FEI Week 7 VC & PE Industry BPP BUSINESS SCHOOL BPP BUSINESS - PowerPoint PPT Presentation

FEI Week 7 – VC & PE Industry BPP BUSINESS SCHOOL BPP BUSINESS SCHOOL

Capital Sources for New Ventures • 3 Fs : Founder/ Family/ Friends - Most frequent source for startup businesses • Angel Investors - Wealthy individuals, typically fellow entrepreneurs, willing to invest in the very early stages of a venture • VC/ PE funds - Fund managed by professional investment managers; typically invests after business is somewhat established 2 BPP BUSINESS SCHOOL

Angel Investors ‐ De fini tion • Wealthy individuals (net worth over $1 million) • Cited by researchers as the most important source of capital for startup firms • Amount of capital provided by angels estimated to be 5 ‐ 11 times the amount provided by VCs • Estimates vary, but reasonable assumptions are approx.: • Provide capital to 50,000 companies • 400,000 angels provide $50 billion in capital • Account for 70% of capital for new ventures • Angels invest their own money; VC/ PE raise funds 3 BPP BUSINESS SCHOOL

Angel Investors ‐ Characteristics • Diligence Process: “It’s about 70% just gut feeling and 30% financial analysis.” • Angels primarily assess the entrepreneur, not the business plan; building trust between the entrepreneur and the potential angel is key. • Often angel investors, especially lead angels, become co‐ founders, and very often an angel functions as a full or part‐ time employee. • Angel investors value non‐financial benefits of new venture investing more than VCs and general investors do. BPP BUSINESS SCHOOL

Angel Investors ‐ Characteristics “ I’m not in it for a fast buck. Besides, it’s cheaper and more fun than buying a yacht. I enjoy investing in companies and getting involved; it’s a real buzz. ” Large percentage of angel investors are willing to accept a lower return in exchange for non‐financial benefits • Socially benefi ting products • Fun to be part of the company • Creation of local jobs • Interacting with highly regarded investors • Company committed to social ideals support • Exciting investment ideas 5 BPP BUSINESS SCHOOL

Difference: Angel Investors vs. VC/ PE Business Angels Venture Capital Funding Sources Angel's own money Investor Number of deals per year 1 every two years 5-10 years Typical investment per year $25,000 - 250,000; Average $50,000 - 75,000 $1 million - $10 million; Average $4 million Company Stage Small, start-up, early stage Larger, expansion stage Geographic Focus Usually close to own location Usually nationwide; large payers international Industry Focus No focus, but prefer industries they know Often focus on specific indutries; or have dedicated indutry groups Source of deals Other angels, friends, business contacts Proposals submitted, other VC's Decision Maker Professionals, MBAs, committees, 40-year- Individual, experienced entrepreneur, olds personal, 50 years old Analysis/ Due Dilligence Minimal, informal, subjective, judgement Extensive, formal, analytical, spreadsheet Investment Structure Simple, common stock Complex, Convertible Preferred Stock Role/ Involvement Hands-on Strategic, Board Seat Investment Time/ Horizon Longer, five or more years Shorter, three to five years Exit/ Harvest Strategy Less important, long-term investment horizon Important, IPO or sell company Return on Investment Expectation 20-30% but often don't have predetermined Expected 30-50% ROI ROI expectation 6 BPP BUSINESS SCHOOL

VC vs. PE De fini tion Private Equity • Asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange • Investment strategies in private equity include: leveraged buyouts, venture capital, growth capital, distressed investments, and mezzanine capital Venture Capital • A subcategory of private equity; investments made, typically in young, emerging, less mature companies, for the launch, early development, or expansion of a business • Most often applied for new technology, new marketing concepts and new products 7 BPP BUSINESS SCHOOL

PE Investment Strategies Leveraged Buyout • Acquisition of a company, business unit or business asset from the current shareholder with the use of financial leverage • Targets are usually mature companies, generating operating cash flow • Sponsor provides part of capital required and raises acquisition debt • Historically debt proportion of LBOs range from 60% ‐ 90% Venture Capital • Most suitable for businesses with large up‐front capital requirements, which cannot be financed by cheaper alternatives, such as debt • Usually associated with fast‐growing technology and biotechnology fields, but it is also used for more traditional businesses 8 BPP BUSINESS SCHOOL

