Grabbing Your Share of the Private Equity Bonanza
SHOW ME THE MONEY!
© 2008 LG Management Corporation
2008 CEBI Executive Summit
April 24, 2008
LG MANAGEMENT CORPORATION
“Empowering the American Dream”
Current Portfolio Includes . . .
Harry D. Loyle, CFE
7086 Corporate Way
Dayton, OH 45459-4294
Phone: 937-291-1900 ext. 255
Email: [email protected]
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2008 CEBI Executive Summit
April 24, 2008
WHAT IS PRIVATE EQUITY (PE)?
. . . a broad term that encompasses a range of strategies for investing
in companies whose stock is not traded on public stock exchanges.

Venture Capital
 Investment

Buy-out
 Acquisition

usually with control
Special Situation
 Unique

in a new or developing company
opportunity . . . distressed, macro change
Merchant Banking
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2008 CEBI Executive Summit
April 24, 2008
WHY ALL OF THE EXCITEMENT WITH PE?
10 Year Return
S&P 500
Private Equity
20 Year Return
0.00%





5.00%
10.00%
15.00%
Deal Flow Approaching $200B per QT
Appearance of Higher Transaction Values
Limited Transparency and Public Information
Tax Treatment: Debt – Capital Gains – Public
Concern with Wealth Distribution Disparity
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2008 CEBI Executive Summit
April 24, 2008
HOW DO PE GROUPS MAKE MONEY?

Exit Strategies
 Partial

Sale, Complete Sale, Recapitalization
Carried Interest
 Percentage

of transaction profits (80/20 split)
Management Fees Charged to . . .
 Minority
Investors (typically 1.5% to 2.0%)
 Portfolio Company (shared with Minority Investors)

Transaction Fees
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2008 CEBI Executive Summit
VALUATION - QUANTITATIVE
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Book Value
Liquidation or Net Asset
Value
Comparable Companies
Earnings Multiple
Discounted Cash Flow
Precedent Transactions or
Replacement Value
April 24, 2008
EVALUATION - QUALITATIVE
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People VALUES
“Warren Buffet” Business
Model Understanding
Professional Management
Clean, Straightforward
Structure and Governance
Other Investors
VISION and Business
Opportunities
WHAT'S MY COMPANY WORTH? TO WHOM?
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2008 CEBI Executive Summit
April 24, 2008
HOW DOES BUSINESS GENERATE VALUE
Company Operating
Performance



Reinvestment
Net Profit (NOI)
EBITDA: Earnings Before
Interest Taxes
Depreciation and
Amortization
Post-Debt Cash Flow

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
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Personal Benefit
W-2 Income
Standard of Living (SOL)
Owner Distributions or
Withdrawals
∆ Equity: Change in
Equity Over Time
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2008 CEBI Executive Summit
April 24, 2008
TYPICAL ACQUISITION TRANSACTION




CASH for Equity Sale (±80%)
Opportunity for “Second Bite of the Apple” (±20%)
Potential for Continued Employment
Potential Equity for Management Team
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2008 CEBI Executive Summit
April 24, 2008
TYPICAL ACQUISITION PROCESS

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Decision on Consulting Representation
Prepare Confidential Investment Memorandum
Research, Select and Submit to PE Firm Options
Receive Preliminary Indication of Interest
Meet and Review Detailed Information
Receive Letter of Intent (LOI: price, structure, etc.)
Due Diligence: Legal, Accounting, IT, Customers, etc.
Review and Negotiate Definitive Acquisition Agreement (APA)
PE to Arrange Debt Financing (Your Obligations?)
Completion of Due Diligence and Credit Agreement(s)
Negotiate Any Management Employment Agreements
Exercise Definitive Agreements
Settlement . . . Back to Operations!
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2008 CEBI Executive Summit
April 24, 2008
PE MANAGEMENT STRATEGIES
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Clear Exit Goal: Buy – Fix – Grow – Sell
With a 3 to 5 Year Horizon Driving Change is Paramount
EVERYONE Knows You’re On a Sprint
Compensation is Clearly Tied to the Goal
Often Managers have “Skin in the Game”
Back a Superb Management Team and Liberate Them
The Board is “On Board” and Focused and Involved
Private versus Public Reduces QT Whipsaws and the
Reporting and Stock Market Attention Required
The Objective is Clear . . . CASH
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2008 CEBI Executive Summit
POTENTIAL ADVANTAGES
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CASH
Marketplace Valuations
“Professional” Buyers
Potential for Continued
Management Involvement
Management Team Equity
Additional Resources: Money,
People, Knowledge, etc.
Additional Opportunity to Sell
April 24, 2008
POTENTIAL DISADVANTAGES
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It’s NOT your company
anymore . . . “Yes Boss”
“Professional” Buyers
Extensive Due Diligence
Financing Contingency
Management Accountability
Relatively Short Term Focus
Transactional Focus
CONSIDERATIONS FOR A PE TRANSACTION
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2008 CEBI Executive Summit
April 24, 2008
PICKING THE “RIGHT” PE FIRM
People VALUES
 Industry Experience
 Situational Experience
 Typical Size of Portfolio Companies
 Management Style: Active versus Passive
 Planned or Discussed Exit Strategy
 Capital Structure: Debt versus Equity %
 Willingness for Additional Cash Injection

