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Transcript of Private Equity
Leveraged Buyout As we take you through the history of Private Equity, leveraged buyouts are the most common investments where failed transactions are most imminent because of their risk. Private Equity activities began long before it became an asset class 1978—Prudent Man Role Increase in private equity assets from $39m in 1977 to $570m in 1978 What is Private Equity?
PE is an asset class, and thus an asset to be held for the PE-firm.
PE consists of equity securities from companies that are not publicly traded on the exchanges. Leveraged Buyouts are investments in private equity with own funds plus leverage with debt from investors.
Investments are typically in mature firms with operating cash flow. Venture Capital investments are made within newly started firms, and thus carry substantially more risk.
Hence the expected return for investors must be higher. The PE-fund invests in a firm it finds suitable and buys a large part of its equity (shares)
Realization / revenue of the investment:
Cash flow / dividends
Resale though secondary markets (The secondary markets are highly illiquid, and sales have to be approved by the fund manager) 1993 - Fall of First PE Boom
Drexel Burnham Lambert collapses, leading to the collapse of the high yield market
Financing Institutions Reform, Recovery and Enforcement Act
Emergence of ‘white collar’ fundhouses Rise of Second PE Boom
White collar funds
Dot Com bubble
Venture Investments 1.087% of GDP
PE Industry valued at $305.7 billion 1981 - Economic Recovery Tax Act
Lowered top capital gains tax rate from 28% to 20% 1982 - Rise of First Private Equity Boom
Corporate Raiders and Hostile Takeovers
Junk Bond market (designed by Michael Milken)
First specialized secondary funds Subjected to the leveraged buyout boom of the 80’s and 90’s (Sold five times from 1986-2003)
Debt increased from $164 million to $1.3 billion during this time Thomas H. Lee Partners (THL) was the most infamous purchase of Simmons in 2003
THL strapped Simmons with multiple debt issues
This debt was used for dividend recapitalization to cover THL’s original investment Early 2000s - Fall of Second PE Boom
Burst of Dot Com Bubble
10 year interest rates fall, increase credit spread
Return of the High Yield market 2003 - Rise of Third PE Boom
Dubbed the Golden Age of Private Equity
Huge leveraged buyouts 2007 - End of Third PE Boom
Mortgage Market Crisis spilled over to High-Yield Market Private Equity in 2012 Mr. Steven Begleiter, Senior Principal at Flexpoint Ford
On Risk Management:
"The best way to manage risk of using too much leverage is that whenever we look at an investment we try to construct a downside case."
"People overlook their true debt capacity in a stress scenario and their company is over levered."
On Due Diligence:
"We hire our own accountants to do what we call a 'two year' analysis, where they go take apart the company's historical financials."
"We'll do background checks on the people who run the company and hire lawyers to review their founding documents." 10/17/2006 - $5.4 billion LBO
Purchased by joint venture of Tishman-Speyer Properties (TSP) and the real estate investment arm of BlackRock from MetLife
Predicted tripling of property value within five years 2010 - TSP Mortgage Loan Default
Largest commercial mortgage default in history
Property value decreased by 65% due to:
Legal battle between tenants and MetLife
Overaggressive valuation of purchase price 2012 - Class Action Lawsuit settled against MetLife Stuyvesant Town-Peter Cooper Village Simmons Mattress