Workshop: Introduction to Private...
Transcript of Workshop: Introduction to Private...
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• Master in Business Administration, University of Innsbruck
• PhD in Business Administration, Stockholm School of Economics and Vienna University
• Creditanstalt AG (Bank Austria/UniCredit), Austria– Retail & commercial banking– Special projects
• Roland Berger Strategy Consultants, Austria/CEE/Russia– Growth strategy consulting– M&A activities– Restructuring projects– Post-merger integration projects
• Alpine Equity Management AG, Austria– Co-founder and Managing Director– Various Board memberships– Member of the Board of Austrian Private Equity Association
Omer Rehman
Omer Rehman
5
Beate Rupp
• Master in Business Economics, University of Innsbruck/Vienna
• Executive MBA City University/Cass Business School, London
– Focus Finance and Strategy
• Bayerische Hypovereinsbank, New York
– Internship
• Deloitte, Vienna
– Senior Audit Assistant
– Audit of (investment) banks, private equity funds etc.
• Alpine Equity Management GmbH
– Investment manager, authorized representative
– Assessment and execution of new investments
– Support and development of portfolio investments
– Exit execution
Beate Rupp
6
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Alpine – leading private equity manager with successful perennial track record
Key facts Most recent exits
Alpine is specialised in managing direct
private equity investments in German-
speaking countries.
Location: Bregenz and Vienna,
Austria
Founded: 1999
Fund volume: EUR 110 m
Investment vehicle: HYPO EQUITY
Unternehnehmens-
beteilgungen AG
Actual investments: approx. 15
Realized investments: 15
Office
centrally
located
Bregenz
Vienna
Zurich
Munich
Stuttgart
Frankfurt
GER
AUTCHE
7
Short introduction to Alpine Equity
• Private equity for medium-sized
companies
– Succession solutions
– MBO/MBI
– Growth capital
– Turnarounds
• Strategy: Internationalisation of mid-
sized businesses
• Volume: ca. EUR 110 m
• Dental technology – 6 years:
– Entry: EUR 7 m
– Exit: EUR 47 m
• Packaging – 2 years:
– Entry: EUR 12 m
– Exit: EUR 30 m
• Razor blades – 6 years:
– Entry: EUR 22 m
– 2013: EUR 52 m
Strategy and Focus Examples − Sales development
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Strategy focuses on four pillars – primarily value-based investment philosophy
Strategy • Focus on
controlling
interest
independent of
development
stage/country/
industry
Buy-out
• Focus on
minority stakes
in fast-growing
companies
(incl. start ups)
Growth Capital
• Selected
investments,
e.g. return-
oriented
companies
• Mezzanine-
capital
Buy and Hold
• Selected
investments,
e.g.
turnaround,
restructuring
situations
Special
Opportunities
HYPO EQUITY Unternehmensbeteiligungen AG
9
Structure – sketch of current fund set up
Management
HUBAG
Insurance compsBanks
Investment CInvestment A Investment B
Family Offices
Alpine Equity
Management GmbH
Management contract
10
Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
11
Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
12
What is private equity?
• Direct participation in equity
• Co-entrepreneurship
• Make the investment more valuable by developing the
company
• Sell the portfolio company after three to six years
13
Private equity is not a new development – early types date back to the 15th century
The history of private equity (selected examples)
Source: Leopold/Frommann: "Eigenkapital für den Mittelstand"; Roland Berger Strategy Consultants
Since early days entrepreneurs and adventurous people cooperate
to make money with innovative but risky ideas
1) Industrial and Commercial Finance Corp. (heute: 3i Group plc.) 2) American Research and Development Corporation
15th century 16th century 19th century 20th century
• In 1492, Columbus
discovered America.
• Roughly 85 % of the
exploration costs were
mainly financed by the
Spanish crown
• In 1572, Sir Francis
Drake became a
famous pirate
• 50 % of the prey went
to the British crown
• Drake‘s sponsors still
generated 4700%
return on their capital
invested
• In 1830, Hamburg
native banker Mr.