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2008 CEBI Executive Summit
April 24, 2008
LG MANAGEMENT CORPORATION
Portfolio Company Transaction Options:

1. Lending / Financial Investments



2. Operating Partnerships (OP)



Marriage of Strengths . . . Management & Operations
50% Financial and 50% Equity Investment
3. Acquisitions / Active Management



Creative Non-bank Lending with Security
Interest Coupled with Participation and/or Equity Kicker
Active OR Competent in Daily Management
100% Financial and Minimum of 80% Equity
Plus . . . Company Consulting and Personal Coaching
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2008 CEBI Executive Summit
April 24, 2008
LG TRANSACTION CONSIDERATIONS


Make the PEOPLE Decisions First
Portfolio Composition and Balancing
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

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ROI: Internal Rate of Return Objective of 25% to 35%
Transaction Exposure of 5% to 10% of Portfolio
Bias Toward Operating Partnerships
Company and Concept Search Criteria




Existing Management and Structure Considerations
Understandable Product and Business Model
Our Ability to Add Value through the Transaction
Management or Operations Upside (with Discount)




Financial Turnaround
Relationship Challenges: Vendors, Franchisees, Associates, etc.
Organizational Improvements: HR, etc.
Synergy with Existing Companies or Brands



Overhead Reduction
Real Estate
Complementary Business: Consumer or Company / Brand
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2008 CEBI Executive Summit
April 24, 2008
NON-TYPICAL ACQUISITION TRANSACTION
Moto Photo, Inc.
(NASDAQ: MOTO)
PUBLIC
to
PRIVATE
363
Bankruptcy
Filing
In 2001 Moto Photo was Hit by “The Perfect Storm” . . .
1. Photography Industry Revolution
2. Macro Economics
3. Cumulative Poor Company Financials
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2008 CEBI Executive Summit
April 24, 2008
POTENTIAL TRANSACTION CONSTITUENTS
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
General Vendors
Critical Vendors
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Kodak
Agfa & Trebla
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Board of Directors
Senior Management
Company Associates
Franchisees
Area Developers
Master Licensee (CAN)
Building Partnership
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FUJI Photo Film USA
Bank(s)
Retail Consumers
Trade Competition
Retail Landlords
Personal

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Family
Business Partners
Post-Transaction


City and County
Business Community
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2008 CEBI Executive Summit
April 24, 2008
TRANSACTION STRUCTURE & FINANCING


Equity (LG Management Corporation at 75%)
Area Developer Participation Equity (6 entities at 25%)


Critical A/P Vendor into Debt Assumption


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
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KODAK – Discounted for Non-secured Creditors
Agfa & Trebla – Face Value
Mezzanine Financing (LG Management Corporation)
Fifth Third Bank Financing


Personal Loan to Facilitate an AD Participant
Working Capital – 2 Different Term(s) Loans
Building Mortgage Financing
Montgomery County ED/GE Grant
Vendor Trade Payables
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2008 CEBI Executive Summit
April 24, 2008
Show
Me
The
Money!
IS A PRIVATE EQUITY LIQUIDATION TRANSACTION RIGHT FOR YOU?
The good news is that you do not have to wait for a PE firm to swoop into
your organization. By using private-equity strategies you can improve
your results and become more successful, starting right now!
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