Lbo Valuation Process
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Private Equity
Linköping
January 8, 2009 Stefan Glevén
Private Equity Private Equity – A catalyst for growth?
“In finance, Private Equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.”
“Growth can come from a rational organization of talents” David Ricardo (1772-1823)
® 2008 EQT – All Rights Reserved Strictly private and Confidential
2
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
3
EQT in brief Industrial approach to private equity y
Founded 1994
y
Almost 200 employees - 11 offices
y
80+ Senior Industrialists
y
Around €11 billion capital raised in 11 funds with four investment strategies – Equity – Expansion Capital – Opportunity – Infrastructure
y
Invested in more than 70 companies, realizing 37 exits
y
Top quartile performance over time
New York
Oslo
Helsinki Stockholm
Copenhagen Frankfurt
Warsaw Munich
Zurich
Shanghai Hong Kong ® 2008 EQT – All Rights Reserved Strictly private and Confidential
4
Industrial heritage Access to industrial leaders and companies through relationship with Wallenberg family and its tradition of building and developing companies ►
Active, long-term owner of highly successful international industrial companies
►
Support portfolio companies in their strategic and financial development
►
International network used to exchange experience, knowledge and competence
® 2008 EQT – All Rights Reserved Strictly private and Confidential
5
® 2008 EQT – All Rights Reserved Strictly private and Confidential
6
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
7
Transaction Process
Target identification
Due Diligence
Deal Execution
Ownership
Exit
® 2008 EQT – All Rights Reserved Strictly private and Confidential
8
Deal Sources y
Families/corporations seeking partners for the development of their companies
y
Non-core divisions in large corporations
y
Privatizations
y
Forced divestitures
y
PTP (public-to-private)
y
From other PE houses and other Funds
® 2008 EQT – All Rights Reserved Strictly private and Confidential
9
Key Participants
Investment Committee Lawyers Financial Sponsor Industry Specialists
Auditors / Accountants
M&A Bankers Leverage Finance Bankers
® 2008 EQT – All Rights Reserved Strictly private and Confidential
10
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
11
General Valuation There are primarily three valuation techniques used when valuing a company y
Discounted cash flow valuation (DCF)
y
Comparable valuation based on trading comparables –
y
EV/EBITDA… Comparable valuation based on precedent transactions
–
EV/EBITDA…
® 2008 EQT – All Rights Reserved Strictly private and Confidential
12
General Valuation Enterprise value is the actual economic value of a company
Debt - Cash
EBITDA x Multiple Enterprise value
=
Equity value
+
Net debt
® 2008 EQT – All Rights Reserved Strictly private and Confidential
13
LBO Valuation LBO valuation of a company is dependent on projections, debt structure and required return Main assumptions: y
Projections for income statement and operational balance sheet –
y
Dependent on market, market position, management, profitability, cost structure etc Debt structure
– y
Dependent on cash flow generation and banks willingness to finance the investment Exit multiple
– y
Dependent on company and industry profile Required return for the investment
–
Dependent on EQT
Most important is to build a solid Base Case, based on assumptions for growth, margins and cash flow ® 2008 EQT – All Rights Reserved Strictly private and Confidential
14
General Valuation Illustrative Example Step 1. Define Base Case Year 0 Year 1 Year 2 Year 3 Year 4 Revenues 100 110 121 133 146 Growth % 10% 10% 10% 10% EBITDA 12.0 13.2 15.7 17.3 20.5 EBITDA Margin % 12.0% 12.0% 13.0% 13.0% 14.0% Free Cash Flow Net Debt/EBITDA Debt Year 0
7.0
8.0
10.0
12.0
15.0
53
45
35
23
5.0x 60
Net Debt
60
Step 3. Define Exit Multiple Year 4 EV/EBITDA Multiple: EBITDA Enterprise Value: Debt: Equity Value:
7.0x 20.5 143 23 120
Step 4. Define Required IRR
Required IRR
Step 2. Define Debt Structure
EV = 102
Year 0 Debt Equity Enterprise Value EV/EBITDA
30% 60 42 102 8.5x
® 2008 EQT – All Rights Reserved Strictly private and Confidential
15
Valuation Summary Illustrative Example 70
LBO: 20-25% IRR; 6x-7x EBITDA Exit
75
80
85
90
95
100
Trading Comparables: 11x-12x 2009E EBIT