Heine founded a bank
for craftsmen and and
industrials (Vor-
schusskasse) – first
German subsidy
scheme for founders
• In 1945, the ICFC1)
was founded in the
UK
• In 1946, the first
independent
institutional equity
investor (AR&D2)) was
founded in the US
• In 1965 first VC/PE
funds emerged in
Germany
…
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What's the difference
Mezzanine
Capital
• Equity in very early stages (no or very little sales and losses)
• Typically 90% of investments fail; IRR expectation > 30%
• Professional VCs, Angel investors, crowdfunding
Venture
Capital
Private
Equity
• Equity for established, fast growing companies
• Success rate far higher than for VC investments
• IRR expectation roughly 20%
• Equity-like financing of cash-flow strong firms
• Subordinate loans with higher interest and equity kicker
• Typical IRR 13-18%
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Development stage and turnover level determine equity categories
Early Stage Expansion Stage Later StageDevelopment
stages
ExpansionFinancing
types
Start-up/
Early StageSeed Buy-out
Secondary
Buy-out
Turnover EUR 0-5 m EUR 5-20 m. > EUR 20 m
• Succession
• Management Buy-out/
Management Buy-in
• Spin-off
• Growth after turnaround
• Market expansion/
internationalisation
• Innovation (products,
business model)
• Expansion of production
capacity
• Add-ons
• Research &
development
• Product-
prototyping
• Development
of sales
strategy
• Establishing
the business
• Start of
production
• Setting sales
network
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Cash flow level and development stage define appropriate and available finance instrument
Cash flow
Development stage
Investment instruments
Bank loans1)
1) Bank loans typically depend on structure of the balance sheet and collaterals
Cash flow
Risk assess-ment
VentureCapital
PrivateEquity
MezzanineCapital
IPO BondsRisk Assess-ment
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Typical stages of an equity financing process
Assessment
partnership
ca. 1 month ca. 2-3 months ca. 1-2 months
Detailing partnership Taking equity stake
Rough cornerstones
(Letter of Intent)
Structure of
equity stake
Investment
execution
• Assessment concept/
businessplan
• Personal talks
• Common basis/undertstanding
mutual goals and intentions
• Analysis of business
(due diligence)
• Company valuation
• Structuring the interest
(volume, shares, rights, duties
etc.)
• Negotiations/
assessments
• Board approval
(supervisory board, advisory
council etc.)
• Capital injections
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Leveraged buyout (LBO) process – what it really means
Purchase of the Chicken Inc.
1
Reducing the staff
3
And with the rest … On the stock exchange !
5
Asset stripping
4
Replacement of the management
2
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Private equity is a cyclical business …
2000-07
Liquidity increase
Credit bubble
1990-99
GDP growth
Multiple expansion
1980-89
Inefficient conglomerates
Prospering junk bond market
0
200
400
600
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
US buyout deal value [USD billion]
Source: Bain US LBO deal database
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Private equity managers mainly apply three drivers to increase company value
• Finance relationship between equity, debt and mezzanine
capitalLeverage Effect1
• Value leverage to increase company valueMultiple Expansion2
• Focus on sustainable increase of annual results (cost
reduction, productivity, employee contribution)Earnings Growth3
Value driver Description
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Key drivers in the private equity business model in Europe
1 Leverage
2Multiple
expansion
3Earnings growth/
management
• Old days: 10-20% pure equity contribution
• New Model: 50-60% pure equity contribution
Description – Key issues Importance
• Size/growth – higher EBITDA multiple for a 100 m
turnover company vs. 10 m (organic and/or M&A)
• Industry trends – cleantech, biotech, fintech
• Focus on operational issues/hand-on
management/cash is king!
• Focus on revenues and cost structure
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Operational improvements – key return influencer
Source: PWC Private Equity Trend Report 2016
75%
20%
6%
21%
51%
28%
4%
29%
66%
0% 20% 40% 60% 80% 100%
Operational improvements
Multiple arbitrage
Financial leverage
Most important Important Least important
• Most important value
drivers:
– 75% ̵ operational
improvement (earnings
growth)
– 20% - multiple arbitrage
(20%)
– 6% - financial leverage
• Impact of operational
improvements expected to
increase in the future
• Management is key and
investors must understand
business in detail
Influence on return on investment
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Leverage Effect – Optimizing the finance structure can lead to higher performance
Example – Buy-out1)
1) Assumption: Tax effect not considered
• Purchase of a business for EUR 100 m (100%)
• Exit business after 5 years for EUR 200 m
Initial
situation
Financing
models
[EUR m]
Multiple
[EUR m]
Equity
Debt
Mezzanine
Equity
100
––
100
Equity+Debt
45
55
–
100
Eq.+Deb.+Mezz
30
55
15
100
1
Exit
Debt+interest
Mezz.+interest
200
–
–
200
200
69
–
131
200
69
25
106
2 3
Multiple 2.0 2.9 3.5
1
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Multiple expansion – raise company value through strategic repositioning
Extension of value chain – e.g.