PE Investment Strategies (cont.) Growth Capital • Equity investments in relative mature companies looking to expand or restructure operations, enter new markets or finance an acquisition • Companies usually mature, generate revenue and operating profits, but unable to generate sufficient cash to fund expansion or acquisition • By selling part of the company to private equity, the owner can take out some value and share the risk of the growth with partners Distressed and Special Situations • Investments in equity or debt securities of financially stressed companies, comprising two sub‐categories: • “Distressed‐to‐Control”/ “Loan‐to‐Own”, where the investor acquires debt in hopes to emerge in control of the companies equity after a corporate restructuring • “Special Situati ons”/ “Turnaround”, where investor is providing debt and equity to companies undergoing operational or financial challenges 9 BPP BUSINESS SCHOOL

PE Investment Strategies (cont.) Mezzanine Capital • Subordinate debt or preferred equity that represents the most junior proportion of the capital structure, that is senior to common equity • Often used to reduce the amount of equity capital required to finance a leveraged buyout or major expansion • Allows small companies that don’t have access to the high‐yield market to borrow additional capital beyond the level of traditional bank loans • For the increased risk, mezzanine debt holder require a higher return for their loan than secured or senior lenders 1 0 BPP BUSINESS SCHOOL

PE Investment along Corporate Life Cycle 1 BPP BUSINESS SCHOOL 1

Alternative Asset Classes 7‐10 years Investment Time Horizon 3‐7 years 1‐3 years Quar terly 1 2 BPP BUSINESS SCHOOL

PE – Risk and Diver sifi cation 1) Long Term: 30 years; Short Term: 19 years; 2) Long Term: 24 years; Short Term: 16 years; • Precise standard deviation is difficult to measure • But strong evidence of risk reduction through asset allocation 1 3 BPP BUSINESS SCHOOL

Private Equity – Portfolio Asset Allocation 1 BPP BUSINESS SCHOOL 4

PE/ VC Industry Europe # of Players Total of 1,696 active private equity and venture capital firms  in 2010 709 venture firms  505 buyout firms  74 growth firms   408 generalist firms  47 PE firms with offices elsewhere in the world made investments in European companies 1,696 active private equity and venture capital firms  managing € 523bn of capital from Europe 1 5 BPP BUSINESS SCHOOL

PE/ VC Investments as % of GDP Source: EVCA Year-Book 2011 1 BPP BUSINESS SCHOOL 6

Funds Raised Source: EVCA Year-Book 2011 1 BPP BUSINESS SCHOOL 7

Funds Raised – Final Closing Source: EVCA Year-Book 2011 1 BPP BUSINESS SCHOOL 8

Funds Raised Challenges: • 2010 saw no substantial fundraising recovery • Uncertainty remained on the economic recovery in Europe • LP’s were still assessing their strategies on private equity • Fundraising increased just 13% to $20bn, far from the peak of $112bn in 2006 • Commitments from pension funds and fund‐of‐funds, which decreased dramatically in 2009, stabilized in 2010 at $2bn • Banks commitments decreased from 19% of total funds in 2009 to 9% of total in 2010 1 9 BPP BUSINESS SCHOOL

Investments Source: EVCA Year-Book 2011 2 BPP BUSINESS SCHOOL 0

Investments – VC by Sector Source: EVCA Year-Book 2011 2 BPP BUSINESS SCHOOL 1

Investments – Buyout & Growth by Sector Source: EVCA Year-Book 2011 2 BPP BUSINESS SCHOOL 2

Investments by size of company • 80% of companies attracted PE capital in 2010 were SMEs (Small and Medium Enterprises) • More than 3,900 SMEs were backed by PE houses, attracted one‐fi fth of the total PE investment in 2010 • 70% of SMEs attracted VC capital, 30% received buyout and growth financing 90% in SMEs • VC investment: 20% in SMEs • Buyout investment: 60% in companies with more than 1000 employees 2 3 BPP BUSINESS SCHOOL

Investments by # of employees Source: EVCA Year-Book 2011 2 BPP BUSINESS SCHOOL 4

Divestments Source: EVCA Year-Book 2011 2 BPP BUSINESS SCHOOL 5

Divestments by Exit Method Source: EVCA Year-Book 2011 2 BPP BUSINESS SCHOOL 6

Largest Private Equity Firms 1. Goldman Sachs Principal Investment Area 2. The Carlyle Group 3. Kohlberg Kravis Roberts (KKR) 4. TPG 5. Apollo Global Management 6. CVC Capital Partners 7. The Blackstone Group 8. Bain Capital 9. Warburg Pincus 10. Apax Partners 2 7 BPP BUSINESS SCHOOL

Legal Structure PORTFOLIO COMP ANIES 2 BPP BUSINESS SCHOOL 8

PE Partnership Structure 2 BPP BUSINESS SCHOOL 9