Precedent Transactions: 8x-9x LTM EBITDA
110
115
120
125
130
110
95
DCF: 7.5%-8.0% WACC; 6x-7x EBITDA TV
Trading Comparables: 7x-8x 2009E EBITDA
105
105
130
105
95
110
100
105
115
® 2008 EQT – All Rights Reserved Strictly private and Confidential
16
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
17
General debt Financing Debt financing is a fundamental component for a leveraged buy-out The Past…
Common Equity/Shareholder Loan
Before Lehman
After Lehman
Common Equity/ Shareholder Loan PIK Loan
PIK Note
Unsecured Note
Unsecured Note
Mezzanine
Mezzanine 2nd Lien Loan
2nd Lien Note
Senior Debt Senior Debt
Common Equity/Shareholder Loan
PIK
Senior Debt
® 2008 EQT – All Rights Reserved Strictly private and Confidential
18
Debt Volumes LBO volume has been significantly lower in YTD 2008 Annual Senior LBO Loan Volume
LBO Loan Volume
( € in billions)
( € in billions) €160B
€140B
320
€140B
€120B
280
€120B
€100B
€100B
€80B
240 200 160
€80B
€60B 120
€60B
€40B
€40B
80
€20B
€20B
40 0
€0B
€0B 2003
2004
2005
2006
2007
YTD 2008
1998
2000
1Q
2Q
2002 3Q
2004 4Q
2006
2008
Deal Count*
Source: Standard & Poor’s LCD ® 2008 EQT – All Rights Reserved Strictly private and Confidential
19
Impact on Leveraged Finance Transactions The debt structures has clearly changed during 2008 LBO Debt Structure
Average Leverage 7.0x
100%
6.0x
5.9x
80%
5.0x
4.5x
60%
4.0x 40%
3.0x
20%
2.0x 1.0x
0% 2003
2004
Sr Only
Sr + 2nd Lien
2005
2006 Sr + Mezz
2007
Jan-Sep 08
Sr + 2nd Lien + Mezz
Average Purchase Multiple
0.0x 2007
Average Equity Contribution 50%
12.0x 10.1x 10.0x
3Q08
44%
45% 8.7x
40% 35%
8.0x
34%
30% 25%
6.0x
20% 4.0x
15% 10%
2.0x
5% 0%
0.0x 2007
3Q08
2007
YTD Sep 2008 ® 2008 EQT – All Rights Reserved Strictly private and Confidential
20
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
21
The Path to Value Creation There are several ways to create value in a portfolio company
Sales Growth
Margin Expansion
Strategic re-positioning
Debt pay down
• Accelerate organic opportunities • Add-on acquisitions to expand product range and/or geographical reach and/or provide synergies
• Operational Improvements • Product mix enhancement
• Equity “Story” Improvement • Consolidation, Critical Mass
• Using the target company’s cash flows to increase the equity component of enterprise value by repaying debt
® 2008 EQT – All Rights Reserved Strictly private and Confidential
22
EQT’s Industrial Acceleration Strategy EQT Industrialists
Industrial Acceleration Industrial Acceleration
Management Team Network
Strategy
Board defines and monitors roadmap for creating shareholder value - Strategic positioning - Internationalization - M&A - Financing issues - Preparation for exit EQT contributes industrial and financial expertise
People
EQT appoints key personnel - The chairman always appointed from EQT network of international experienced industrialists - EQT partner always member of the board as owner but never chairman - EQT active in assisting in the recruitment of first line management - Internationally experienced executives appointed to the board or as consultants
Incentives
Board, management and owners interests are aligned through investments Common mindset established through - Joint business plan - Transparency - Open communication
® 2008 EQT – All Rights Reserved Strictly private and Confidential
23
Exit General EQT has not made a good deal until exit – the goal is to achieve a return of at least 2-4 times investment in three to five years
Company
Market
Buyers
EQT
• Has delivered on the plan? (financials) • Has the right structure? (reporting etc) • More to do? (marginal return)
• Equity Markets • Debt Markets • Competing Offerings
• Many • Willing • Able
• Return vs requirements • Need for exits (fund raising etc) • Portfolio Management issues
® 2008 EQT – All Rights Reserved Strictly private and Confidential
24
EQT Value Creation EQT has historically created value through accelerated revenue growth, increased efficiency and strategic re-positioning Focus on Growth and Efficiency
Historic Breakdown of Value Creation
Proven Ability to Drive Growth
Average growth of all EQT portfolio companies in Europe (1)
20%
100%
80%
42%
Revenue growth
12%
13%
60%
40%
36%
20% 19% 0%
3%
Margin improvements Strategic repositioning Debt pay-down Employee growth
(1)
