 2000 2002 2003 2004 2005 2006
Pension Funds are Largest Private Equity Investors, and Pensioners Benefit (US$ in Millions) Institution Total Assets Allocation % To PE California Public Employees Retirement System $207,100 $12,426 6% New York State Common Retirement Fund 128,000 11,520 9% Washington State Investment Board 69,900 10,835 16% Florida State Board of Administration 130,000 10,400 8% Oregon State Treasury 56,000 10,000 15% Canada Pension Plan Investment Board 80,891 8,089 10% Michigan Department of Treasury 50,000 7,500 15% Source: Dow Jones Private Equity Analyst, data as of July 2006. 10
Relative Scale $20,000 $5,000 $17,500 $10,000 4,000 $10,400 US$ in Billions 3,000 2,000 Leverage 1,000 $2,000 0 US Major Exchanges $566 $422 $250 Mutual Funds* Hedge Funds Private Equity ETFs Venture Capital Total US Holdings * Over $4.9 billion in US equity funds. Source: Investment Company Institute, Hedge Fund Research, Thomson Venture Economics, World Federation of Exchanges market data as of 6/30/06 includes NYSE and NASDAQ 11
Private Equity Investment Criteria Industry Expertise Management Potential for Operational Improvement Business Model Debt Capacity Downside Protection Asset Quality Friendly Seller (vs. Hostile) 12
Private Equity Investment Criteria (continued)??? Undervalued Assets??? Keys: (1) Proprietary Deal Flow (2) Intense Early Involvement 13
Private Equity The Advantages Time Horizon Debt Utilization / Leverage Corporate / Management Restructuring Aligned Incentives Focus: Sell at a profit Management Debt paydown Relationships (Fees) Transparency but 14
Private Equity The Issues Value Creation vs. Financial Engineering Conglomerate Experience Increased Risks Price / Leverage / Credit Cycle Size / Scale Investors vs. Investment Managers Extended Reach Tech / Utilities / Financial Convergence Globalization Public Scrutiny Regulation Hubris The King of Wall Street Permanent Capital 15
Private Equity Looking Ahead Broad Collapse(s) Unlikely Highly Competitive Environment Funding Investment Opportunities Auctions Pressure Terms / Fees Increased Problem Companies / Distressed Situations Public-to-Private Board / Investor Awareness Attention to P-O-M (Piles of Money) vs. IRR (Internal Rate of Return) LOWER RETURNS 16