producer with higher valuation
compared to pure merchant
M&A
Size & consolidation
Consolidation of (e.g.
regionally) fragmented
industries by organic
growth and/or buy-and-
build strategy
Industry trends as main
drivers – e.g. FinTech,
disruptive business models
Industry trends
Multiple Expansion
2
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Earnings growth – both income and cost focus for sustainable increase of profits
Costs
• Ongoing optimization
• Sale of non-core assets
• Lean structures/ outsourcing
assessment
Sales/
Gross
profit
• Growth strategy
• Focus on margin and turnover
• M&A/consolidation/buy and build –
income synergies
Strategy
Continuous optimization
Sales/GP
Costs
3
Private equity: increase of profits as ultimative goal/
no 'principle of hope'
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Typical exit routes
• Synergies
• Improve product
pipeline
• High cash piles –
low interest rates
Strategic
buyers
Financial
sponsorsMBO/MBI IPO Write-offs
30% 5% 5% 30%30%
• Business model
• A lot of money at
hand ('dry powder')
• Current employee/
industry insider
• Become
entrepreneur
• Current
shareholders keep
influence in
company
• BUT: volatile
capital markets
• Failed strategy
• Outdated business
model
• Unaffordable
restructuring costs
• etc.
Occurence
Investment
Motives
Source: Alpine Equity Analysis
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Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
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Private Equity – Key topics 2015
1) Bain Global Private Equity Report 2016
• High dry powder – USD 1,3 trillion1) of undeployed capital available as investment pace lagged fund-raising activity
• Low interest environment – favoured alternative investments and LBO's at the same time
• Intensified competition – huge amounts of dry powder of PE players, weak Euro/strong USD attracted new investors from the US and China, cash-rich strategic buyers have to buy growth intensified the chase for new targets
• Difficult identification of strong performers – low growth and returns in Europe made it harder to distinguish strong performers from weak ones
• Sky-high valuations – a result of excess supply of capital while a shortage of attractive asset
• Operational improvement – key influencing factor on return since financial crisis
Source: Bain Global Private Equity Report 2016; PWC Private Equity Trend Report 2016
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In 2015, the industry spent USD 282 billion to acquire companies
422
0
100
200
300
400
500
600
2011 12 13 14 15
527
0
100
200
300
400
500
600
2011 12 13 14 15
282
0
100
200
300
400
500
600
2011 12 13 14 15
USD 500 bn USD 500 bnUSD 600 bn
Source: Bain Global Private Equity Report 2016
• Cash-rich strategic buyers bought growth
• Rich M&A activity
• Cash distributions run well ahead of calls of LPs
• Abundant fresh capital facilitated fund raising
• Sky-high valuations• Growing uncertainty in debt
markets
Global buyout exits Global buyout funds raised Global buyout investments
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Private equity compared with Iranian figures
1) USD 422 bn / USD 415 bn GDP Iran2) USD 282 bn global buyout investments / USD 415 bn GDP Iran 3) USD 527 bn funds raised / 78 million Iranians
1 xGlobal buyout exits equal Iran's GDP1)
USD 6,750per Iranian citizen equals total global buyout funds raised3)
~70%of the Iranian GDP
invested in buyouts2)
Source: Bain Global Private Equity Report 2016; Roland Berger How to do business in Iran
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Buyouts are dominating
25%
Buy-out
75%
Other
1) As of 2014 – total European investments
2) Seed: Financing provided to research, assess and develop initial concepts before a business has
reached the start-up phase
3) Start-up: financing provided for product development and initial marketing. Companies have not yet
sold their product commercially.
4) Later-stage venture: financing expansion of company which might or might not be break-even yet.
Probably company has already been backed by venture capital firms.