Includes organic and acquisitive growth. Analysis based on Carl Zeiss having acquired Sola and Dragoco Haarmann & Reimer. If base for these acquisitions is adjusted, EQT portfolio companies recorded an average +10% employee growth, +11.3% sales growth and +18% EBITDA growth
Sales growth
EBITDA growth
® 2008 EQT – All Rights Reserved Strictly private and Confidential
25
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
26
EQT Infrastructure The EQT Infrastructure fund was launched in November 2008
® 2008 EQT – All Rights Reserved Strictly private and Confidential
27
EQT Infrastructure EQT will invest €6–7 billion in infrastructure assets in the next years with a focus on the Northern and Eastern Europe y Fund size: ~€1.2 billion y Focus on Northern and Eastern Europe
– Advising teams in Stockholm, Helsinki, Munich and New York y Medium-sized infrastructure operating assets/companies – control or co-control
positions y Primary targets;
– Regulated basic infrastructure (e.g. power generation, power transmission and distribution, wind power, gas pipelines, telecom) – Concession-based essential infrastructure (e.g. airports, ports, toll roads, rail transport, water and waste treatment facilities)
1. Source: OECD “Infrastructure to 2030 Telecom, Land, Transport, Water and Electricity”
® 2008 EQT – All Rights Reserved Strictly private and Confidential
28
EQT Infrastructure Infrastructure - macro perspective y Global need for new and improved infrastructure
– Rising global population – Focus on competitiveness – Huge investment need (some €52 trillion for basic infrastructure worldwide through 20301) y Privatization important part of infrastructure investment solution - risk split, free up
capital, strengthen competitiveness y Decreased government spending on infrastructure
1. Source: OECD “Infrastructure to 2030 Telecom, Land, Transport, Water and Electricity”
® 2008 EQT – All Rights Reserved Strictly private and Confidential
29
Infrastructure fundamentals Decreased government spending on infrastructure
Source: OECD
® 2008 EQT – All Rights Reserved Strictly private and Confidential
30
® 2008 EQT – All Rights Reserved Strictly private and Confidential
Linköping
January 8, 2009 Stefan Glevén
Private Equity Private Equity – A catalyst for growth?
“In finance, Private Equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.”
“Growth can come from a rational organization of talents” David Ricardo (1772-1823)
® 2008 EQT – All Rights Reserved Strictly private and Confidential
2
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
3
EQT in brief Industrial approach to private equity y
Founded 1994
y
Almost 200 employees - 11 offices
y
80+ Senior Industrialists
y
Around €11 billion capital raised in 11 funds with four investment strategies – Equity – Expansion Capital – Opportunity – Infrastructure
y
Invested in more than 70 companies, realizing 37 exits
y
Top quartile performance over time
New York
Oslo
Helsinki Stockholm
Copenhagen Frankfurt
Warsaw Munich
Zurich
Shanghai Hong Kong ® 2008 EQT – All Rights Reserved Strictly private and Confidential
4
Industrial heritage Access to industrial leaders and companies through relationship with Wallenberg family and its tradition of building and developing companies ►
Active, long-term owner of highly successful international industrial companies
►
Support portfolio companies in their strategic and financial development
►
International network used to exchange experience, knowledge and competence
® 2008 EQT – All Rights Reserved Strictly private and Confidential
5
® 2008 EQT – All Rights Reserved Strictly private and Confidential
6
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
7
Transaction Process
Target identification
Due Diligence
Deal Execution
Ownership
Exit
® 2008 EQT – All Rights Reserved Strictly private and Confidential
8
Deal Sources y
Families/corporations seeking partners for the development of their companies
y
Non-core divisions in large corporations
y
Privatizations
y
Forced divestitures
y
PTP (public-to-private)
y
From other PE houses and other Funds
® 2008 EQT – All Rights Reserved Strictly private and Confidential
9
Key Participants
Investment Committee Lawyers Financial Sponsor Industry Specialists
Auditors / Accountants
M&A Bankers Leverage Finance Bankers
® 2008 EQT – All Rights Reserved Strictly private and Confidential
10
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
