Corporate Strategy of Berkshire Partners

- Group 5

Ajit (B10065)

Himanshu (B10080)

Pinaki (B10095)

Shriya (B10110)

PE Industry

Raised money from investors Invested in portfolio companies Provided returns on sale of portfolio

companies MDs served as Funds General Partners

(GPs) : Active Outside Investors : Passive

PE Industry

Early History Conglomerate business, out of favour in 1970 Pension funds allocate more funds to PE and Hedge

funds New source of funding

1980s Leverage Buyout Revolution LBOs became popular

• Small Equity and high debt (high yield bond market)

Debt financing imposed financial discipline• Not covering debt risked moving to bankruptcy• Robust monitoring tool for each portfolio company

– Value Added boards– Tranparent financial reporting

PE Industry

1990s Industry Evolution LBO Regulations Industry moved to Advisory services

• Revenue growth, Margin expansion and Synergistic acquisitions

• Venture capital in technology and biotechnology

Renaissance and diversification in 2000s Abundant in expensive debt High involvement in M & A activities (25%) Launch of specialised funds Diversification into hedge funds

PE Industry

Emergence of Club Deals Many PEs joint hands to take on larger

targets for portfolio diversification

Founders sell General Partners stakes Major restructuring in PEs

The PE Industry in 2008 AUM is $ 2.5 trillion Collapse of many big banks stalled the PE

fundraising

Background of Berkshire Partners

First fund in 1984 5 Founding MDs divided stakes equally Invested in over 90 companies Capital came from large institutional

investors “Stay small” philosophy “Provide constantly superior returns to our

investors”

The Investment Process

Sourcing Deals : Targeted companies with EV of $200mn to

$2bn Invested $50mn to $500mn of equity in a

company and borrowed the rest Generalist equity investor – not separated by

sector or region 40% in retail, 26% industrial sector, 25%

business service

On POINT initiative

Formalize best practices in developing relationships within industry

Developing sector expertise Staffing across deals remained flexible Still needed more degree of industry

specialization

Analyzing deals

Highly selective investment process Consensus method of deal analysis (Monday

morning Firm Meetings) Multiple MDs worked on the same deals to

seize it Majority voting by the staff before acquiring a

company A conservative approach

Adding Value: Its reputation was important in bidding process Invested sufficient time and resource to help

portfolio companies improve performance

Existing Investments Held portfolio companies for 3-7 yrs Exited a high proportion through private sales Exit was dependent on the capital markets

which provided financing for buyers

Economics

Fees Charged annual management fee of 2% of

AUM Carried interest was the principal longterm

incentive fee

Returns Annualized net returns after fees were 29%

apprx The market average was 20%

Stockbridge

Recent Diversification: 2005 Internal public securities investment fund Investment strategy:

Publicly traded securities in 10-20 U.S. firms Period: 3-5 years

Not deep value investors Not high value, short term

Stockbridge

TEAM Led by Robert Small By 2008:

• Was a growing team- familiarity with firm’s culture, strategy & processes

• Had solid investment record

FUNDING Till now Berkshire : sole investor Future: raising capital from LP’s

Recent changes at Berkshire

Institutionalization of best practices Centralized corporate functions in

business development, legal, human resources and capital markets

Executive oversight committees Recruitment

The Board room of Berkshire Partners

Issues on the table Continued evolution of firms governance model Future challenges regarding professional

development Retaining Berkshire’s culture amidst expansion Integration of Stockbridge

• Required material investments and new business effort• When and how to begin marketing public securities

Alignment of Berkshire’s, Stockbridge’s & fund Investor’s teams