Source: EVCA 2014 European Private Equity Activity
Overview1) Segment Type
• Buy-out
• Venture
Capital
• Growth
capital
• Special
opportunity
MBO/LBO
Seed2), start-up3), later-stage
venture4)
Minority stakes/
expansion capital
Replacement capital/
restructuring
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LBO-valuations are up again – in the US record highs were hit!
Source: Bain Global Private Equity Report 2016
5 5,1
6
4,8
3,7
4,64,9
5,15,3
5,85,5
20
05
06
07
08
09
10
11
12
13
14
H1 1
5
EBITDA multiple for LBO transactions
5,25,4
6,1
5,2
4,04,4 4,5 4,6 4,7
5,14,9
20
05
06
07
08
09
10
11
12
13
14
H1 1
5
Ø 9.2 x
EBITDA multiple for LBO transactions
Ø 8.9 x
US Europe
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--- Beate Only ----
5,0 5,1
6,0
4,8
3,7
4,64,9
5,15,3
5,85,5
20
05
06
07
08
09
10
11
12
13
14
H1 1
5
5,25,4
6,1
5,2
44,4 4,5 4,6 4,7
5,14,9
20
05
06
07
08
09
10
11
12
13
14
H1 1
5
Ø 4.9 xØ 5.1 x
Source: Bain Global Private Equity Report 2016
Average debt-to-EBITDA multiples for LBOtransactions
Average debt-to-EBITDA multiples for LBOtransactions
US Europe
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How private equity contributes to Europe's economy
€ 307 bninvested by private equity in Europeancompanies from 2007 to 2013 in the12 largest private equity markets in Europe
5,600new business created every year in Europe, either through direct investment or via a "spillover" effect, caused by knowledge sharing, networking and inspiring role models
4.5-8.5 %the percentage by which private equity backing improves the operating performance of portfolio companies during the first three years of investment
25.000companies backed by private equity in Europe …
83%… of which are SMEs
€ 350 bnis the economic value of patents granted to private equity-backed companies in Europe between 2006 and 2011
Up to
50 %the percentage by which private equity-backed companies are less likely to fail than non-private-equity-backed companies with similar characteristics
12 %of all industrial innovation in Europe is attributable to private equity-backed companies
> 50 %of the total invested into European private equity in 2013 came from outside Europe
Source: EVCA Private Equity‘s cntribution to building European businesses
Euro investment Competitiveness Productivity
Innovation
36
Fundraising was rather cyclical in the last years –funds have to find a sweet spot
Fundraising of European PE-Firms [EUR bn]
80
1922
42
25
54
45
2008 09 10 11 12 13 14
• Private equity established as
asset class
• Fund of funds, insurances and
high-net worth individuals as
crucial investors
• Fundraising is becoming a
challenge; investors need to
differentiate themselves from
peers and find a sweet spot in
order to impress new investors
with superior success rates
Source: 2014 EVCA European Private Equity Activity; Bain Global Private Equity Report 2016; PWC Private Equity Trend Report 2016; Alpine Equity Analysis
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PE was growing in the last years before volumes returned to pre-crisis level
Private equity investments Europe 2000-2014 [EUR bn]1)
Source: EVCA 2014 European Private Equity Activity; Bain Global Private Equity Report; PWC Private Equity Trend Report 2016; Alpine Equity Analysis
• Strong growth followed by
sharp decline in 2008/09
• Climate 2015
– Low interest rates
– Difficult to find suitable assets
– Large piles of dry powder
(USD 163 bn3))
sky-high valuations
– Focus on deal sourcing,
investment thesis articulation
and operational improvements2)
– Midterm outlook for private
equity positive
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2428 29
37
47
71 73
55
25
4347
38 3842
2000
01
02
03
04
05
06
07
08
09
10
11
12
13
14
1) Equity + shareholder loans– excl. bank loan (leverage financing)
2) Such as cost reduction, strategic sourcing and procurement, working capital management
3) Source: Preqin
38
Private equity investors favour just five industries
0% 2% 4% 6% 8% 10% 12% 14% 16%
Unclassified
Real estate
Agriculture
Transportation
Chemicals and materials
Construction
Energy and environment
Financial services
Business & industrial services
Consumer services
Communications
Business & industrial products
Life sciences
Consumer goods & retail
Computer & consumer electronics
Source: EVCA 2014 European Private Equity Activity
All private equity Europe – investments by sector 2015 [%]
2/3 of all
investments
39
90% of investments go into established companies
3,6
3,7
3,3
3,4
1,6
2010
2011
2012
2013
2014
Venture Capital[EUR bn]
6,3
5,2
4,0
3,6
1,6
2010
2011
2012
2013
2014
Growth Capital[EUR bn]
29,7
28,1
28,0
31,3
2010
2011
2012
2013
2014
Buyout Capital[EUR bn]
2,3
1,5
1,4
1,3
1
2010
2011
2012
2013
2014
Turnaround/replacement capital[EUR bn]
8,7%
13,5% 75,4%
2,4%
Source: EVCA 2014 European Private Equity Activity
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EVCA – legend
Venture CapitalSeed
Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase
Start-up
Financing provided to companies for product development and initial marketing. Companies may be in the process of being
set up or may have been in business for a short time, but have not sold their product commercially.