11
General Valuation There are primarily three valuation techniques used when valuing a company y
Discounted cash flow valuation (DCF)
y
Comparable valuation based on trading comparables –
y
EV/EBITDA… Comparable valuation based on precedent transactions
–
EV/EBITDA…
® 2008 EQT – All Rights Reserved Strictly private and Confidential
12
General Valuation Enterprise value is the actual economic value of a company
Debt - Cash
EBITDA x Multiple Enterprise value
=
Equity value
+
Net debt
® 2008 EQT – All Rights Reserved Strictly private and Confidential
13
LBO Valuation LBO valuation of a company is dependent on projections, debt structure and required return Main assumptions: y
Projections for income statement and operational balance sheet –
y
Dependent on market, market position, management, profitability, cost structure etc Debt structure
– y
Dependent on cash flow generation and banks willingness to finance the investment Exit multiple
– y
Dependent on company and industry profile Required return for the investment
–
Dependent on EQT
Most important is to build a solid Base Case, based on assumptions for growth, margins and cash flow ® 2008 EQT – All Rights Reserved Strictly private and Confidential
14
General Valuation Illustrative Example Step 1. Define Base Case Year 0 Year 1 Year 2 Year 3 Year 4 Revenues 100 110 121 133 146 Growth % 10% 10% 10% 10% EBITDA 12.0 13.2 15.7 17.3 20.5 EBITDA Margin % 12.0% 12.0% 13.0% 13.0% 14.0% Free Cash Flow Net Debt/EBITDA Debt Year 0
7.0
8.0
10.0
12.0
15.0
53
45
35
23
5.0x 60
Net Debt
60
Step 3. Define Exit Multiple Year 4 EV/EBITDA Multiple: EBITDA Enterprise Value: Debt: Equity Value:
7.0x 20.5 143 23 120
Step 4. Define Required IRR
Required IRR
Step 2. Define Debt Structure
EV = 102
Year 0 Debt Equity Enterprise Value EV/EBITDA
30% 60 42 102 8.5x
® 2008 EQT – All Rights Reserved Strictly private and Confidential
15
Valuation Summary Illustrative Example 70
LBO: 20-25% IRR; 6x-7x EBITDA Exit
75
80
85
90
95
100
Trading Comparables: 11x-12x 2009E EBIT
Precedent Transactions: 8x-9x LTM EBITDA
110
115
120
125
130
110
95
DCF: 7.5%-8.0% WACC; 6x-7x EBITDA TV
Trading Comparables: 7x-8x 2009E EBITDA
105
105
130
105
95
110
100
105
115
® 2008 EQT – All Rights Reserved Strictly private and Confidential
16
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
17
General debt Financing Debt financing is a fundamental component for a leveraged buy-out The Past…
Common Equity/Shareholder Loan
Before Lehman
After Lehman
Common Equity/ Shareholder Loan PIK Loan
PIK Note
Unsecured Note
Unsecured Note
Mezzanine
Mezzanine 2nd Lien Loan
2nd Lien Note
Senior Debt Senior Debt
Common Equity/Shareholder Loan
PIK
Senior Debt
® 2008 EQT – All Rights Reserved Strictly private and Confidential
18
Debt Volumes LBO volume has been significantly lower in YTD 2008 Annual Senior LBO Loan Volume
LBO Loan Volume
( € in billions)
( € in billions) €160B
€140B
320
€140B
€120B
280
€120B
€100B
€100B
€80B
240 200 160
€80B
€60B 120
€60B
€40B
€40B
80
€20B
€20B
40 0
€0B
€0B 2003
2004
2005
2006
2007
YTD 2008
1998
2000
1Q
2Q
2002 3Q
2004 4Q
2006
2008
Deal Count*
Source: Standard & Poor’s LCD ® 2008 EQT – All Rights Reserved Strictly private and Confidential
19
Impact on Leveraged Finance Transactions The debt structures has clearly changed during 2008 LBO Debt Structure
Average Leverage 7.0x
100%
6.0x
5.9x
80%
5.0x
4.5x
60%
4.0x 40%
3.0x
20%
2.0x 1.0x
0% 2003
2004
Sr Only
Sr + 2nd Lien
2005
2006 Sr + Mezz
2007
Jan-Sep 08
Sr + 2nd Lien + Mezz
Average Purchase Multiple
0.0x 2007
Average Equity Contribution 50%
12.0x 10.1x 10.0x
3Q08
44%
45% 8.7x
40% 35%
8.0x
34%
30% 25%
6.0x
20% 4.0x
15% 10%
2.0x
5% 0%
0.0x 2007
3Q08
2007
YTD Sep 2008 ® 2008 EQT – All Rights Reserved Strictly private and Confidential
20
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
21
The Path to Value Creation There are several ways to create value in a portfolio company
Sales Growth
Margin Expansion
Strategic re-positioning
Debt pay down
• Accelerate organic opportunities • Add-on acquisitions to expand product range and/or geographical reach and/or provide synergies
• Operational Improvements • Product mix enhancement
• Equity “Story” Improvement • Consolidation, Critical Mass
• Using the target company’s cash flows to increase the equity component of enterprise value by repaying debt
