PrivateEquityInvestingMehmetI.BudakPrivateEquityInvestingMehmetWhatisPrivateEquity?InvestmentstrategythatinvolvesthepurchaseofequityorequitylinkedsecuritiesinacompanyInvestmentismadethroughanegotiatedprocessBysophisticatedinvestorswithfinancialandoperatingexpertiseThegoalistoacquireundervaluedor“promising”assetsandrealizeprofitsin3-5yearsaftertheacquisitionInformationasymmetryandinefficienciesareimportantfactorsWhatisPrivateEquity?InvestmAlternativeInvestmentsAlternativeInvestmentsPrivateEquityInvestmentStrategiesLeveragedBuyoutsVentureCapital(earlyvs.latestage)SpecialSituations(i.e.distressed)MezzanineSecondaryPurchasesFundofFundsPrivateEquityInvestmentStraLeveragedBuyoutsEstablishedfirmswithtrackrecords,stablecashflowsandstablegrowthratesAnnualrevenuesof$25-$500millionTypicallyinbasicretail,transportationandmanufacturingindustriesTypicallyhaveassetstoborrowagainstandaccesstobankloansSeekprivateequitytoeffectachangeinownership,financeanexpansionorrestructureLeveragedBuyoutsEstablishedfVentureCapital-EarlyStageFirmswithsubstantialriskoffailure-businessmodelsandmarketingapproachareyettobeprovedSmallandilliquidinvestmentswithsizeof$500k-$2millionThesmallesttypeistheentrepreneurwhoneedsthefinancingtoconductinitialresearchanddevelopmentThemostmaturetypearethosefirmsthatarestartingtoturnprofitsbutneedcapitalforexpansionAngelcapitalisanimportantsourceoffundingVentureCapital-EarlyStageVentureCapital-LateStageFirmswithmorecertainbusinessmodelsProventechnologyandmarketProfitableandneedexpansioncapitalGeneralsizeof$2-$15millionIPOorSaleexpected/feasibleinneartermOriginalinvestorsmayachievesomeliquidityBecausetheriskisgenerallylowerandtheliquidityhigher,later-stageinvestmentsrequirelowerreturnsthanearly-stageinvestmentsVentureCapital-LateStageFLeveragedBuyoutsvs.VentureCapitalBuyoutsfocusonmaturecompanieswithstableorsustainablegrowthprofileBuyoutsrelyheavilyondebtfinancingtofinancemostofthepurchasepriceVentureCapitalfocusonhighgrowthindustrieswithriskierinvestmentprofilethanbuyoutsVentureCapitalreliesheavilyonequityfinancingandhashigherreturntargetsthanbuyoutsLeveragedBuyoutsvs.VentureSpecialSituationsInvestmentissuppliedbyspecializedTurnaroundFunds(TF)fortargetfirmsthathavedefaultedontheiroutstandingloansTFsreceivecontrollinginterests,withformerownersmakinguptheminorityinterestTFsrenegotiatestermswithexistinglenders,offeringtorestructureorpayoffloansatadiscountTFsalsodeliverexpertisetofindnewmarketsorpartnersforthefirm’sproducts,cutcosts,changeorimprovethecurrentmanagementSpecialSituationsInvestmentiFundofFundsInvestingdirectlyinPEfundscanbedifficultforindividualinvestorsandsmallinstitutionsRelativelyhighinvestmentminimumsmaydisqualifysomeofthesmallinvestorsInformationonPEmanagersisdifficulttolocateGainingaccesstotopPEfundscanbedifficultduetohighinvestordemandFundofFundsco-minglestheinvestmentsofsmallinvestorsintoasinglepoolandthenassemblesaportfolioofPEfundsFundofFundsInvestingdirectlHowarePEFundsStructured?PrivatelimitedpartnershipsIndividualmanagersaretheGeneralPartner(GP)Providersofcapital(pensions,insurancecompanies,wealthypeople)areLimitedPartners(LPs)Partnershipshave10-yearlifewith+1+1extension4-6yearinvestmentperiod1-2%annualmanagementfeeProfitssplit80-20,afterreaching“hurdle”returnlevelforLPsLPsneedtofundwithin2-3weeksof“capitalcall”PenaltiesforfailuretofundbyLPsIRRsdependonwhenmoneyistransferredbyLPsHowarePEFundsStructured?PrGeneralPartner’sKeyActivitiesSelectinginvestmentsObtainingaccesstohighqualitydealflowSortingandevaluatinglargeamountofinformationStructuringinvestmentsDesigningtransactionsMonitoringinvestmentsProvidingstrategic,operationalandfinancialassistancetoportfoliocompaniesExitinginvestmentsIPO,SaleorRecapitalizationGeneralPartner’sKeyActivitiPrivateEquityPartnershipsandFundraisingPrivateEquityPartnershipsanPrivateEquityMarket-InvestorsPublicandcorporatepensionfunds,endowments,foundations,wealthyfamilies,insurancecompanies,foreigninvestorsandothersInvestorsexpecttoreceivehigherrisk-adjustedreturnsonprivateequitythanotherinvestmentsPotentialbenefitsofdiversificationAdvantageofeconomiesofscopebetweenprivateequityinvestingandinvestors’otheractivitiesPrivateEquityMarket-InvestPrivateEquityMarket-Intermediaries~80%ofPEinvestmentsflowthroughspecializedintermediaries,whicharelimitedpartnershipsIntermediariesprovideexpertiseinselecting,structuring,andmanagingprivateequityinvestmentsIntermediariesnotorganizedasLPsplayalesssignificantroletodayintheprivateequitymarketSBICsownedbybanksandVCsubsidiariesofnon-financialcorporationsmostlyinvesttheircorporateparent’scapitalPrivateEquityMarket-IntermPrivateEquityMarket-IssuersVaryinsizeandtheirreasonsforraisingcapitalYoungfirmsthataredevelopinginnovativetechnologiesMiddlemarketcompaniesthatarestable,profitableandneedprivateequitytoexpandorrestructureGoingprivatetransactionsforpubliccompaniesPIPE(PrivateInvestmentinPublicEquity)providesfinancingwithoutregistrationcosts/disclosuresassociatedwithpublicofferingsPrivateEquityMarket-IssuerHowarePEFundsStructured?LimitedPartners–InvestorswithmoneyInsurancecompanies,pensionfunds,banks,andhighnetworthindividualsInvestorscommitacertainamounttothefundTheyhavenootheractiveroleinthefundandnoliabilitybeyondtheircommitmentsOneGeneralPartner–ManagersofmoneyManagestheinvestmentsviaamanagementcompanyReceivesmanagementfee(typically2%)oncommitmentsReceives“carriedinterest”intheprofitsHowarePEFundsStructured?LiHowarePEFundsStructured?Contractuallyfixedlifetime(10-12years)Capitalisinvestedduringthefirst4-6yearsThereafter,investmentsaremanagedandliquidatedDistributionsaremadetothelimitedpartnersintheformsofcashorsecuritiesGeneralPartnertypicallyraisesanewfundwhentheinvestmentphasefortheexistingfundhasbeencompleted(=>80%)Eachfundpartnershipislegallyseparateandismanagedindependentlyofotherfundpartnerships(i.eKKRIvs.KKRII)HowarePEFundsStructured?CoPartnershipTerms-ExampleTargetFundSize $1billionMinimumCommitment $10millionGrossTargetReturn 25%ManagementFee 2%CarriedInterest 80%-20%CommitmentPeriod 5yearsFundTerm 10years+1+1PartnershipTerms-ExampleTarRelationshipBetweenLPsandGPsLPsdelegatesignificantresponsibilitiestoGPsResolutionofpotentialconflictofinterestsliesinthestructureofthepartnershipagreementPartnershipshavefinitelivesToremaininbusiness,GPsregularlyraisenewfunds-easierforreputablefirmswithgoodrecordGPcompensationiscloselylinkedtothefundreturnsRelationshipBetweenLPsandGPartnershipCovenantsTheobjectiveistolimitexcessiverisktakingbyGPsCovenantsusuallysetlimitsonthe%ofthepartnership’scapitalthatmaybeinvestedinasinglefirmCovenantsmayprecludeinvestmentsinpubliclytradedandforeignsecurities,derivativesandotherprivateequityfunds,etcCovenantsusuallyrequirethatcashfromsaleofportfolioassetsbeimmediatelydistributedtoLPsLPsusuallylimitsuchdealfeesorrequirethatdealfeesbeoffsetagainstmanagementfeesReturnhurdleratesforLPsPartnershipCovenantsTheobjecEvaluatingGeneralPartnersTrackrecord,relevancyofpastexperienceGenerationofadequatedealflowSoundinvestmentdecision-makingprocessesAbilitytoachievesuccessfulexits/liquidityAdvantagesvs.similarlyfocusedfundsSufficiencyofresourcesMeaningfulcommitmentoftimeCohesivenessandsustainabilityofteamSuccessionplanningEvaluatingGeneralPartnersTraCo-investmentByLPsCo-investmentsaredirectinvestmentsinportfoliocompaniesbyLPsalongsideprivateequitypartnershipsUsually,LPsacquirethesecuritiesonthesametermsasthepartnershipbutpaynomanagementfeeorcarriedinterestCo-investmentopportunitiesarisewhenGPsneedadditionalequityfinancingtocloseadealSomeinstitutionalinvestorsseeco-investingasanopportunitytoacquireexpertiseinprivateequityinvestingForGPs,LPsthatstandreadytoco-investrepresentaflexiblesourceoffundsforclosingdealsCo-investmentByLPsCo-investmTransactionOriginationTransactionOriginationDealFlowDealflow,accesstohighqualityinvestmentopportunities,isabsolutelycrucialGPsrelyonrelationshipswiththirdpartiesandindustrycontactsfordealflowgenerationThegreaterthedealflow,thehigherthelikelihoodofidentifyinganattractiveopportunity“Proprietary”dealsaremoreattractivethandealsbroughtbyagentsorintermediariesLesscompetitionmeanslowerpurchasepriceLowerpurchasepricemeanshigherIRRsDealFlowDealflow,accesstoOriginationInvestmentbanks,consultants,lawyersandindustrycontactsintroducepotentialopportunitiesPreliminaryopportunityanalysiswillbeperformedrelativelyquicklyInitialdecisionisquicklymadewhetheraPEfirmwouldbeinterestedintheopportunityPEfirmshavedifferentinvestmentstrategiesandviewsoftheworldIfinterested,PEfirmswouldsignConfidentialityAgreementtobeginevaluatingtheopportunityOriginationInvestmentbanks,cScreeningofDealsDealscreeningisartandsciencePEfirmsreceivemanyinvestmentproposalsinayearProposalsarefirstscreenedtoeliminatethosethatareclearlyfailtomeetinvestmentcriteriaSpecializationonaspecificindustryorgeographyreducesthenumberofinvestmentopportunitiesconsideredInitialreviewtakesa1–2daysandresultsintherejectionof~90%ofproposalsreceivedbyaPEfirm“Surviving”proposalsthenbecomesubjecttoasecondaryreviewafterthesigningofaConfidentialityAgreementProposalsthatsurvivethepreliminaryandsecondaryreviewsbecomethesubjectofacomprehensiveduediligenceprocessScreeningofDealsDealscreeniNon-BindingIndicationsofInterestCommonlyreferredtoas“1stroundbid”GivesellersaperspectiveonthelevelofbuyerinterestandthevaluationparametersbuyersarelikelytoassumeIndicationofinterestsubjectto:Completionofbusiness,legal,accountingandenvironmentalduediligenceNegotiationandexecutionofdocumentsReceiptofnecessaryapprovalsNegotiationofemploymentagreementswithkeymanagementNon-BindingIndicationsofIntLeveragedBuyoutsLeveragedBuyoutsWhatisanLBO?AcquisitionofacompanywhereaPEfirmusescashequityanddebttofundthepurchasepricePEfirminjectsequityintoanewshellcompany(“NewCo”),whichborrowsdebtandsimultaneouslyacquiresthetargetPEfirmcontributescapital,operatingandfinancialexpertise,strategicinsight,contactsandmanagementtalentManagementownershipincreases,creatinghigherincentivestoimproveoperationsanddeliverresultsDebtisrepaidbytheoperatingcashflowsorbythesaleofnon-coreassetsoftheacquiredbusinessLBOissimilartobuyingandrentingoutahouse-therentcashflowstopaydownthemortgagedebtWhatisanLBO?AcquisitionofTypicalLBOStructureTypicalLBOStructureTypicalLBOStructureVariesovertimewithmarketconditionsSourcesoffinancing40–50%seniorbankdebt(5-7years)20–30%subordinateddebt(8-12years)20–40%commonequityBankdebtissecuredfromreceivables,inventoryandPP&ETypicalLBOStructureVariesovGoodLBOCandidatesHistoryofconsistentprofitabilityPredictablecashflowstoservicedebtAvailabilityofexcesscashEasilyseparableassetsorbusinessesStrongmanagementteamStrongbrandsandmarketpositionIndustrywithbarrierstoentryLittledangerfromdisruptivechanges(technology,regulatory,etc.)Visible/feasibleexitstrategy(IPOorM&A)GoodLBOCandidatesHistoryofValueCreationStrategicVision,growthinitiatives,add-onacquisitions,exitOperationalSales,costs,assetsOrganizationalProcesses,structure,systems,skillsFinancialBalancesheet,taxstructure,capitalizationExpansioninvaluationmultiplesAdvantagesofbeingprivateValueCreationStrategicHowDoPEFirmsCreateValue?MinimizepurchasepriceMaximizeleverageMinimizeliabilitiespurchasedManagetransactioncostsImprovebusinessoperationsMaximizetaxefficiencyOptimizeexitHowDoPEFirmsCreateValue?MMinimizePurchasePriceAvoidcompetitionAprietarydealMaintainpricedisciplineAvoid“dealfever”MaximizedeductionsfromheadlinepriceEarnoutsLiabilities–pension,legal,otherMinimizePurchasePriceAvoidcMaximizeLeverageMaintaincompetitiveprocessamongbankswillingtofundthetransactionChooserightfinancingstructureBalanceofrisk,flexibilityandinterestcostSellernotesandstaplefinancingDeeplysubordinateandatattractivetermsPartnerwithco-investorsMaximizeLeverageMaintaincompMinimizeLiabilitiesPurchasedDetailedduediligenceLegalFinancialAccountingEnvironmentalToughnegotiationsRepsandWarrantiesMinimizeLiabilitiesPurchasedTransactionCostsandTaxationMinimizetransactioncostsInternalcostsAborteddealcostsMaximizetaxefficiencyIncreaseinteresttaxshieldIncreasedepreciationIncreasetaxdeductibleamortizationTransactionCostsandTaxationImproveBusinessOperationsToplinegrowthNewmarkets,partnersProductsMarginimprovementCOGSSG&AImproveBusinessOperationsTopExitDifficulttopredictfuturebusinesscyclesandmarketconditionsPrepareanexitstrategyandgroomthebusinessforthatexitTradesaleorM&A–“clean”cashexitIPO–longprocess,companyneedstobeaboveacertainsize,lock-uprestrictionsLeveragedrecapitalization–allowssponsortoremoveinvestedcapitalpriortoultimateexit,increasesIRRandhedgesagainstpoorexitSecondarybuyout–sellingtoanothersponsorExitDifficulttopredictfuturSourcesandUsesofFundsSourcesandUsesofFundsSourcesofFundsEquityNewequityinjectionfromLBOsponsorPotentialequitycontributionfromexistingmanagementPotentialcontinuingequityinvestmentbyexistingshareholders(“rollover”)EquityfromastrategicpartnerDebtBankdebt(“senior”debt)Highyielddebt(“subordinated”debt)MezzaninesecuritiesCanbestructuredtobemore“debt-like”ormore“equity-like”dependingonthesituationSourcesofFundsEquityBankDebtSeniorsecured(mostseniordebt)Flexible,interestrateisfloatingMaturesbeforeotherdebtclasses,amortizingTypicallycallable/prepayableatparQuarterlyinterestpaymentsMaintenancecovenantsStructuredattheoperatingcompanylevelUnderwrittenviasyndicationDiligence,commitment,launch,syndicate,fundBankDebtSeniorsecured