Later-stage venture
Financing provided for the expansion of an operating company, which may or may not be breaking even or trading profitably.
Later-stage venture tends to finance companies already backed by venture capital firms.
GrowthA type of private equity investment – most often a minority investment but not necessarily – in relatively mature companies
that are looking for capital to expand operations, restructure operations or enter new markets.
BuyoutFinancing provided to acquire a company. It may use a significant amount of borrowed money to meet the cost of acquisition.
Rescue/TurnaroundFinancing made available to an existing business, which has experienced trading difficulties, with a view to re-establishing
prosperity.
Replacement capitalThe purchase of a minority stake of existing shares in a company from another private equity firm or from another
shareholder or shareholders.
Source: EVCA 2014 European Private Equity Activity
41
Private equity outperforms compared indices in the long-run
Evolution of comparators – 5-year rolling IRRs [%]
-10%
-5%
0%
5%
10%
15%
20%
25%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
FTSE: 3.3%
JP M.: 8.4%
HSBC: 4.4%
Average IRR
PE: 8.5%
Source: EVCA 2013 Pan-European Private Equity Performance Benchmarks Study
JP Morgan Euro Bonds (EMBI+)
European Private Equity
HSBC Small Company Equity
FTSE Europe
42
Buyouts outperform both venture and generalist investments
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: EVCA 2013 Pan-European Private Equity Performance Benchmarks Study
5-year rolling IRRs (funds formed 1980-2013) [%]
Generalist
Venture
Buyout
Average IRR range
between 10-15%
43
US investments outperform European investments in the long-run but are more volatile at the same time
Source: EVCA
-10%
0%
10%
20%
30%
40%
50%
60%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
-10%
0%
10%
20%
30%
40%
50%
60%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
5-year rolling IRRs for Europe [%] 5-year rolling IRRs for US [%]
EuropeanVenture
European Buyout US
Venture
USBuyout
44
On average private equity generates returns between 10 and 12% annually
Source: EVCA
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
5-year rolling IRRs global benchmark for all private equity
US: 12.2%
Global: 11.7%
Average IRR(1991-2013)
Europe: 10.6%
Global
Europe
US
45
Private Equity Outlook Europe – overall stable but challenging
Source: PWC Private Equity Trend Report; Alpine Equity Analysis
• Financing conditions – availability of LBO capital increased in the second half of 2015 and is expected to improve in 2016
• Investment opportunities – few quality assets together with a many players lead to very competitive processes and demand yield premium valuations
• Start-ups and growth capital – offer more deal opportunities as they are less impacted by economic crisis and less interesting for corporates and large buy-out funds
• Regulation – will set financial boundaries and therefore restrict additional value
• Returns – most likely decrease as a consequence of increased competition and sky-high valuations
• Focused investors – sweet spot investors (2.2 x money multiple) statistically outperform opportunistic investors (1.3 x)
• Operational improvement – has become a key element of a financial investor's business model
OutlookInfluencers
46
Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
47
Broad universe of private equity investors
Fund of fundsGenuine global
funds
European mid-
sized funds
Turnaround
fundsCaptive funds
Infrastructure
funds
Real estate
funds
Venture Capital
funds
Private
foundations
University
endowmentsFintech funds
State-owned
funds
48
Types of private equity funds (1)
Captive fund • A VC or PE fund with one main shareholder. This can be e.g. a corporate with both financial and strategic interest.
• A captive fund in a more narrow sense points to a situation where the only shareholder is a financial institution.