® 2008 EQT – All Rights Reserved Strictly private and Confidential
22
EQT’s Industrial Acceleration Strategy EQT Industrialists
Industrial Acceleration Industrial Acceleration
Management Team Network
Strategy
Board defines and monitors roadmap for creating shareholder value - Strategic positioning - Internationalization - M&A - Financing issues - Preparation for exit EQT contributes industrial and financial expertise
People
EQT appoints key personnel - The chairman always appointed from EQT network of international experienced industrialists - EQT partner always member of the board as owner but never chairman - EQT active in assisting in the recruitment of first line management - Internationally experienced executives appointed to the board or as consultants
Incentives
Board, management and owners interests are aligned through investments Common mindset established through - Joint business plan - Transparency - Open communication
® 2008 EQT – All Rights Reserved Strictly private and Confidential
23
Exit General EQT has not made a good deal until exit – the goal is to achieve a return of at least 2-4 times investment in three to five years
Company
Market
Buyers
EQT
• Has delivered on the plan? (financials) • Has the right structure? (reporting etc) • More to do? (marginal return)
• Equity Markets • Debt Markets • Competing Offerings
• Many • Willing • Able
• Return vs requirements • Need for exits (fund raising etc) • Portfolio Management issues
® 2008 EQT – All Rights Reserved Strictly private and Confidential
24
EQT Value Creation EQT has historically created value through accelerated revenue growth, increased efficiency and strategic re-positioning Focus on Growth and Efficiency
Historic Breakdown of Value Creation
Proven Ability to Drive Growth
Average growth of all EQT portfolio companies in Europe (1)
20%
100%
80%
42%
Revenue growth
12%
13%
60%
40%
36%
20% 19% 0%
3%
Margin improvements Strategic repositioning Debt pay-down Employee growth
(1)
Includes organic and acquisitive growth. Analysis based on Carl Zeiss having acquired Sola and Dragoco Haarmann & Reimer. If base for these acquisitions is adjusted, EQT portfolio companies recorded an average +10% employee growth, +11.3% sales growth and +18% EBITDA growth
Sales growth
EBITDA growth
® 2008 EQT – All Rights Reserved Strictly private and Confidential
25
Agenda I. Introduction to EQT II. Private Equity - Process - Valuation - Financing - Value Creation & Exit III. EQT Infrastructure
® 2008 EQT – All Rights Reserved Strictly private and Confidential
26
EQT Infrastructure The EQT Infrastructure fund was launched in November 2008
® 2008 EQT – All Rights Reserved Strictly private and Confidential
27
EQT Infrastructure EQT will invest €6–7 billion in infrastructure assets in the next years with a focus on the Northern and Eastern Europe y Fund size: ~€1.2 billion y Focus on Northern and Eastern Europe
– Advising teams in Stockholm, Helsinki, Munich and New York y Medium-sized infrastructure operating assets/companies – control or co-control
positions y Primary targets;
– Regulated basic infrastructure (e.g. power generation, power transmission and distribution, wind power, gas pipelines, telecom) – Concession-based essential infrastructure (e.g. airports, ports, toll roads, rail transport, water and waste treatment facilities)
1. Source: OECD “Infrastructure to 2030 Telecom, Land, Transport, Water and Electricity”
® 2008 EQT – All Rights Reserved Strictly private and Confidential
28
EQT Infrastructure Infrastructure - macro perspective y Global need for new and improved infrastructure
– Rising global population – Focus on competitiveness – Huge investment need (some €52 trillion for basic infrastructure worldwide through 20301) y Privatization important part of infrastructure investment solution - risk split, free up
capital, strengthen competitiveness y Decreased government spending on infrastructure
1. Source: OECD “Infrastructure to 2030 Telecom, Land, Transport, Water and Electricity”
® 2008 EQT – All Rights Reserved Strictly private and Confidential
29
Infrastructure fundamentals Decreased government spending on infrastructure
Source: OECD
® 2008 EQT – All Rights Reserved Strictly private and Confidential
30
® 2008 EQT – All Rights Reserved Strictly private and Confidential
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