(mostBankDebtRevolvingCreditFacilitiesvs.TermloansRevolversallowmultipledrawingsforworkingcapitalandgeneralcorporateneedsTermloansfundedatclosingProRatafacilitiesRevolverandTermLoanA–heldbycommercialbanksBuyandholdmentality,shrinkingsegmentInstitutionaltranchesConsistofTermLoans“B”,“C”or“D”-heldbyinsurancecompanies,CLOsandCDOs,growingsegmentPurelytransactional,liquidityinthesecondarymarketMinimalfront-endamortizationBankDebtRevolvingCreditFaciHighYieldBondDebtUsuallysubordinatedand/orunsecuredInterestrateisfixed,maturityof8-10years“Bullet”maturityafterfullbankdebtamortizationUsuallynotcallableatparinearlyyears,typically1-5yearsStructuredattheoperatingcompanylevelPubliclyquotedsecurityIncurrencecovenantsDiligence,document,roadshow,priceandfundHighYieldBondDebtUsuallysuMezzanineDebtSubordinatedtobankdebtandhighyieldbondsFlexible,typicallyfloatinginterestrateNon-amortizing,“bullet”maturitytypicallyafter10yearsCash&PIKcouponpaymentfurtherenhancedwithequitywarrantsPIKcomponentcan“eat”intoequityStructurallysubordinatedattheholdingcompanylevelIncurrencecovenantsMezzanineDebtSubordinatedtoDueDiligenceDueDiligenceDueDiligenceObjectiveValidatebusinessconceptVerifymarketAppraisemanagementValidateforecastsValuationDiligenceestablishesbasisforvaluation,priceandnegotiationDiligenceisexpensiveandtimeconsumingDiligencestrategyPreliminaryevaluationtoidentify“deal-breakers”beforespendingtimeandmoneyondetailedduediligenceDueDiligenceObjectiveKeyTopicsforDueDiligenceBusinessconcept,opportunityMarketCompetitionCustomersProductsManagementFinancialsReturnsKeyTopicsforDueDiligenceBuBusinessConcept,OpportunityWhatistheconcept/opportunity?Istheopportunitysustainable?Potentialsizeoftheopportunity?Howcanthetargetcompanycapitalizeontheopportunity?Istheproposedplan/strategyrealistic?Howdoesthetargetbusinessfittoitsmarketsandregion?Whyarewesosmartorlucky?BusinessConcept,OpportunityWMarketMarketcharacteristics,segments,size,growth,cyclicality,keymetrics,demographics?Projectedmarketshareandsalesvolume?Lowbarrierstoentryintothemarket?Istarget’sbusinessmodelsustainable?Howwillthebusinessbeperceivedbycustomers?Regulatoryissues?MarketMarketcharacteristics,CompetitionWhoarethedirectcompetitors?Relativesize,scope,costbasis,brandsandmarketshare?Whatarethekeyfactors/leversofcompetitionintheindustry?Howistarget’sbusinessstrategydifferentthancompetitors’?Whataretarget’scompetitiveadvantages?Whatarethetarget’scompetitivedisadvantages?Threatfrompotentialnewentrants?CompetitionWhoarethedirectCustomersWhoarethecustomers?Currentandfuturecustomerbase?Whatspecificmarketandcustomerneedsdoesthetargetbusinessserve?Howdocustomersmaketheirpurchasedecisions?Keycriteria?Customersatisfactionandretention?Doestheprojectednumberofcustomersorsalesmakesense?Realistic?Howwillthetargetacquirenewcustomers?CustomersWhoarethecustomersProductsProductlifecycle,penetrationtrends?Productpricing?Productprofitability?Productivityversuscompetition?Maintainor“jettison”certainproducts?Plantconsolidation?Inventoryoptimization?CAPEXrequirements?Developmentplans?ProductsProductlifecycle,peManagementCompetent?Experienced?Cohesive?Strategic?Flexible?Incentivized?Proactive?Realistic?ManagementCompetent?FinancialsWhatistheoptimalcapitalstructure?Arerevenueandcostprojectionscomprehensive,realistic,reasonable?Whataretheunderlyingbusinessassumptionsoftheprojections?Impactofvariousbusinesscasescenarios?Howdoescashflowinthisbusiness?Howmuchcapitalinvestmentneeded?When?Correctaccountingtreatment?Whatarethekeysensitivities?FinancialsWhatistheoptimalConfirmingValueFinancialandaccountingdiligenceisprimarilyfocusedondrillingintothebasiccomponentsofvaluationRecurringEBITDA(adjustforextraordinaryitems)CAPEXWorkingCapitalCashFlowMultipleConfirmingValueFinancialandRecurringEBITDAGeneralissues–exclusions,accountingchanges,proformaadjustmentsRevenue–components,methodofrecognition,customers,customerarrangements,pricing/volumeMargins–componentsofcostofsales,grossmargintrendsReserves–under/overstatementofprofitsCompensation–benefits,headcountneeds,transitionissues,bonusSG&A–components,trends,discretionarycosts,fixedvs.variable,costsavingsOther–restructurings,acquisitions,contingenciesRecurringEBITDAGeneralissuesCAPEXDeterminenormalizedannualCAPEXMaintenanceormandatoryCAPEXDetermineexpansionCAPEXDiscretionaryCAPEXCAPEXbetweensigningandclosingoftransactionreducenetcashpositionImportanttohavecorrectCAPEXassumptionsincalculatingexitvalueCAPEXDeterminenormalizedannuWorkingCapitalAnalyzeworkingcapitalcycleComponentsofB/SaccountsNeedsandtrendsSavingsopportunitiesPotentialclosingbalancesheetissuesImportanttohavecorrectworkingcapitalassumptionsincalculatingexitvalueWorkingCapitalAnalyzeworkingLegalDueDiligenceConductedintandemwithbusiness,financialandaccountingduediligenceStructurethetransactioninthemosttaxefficientmannerUnderstandthelegalaspectsoftarget’sbusinessandassetsbeingacquiredIdentifyandevaluateliabilitiesMaterialsaretypicallymadeavailableforreviewinadataroomLegalDueDiligenceConductediWhatIsaBadDeal?NorealcompetitiveadvantageofPEfirmLonglistofthingsthathavetogorighttomakethedealwork“Builditandtheywillcome”isnotagoodbusinessstrategyAggressiveestimatesoffuturegrowthEmployingthewrongmanagementteamTruedownsidecaseisnotadequatelyevaluatedWhatIsaBadDeal?NorealcomTransactionStructuringandDocumentationTransactionStructuringandDoTermSheetsPreliminarydocumentsdesignedtoprovideaframeworkfornegotiationsbetweeninvestorsandthetargetcompanyProvidescollectiveunderstandingoftheproposedtransaction,basictermsandconditionsGenerallyfocusesonthetarget’svaluationandtheconditionsunderwhichinvestorsagreetoprovidefinancingTermsheeteventuallytransformsintoaformalagreementknownasthePurchaseAgreement,whichisalegaldocumentthatdetailswhoisbuyingwhatfromwhomatwhatpricewhenTermSheetsPreliminarydocumenKeySectionsofTermSheetsAcquirerTargetValuationStructureofacquisitionManagementcompensationDebtfinancingBoardofdirectorsRightsTransactionfeesManagementfeesKeySectionsofTermSheetsAcqPurchaseAgreementTransactiontermsandstructureDescriptionofassetsoldCalculationofpurchasepriceClosingdateRepsandWarranties–buyerandsellerConditionstoclosing–sellerConditionstoclosing–buyerConditionsforterminationPurchaseAgreementTransactionPurchaseAgreementClarityregardingkeyfinancialanddealtermsBusiness/assetsbeingacquiredandtheliabilitiesbeingassumedArrangementsforassetsharinggoingforwardProtectingtheacquirerfromcontingentorundisclosedliabilitiesLockingupthetarget,no“shopping”ofthedealRepresentationsandWarranties–verificationoffactualmatterscoveredduringtheduediligencePre-closingoperationsClosingconditions–fiduciaryouts,breakupfeePurchasepriceadjustments–postclosingadjustmentPurchaseAgreementClarityregaRepresentationsandWarrantiesStatementoffactataparticularpointintimePurposeProvidesbasisforrefusaltoclosethetransactionifuntrue(pre-close)Providesbasisforpost-closingindemnificationfordamagesifuntrue(post-close)MainlyreferstoareascoveredinduediligenceFinancialstatements,liabilities,contracts,realestate,litigation,taxesBothbuyerandsellergivesReps&WarrantiesBuyer’sobjective–understandwhatIambuyingSeller’sobjective–increasecertaintyofclosingRepresentationsandWarrantiesCovenantsAgreementstoactorrefrainfromactinginthefuturePositivevs.NegativecovenantsNecessarybecausesigningandclosingarenotsimultaneousPre-closingcovenantsLargelytothebenefitofbuyerObjectiveistopreservetheassettobepurchasedandensureclosingoccursPost-closingcovenantsTothebenefitofsellerObjectiveistoprotectcertaininterestsoncesellernolongerownsthebusinessCovenantsAgreementstoactorCovenantsPre-closingOperationsintheordinarycourseofbusinessNosolicitationofproposalsfromcompetingbuyersNodividendsanddistributionsNoissuanceofequityorincurrenceofdebtNoacquisitionsanddivestituresNoexecutionofsignificantcontractsNochangeinaccountingpracticesPost-closingNochangestocompensationNohiringorfiringofkeymanagementemployeesCovenantsPre-closingClosingConditionsTransactionwillnotcloseuntilallconditionsaresatisfiedRepresentationsandwarrantiesaretrueAbsenceofmaterialadversechangeinthebusinessExcludesgeneraleconomicorindustryconditions,stockpricemovements,failuretomeetforecasts,mattersknowntobuyerReceiptofrequiredgovernmentapprovalsandmajorthirdpartyconsentsDebtfinancingavailableontermsandconditionssetforthincommitmentlettersTerminationiscessationofbothparties’obligations“Dropdead”date–financingandregulatoryBreaches-breakupfee~5%FiduciaryoutBuyer’sobjective–tobeabletowalkawayifanythingmajoriswrongSeller’sobjective–tohavesomecertaintythattransactionwillcloseifthingsareinreasonableorderClosingConditionsTransactionDealProcessInsidethePEFirmInitialscreeningofdeals“Headsup”memorandumNon-bindingindications/termsheetsDetailedduediligenceandevaluationFormalanddetailedpresentationtotheinvestmentcommitteeFinalapprovalandfundingDealProcessInsidethePEFirHeadsUpMemo Whyisthecompanybeingsold?Whatistheinvestmentthesis?HowdoestheopportunityfitwiththePEfirm’sinvestmentstrategyandskillbase?Whatarethesize,structureandtimingoftheinvestment?WhatisthePEfirm’s“edge”intheprocess?Whatistheduediligenceroadmap?HowwillthePEfirmexittheinvestment?Whataretheexpectedreturnsandkeyassumptionsdrivingtheprojections?HeadsUpMemo WhyisthecompaFormalInvestmentCommitteeMemoAnalysisofthedealopportunity,thebusiness,thetransaction,theprocess,industrytrends,duediligenceresultsDetaileddiscussionofrisksandopportunitiesDetailedanalysisofoperatingandfinancialprojectionsDetailedscenarioanalysisandprojectedreturnsKeyquestionstoanswer:Whydowewanttodothisdeal?Whatisouredge?Whatvaluedowebringtothisdeal?Whoisthecompetition?Howandwhenwillweexit?Impactofthisdealontherestoftheportfolio?FormalInvestmentCommitteeMePortfolioCompanyMonitoringPortfolioCompanyMonitoringPortfolioCompanyLifeYear1–FigureoutwhatyoujustboughtFixproblems,focuson2-3keyareastoimproveAssessandchangeoutmanagementYears2-3–StrategicPlanandExecutionDevelopstrategicbusinessplanMakeinvestments,pursueacquisitionsExecuteplanPaydowndebt