• Typical structure for banks (equity + loan)
Leading global fund • Gobal alternative asset manager with several billion USD1) of assets under management across several funds and fund of funds vehicles and worldwide offices
• Typical fund size: Large Buyout USD 1.5m-4.5bn, Mega Buyout > USD 4.5bn
• Typical asset classes: private equity, energy, infrastructure, real estate credit strategies and hedge fund etc.
Source: www.valuewalk.com: Private Equity Buyout Fund: Does Size Really Matter?1) USD 100 – 300 bn
Fund type Description Examples
49
Types of private equity funds (2)
• Focus on medium and large businesses (ticket size between EUR 40 and 600 m) based in Europe
• Focus on (family) businesses with attractive market position and solid growth potential
• Portfolio of other investment funds rather than investing directly in stocks, bonds or other securities
• Investing in a collective investment scheme may increase diversity compared with a small investor holding a smaller range of securities directly
• The benefit of diversification can be the reduction of volatility while maintaining average returns. However, this is countered by the increased fees paid both at FOF level and at the level of the underlying investment fund
… High relevance
Fund type Description Examples
European mid-sized
fund
Fund of funds
50
Types of private equity funds (3)
• Fund either invests in other infrastructure funds or directly in infrastructure businesses
• Typical fund size several billion EUR/USD
• Excess cash (profits of state-owned companies) is invested in listed companies, private equity etc. in order to care for times when natural reserves like oil are fully exploited
• Billions of USD under management
Norwegian State
fund
Abu Dabi State
fund
Infrastructure and
real estate fund
Fund type Description Examples
State-owned
investment fund
51
Types of private equity funds (4)
• A university endowment is a fund created out of donations received by a university or college.
• A small portion of traditional stocks and bonds and a large portion of non-traditional alternative assets in the form of hedge funds, private equity, venture capital and real assets like oil and natural resources
• Often high-net worth industrials follow philanthropic approach to support poorest of the world
• Diversified investment approach and/or industry focus on industry they have profound expertise in
Fund type Description Examples
Endowments of
universities
Private foundations/
Family offices
52
Types of private equity funds (5)
• Private equity stakes in startup and small- and medium-size enterprises with strong growth potential.
• Investments are generally characterized as high-risk/high-return opportunities.
• Turnaround is the financial recovery of a company that has been performing poorly for an extended time.
• Possible characteristics of a troubled company in need of a turnaround include revenues that do not cover costs, an inability to pay creditors, layoffs, salary cuts and a significant decline in stock price. Poor management and/or social, technological and competitive changes may have caused the products or services to be perceived as subpar by consumers.
Sequoia Capital
Avenue Capital
Group
Fund type Description Examples
… High relevance
Venture Capital fund
Turnaround fund
53
Types of private equity funds (6)
• Banks, VC investors try to get get closer to the wave of disruptive innovation in the FinTechspace.
• Combination of entrepreneurial execution, technological capabilities and industry expertise to build companies that reshape finance.
• Help FinTech companies grow from a very early
stage (i.e. seed) to a more mature stage.
Fund type Description Examples
Fintech fund
… High relevance
54
Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
55
Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
56
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Financial Technology – line of business that usestechnology to offer innovative solutions in Financial Services
Source: Roland Berger
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Initial situation
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Internet access, new customer patterns, easy technology- access & conservative banks – perfectground for FinTechs
Source: figo: Disruption or revolution? Wie die Digitalisierung auch die Finanzindustrie verändert
> Mobile is changing the world – and doesn’t
stop anytime soon!
INITIAL SITUATION
Online 24/7
> Apps capability set out
new benchmarks
> Customer needs and
patterns are changing
more drastically and
faster than we
currently think of
Changing patterns
> Fast penetration of new technology
offers new players valid chances for
a targeted market entry
> Never before has it been as cheap as
today to create secure high-tech
solutions
Banks lost sight
> In the last years banks were mainly
busy with themselves and have lost
sight of customers and their needs
> Banks are unable to cope with
speed of actual digital developments
> This makes banks’ core business
vulnerable for FinTech start-ups
Technology
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FinTech start-ups have a lot in common …
Source: figo: Disruption or revolution? Wie die Digitalisierung auch die Finanzindustrie verändert
Master technology
FinTech
start-up
attributes!
The newcomer …
Think, live and act digital
Are fast and innovative
Try something, make mistakes and learn quickly
And have a clear eye on customers
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FinTech funding has increased substantially in recent years
Source: CB insights; Crunchbase; Roland Berger; figo
FinTechs are shaping the new banking industry !
• FinTech funding has increased to
USD12bn in 2014 and shows increased
attractivity
• VCs and business angels have spotted
FinTech after watching the evolving
ventures for a long while
• Legal framework to be clarified to fit
FinTech companies – otherwise time-
consuming decisions and unclear
outcomes hinder start-ups!
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Traditional „all-in-one“ banks are threatened along
the value chain by FinTech start-ups as well as other
sector players
Source: Roland Berger
Deposits
Loans
Investment
Payment
Industrials
Internet giants
Telco & others
Checking
account/account
aggregation services
Consumer loans
Loans for SMEs &
entrepreneurs
Brokerage
Consulting
Payment
Forex/monetary
Players from
other sectors Exploitation of their client baseTraditional players in
financial servicesTargeting new customer needs
FinTechstartups
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In response to FinTech innovation, major financialinstitutions have launched different sets of actions
Source: Roland Berger
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Dutch banks are active in FinTech through multiple modes
Source: Roland Berger
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Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
64
Typical structure of a private equity investment vehicle
Limited partners (investors)
Private equity fund
Investment CInvestment A Investment B
Private
equity firm (general partner)
Fund/investment management
• Tax efficient for investors• Typical locations (Europe):
UK, Luxembourg, Liechtenstein
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Key issues to consider when setting up a fund
• Executes investment decisions
• Oversees fund’s investments
• Receives fees for this services
• Fund raising
• Substantial commitment for equity interest to PE fund
• Incentive scheme – carried interest (compensation as share of profits earned on investment)
• Direct control of investors – advisory boards, covenants (e.g. 15% investment limit in one firm; use of debt at fund level; distribution vs. reinvestment ratio)
General Partners (management company) Limited Partners (investors)
• Institutional investors (pension funds, financial institutions, foundations, family offices, corporates, fund of funds etc.)
• Member of advisory board1) and/or participation in annual meeting of fund
• Quarterly reporting about progress of investments
• Fees2):
– Management fee approx. 2-2,5% of committed capital
– Carried interest 20% of profits of the fund
– Hurdle rate 8%; carry only payable after invested capital plus 8% p.a. is distributed to investors
1)The advisory board typically meets twice a year to provide guidance and support in matters
relating to running the partnership and deal with potential upcoming conflicts of interest.
2)Fee structures vary from fund to fund; here: only rules of thumb
66
Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
67
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Key goals of the fund
• Market entry, know-how transfer
• Increase own strategic innovation potential
• Industry holding – buy and hold companies, dividend model
• Diversify assets and invest in alternative asset classes
• Invest in different continent, e.g. Europe
• Philanthropic approach – make world a better place to live in
• Turnaround distressed companies
• Improve competitive advantage of the country, e.g. for a state-backed fund
68
Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
69
Key Issues to be considered
• Investment strategy – i.e. focus on specific industries, equity/mezzanine, development stage, holding period
• Minimum fund volume – min EUR 50 m for VC; and min. EUR 100 m for PE
• Management team – deal sourcing, value creation, negotiation
• Align interest between management and investors
• Fee structure – incentive scheme for management
• Corporate governance – who is responsible for investment decisions, reporting rhythm, distribution policy
• Subsidy schemes for certain legal entities applicable
70
Overview
A. Introduction to Private Equity
B. Global/European Private Equity Market
C. Case Studies: Types of Private Equity Investors
D. Case Studies: Mid-Market Segments
E. Case Study: FinTech
F. Legal Environment
G. Investment Philosophy
H. Key Considerations for Setting Up a Fund
I. Conclusion and Next Steps
71
Potential next steps
• Fund set up:
A. A fintech fund; volume EUR 50-100 m
B. Industrial fund for certain industries; volume EUR 100-500 m
• Ayandeh Bank as lead investor plus other banks, insurance companies, industrial companies etc.
• Next steps: evaluate proposal, timeframe
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Conclusion and next steps
• Private equity is all about people
• Private equity as established asset class
• Private equity has positive macro economical impact
• Private equity requires industry knowledge and a network
• Alpine equity as partner for strong growing companies
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