An Introduction to Private Equity Robert Burgess Director Montagu Private Equity www. montaguequity. com
Questions I will (try to) answer: 4 Who is Montagu? 4 What sort of deals do we do? 4 How are we different? 4 How are deals structured? 4 How do we deal with our portfolio? 4 How do we exit? 4 What is like to work for a PE firm?
My background 4 4 Degree in Business Administration at Bath (1990 – 1994) Joined HSBC Investment Bank on graduation 4 Two year graduate training programme, including six months in private equity unit 4 Placed in Project Finance in 1996 Moved across to PE in 1999 to work on UK deal origination Became a director this year
Profile of Montagu Private Equity 4 4 4 Currently investing a € 2. 3 bn fund raised in 2005 Focussed on £ 100 m - £ 750 m+ buy-outs across the UK, France, Germany, Scandinavia We are Britain’s biggest car auctioneer, the maker of 90% of F 1 gearboxes, Germany’s biggest maker of sausage casings and France’s biggest publisher of racing newspapers
What is the history of Montagu? 4 4 4 Formed in 1968 as a division of Midland Bank. Mainly growth capital. Operating as HSBC Private Equity by the mid 1990 s. Focus moved to £ 20 m-£ 50 m buy-outs. 81% stake sold to employees in 2003. HSBC retains 19% and remains a significant investor. Business renamed Montagu Private Equity. Average deal size £ 250 m. 35 executives plus support staff
The Basics
What do we do ? 4 4 Raise money from pension funds, endowment funds, etc Leverage this money with bank debt and use it to finance management buy-outs of, in our case, mature industrial / service businesses 4 Buy around 4 businesses per year 4 Develop each business over 2 -4 years 4 Sell the business and return the profits to our investors
Venture Capital v Private Equity 4 Private equity is NOT venture capital: 4 4 Substantially lower risk than start-ups or growth capital Management buy-outs / ins, ‘take privates’ of PLCs, secondary buy-outs Usually established and cash generative Able to support heavy debt burden (usually 60% of the purchase price)
Who are the major players in PE? 4 4 4 Sub £ 100 m deal size – ECI, Graphite, Gresham, Isis, Sovereign Capital, Exponent Sub £ 750 m – Montagu, Bridgepoint, Duke Street, Lloyds TSB, 3 i £ 750 m+ - Apax, BC Partners, Cinven, CVC, Doughty Hanson, KKR, Permira, TPG
The Montagu Way
Where do our deals come from ? 4 4 4 In order of our enthusiasm: PLCs selling assets to refocus on the core business or to reduce debt Private companies with succession issues or where owner wants to move on 4 MBOs where the original backer wants to exit 4 Public companies looking to leave the market
Why is Montagu different ? 4 4 4 We only support incumbent management teams with a successful track record Looking for “the man with the plan” …. …. . who works in a business that is No. 1 or No. 2 in its market, is stable and cash generative We do not do turnarounds or MBI’s Very low risk approach – until last year our loss rate was just 4% (then we had a problem …)
The Montagu model day-to-day 4 4 Management executes its business plan We sit on the board but have minimal active involvement as long as the plan is hit Regular reporting to banks, with covenants to be met Acquisitions / investments considered – we are happy to invest more money
PE firms are NOT all the same …. 4 4 Some PE firms change the CEO in 90% of the businesses they buy Some PE firms are very “hands on” operationally This can be hugely successful – i. e. Debenhams. It certainly leads to more volatile returns to investors – but this is OK for most of them! Montagu deals tend to cluster at 2 -2. 5 x equity return. Few massive wins, very few disasters.
Structuring a Deal
How it works 125 Equity Value % 100 75 Montagu loan stock 40 Senior & junior debt 0 Failure Start Success
Stability = Leverage 4 4 4 Typical price paid for a UK PE deal is 8 -10 x EBITDA Typically funded with: 4 Senior debt to 4 x EBITDA 4 Subordinated debt to 5. 5 x EBITDA 4 Montagu loan stock to 99% 4 1% pure equity Management only invest in the pure equity. Usually £ 50 k - £ 100 k each for 10% - 15% in total.
How the finance is sourced 4 4 4 Senior debt: 4 3 rd party - CIBC, JPM, Mizuho, HBOS etc 4 3 tranches, 7 -9 years, 2%-2. 75% margin 4 Back-ended repayment Subordinated debt: 4 From bank or mezzanine / hedge fund 4 9 year maturity, bullet repayment 4 14%-16% coupon Montagu loan stock: 4 Coupon of 10%-12%, mostly rolled up
On a £ 220 m deal sold for £ 275 m …. 4 Montagu receives loan stock + 85% of equity gain = £ 122 m 4 3 year IRR of 25% on our investment of £ 62 m 4 Management share £ 7. 5 m (15% of equity gain)
If it all goes wrong …. . 4 4 4 Banks have right to take control if interest payments or covenants are not met Some flexibility but ultimately we have little choice but to replace management and restructure the debt Our equity value can be wiped out relatively easily
Case Study
The story of a deal 4 4 4 Dignity Caring Funeral Services UK’s leading undertaker (500 sites) and crematorium operator (20 sites) £ 20 m+ operating profit when we bought it in 2002
History pre-deal 4 4 4 1994 – US funeral group SCI enters UK and acquires the two main quoted players, Great Southern Group and Plantsbrook Group 1998 – SCI encounters problems in US due to high debts and in UK over well-publicised customer service failings 1998+ - Peter Hindley, well respected UK funeral industry executive, brought in to fix UK operations 4 2000 – Montagu approaches Hindley for first time 4 2002 – Business acquired for £ 235 m inc costs
The UK funeral services industry 4 4 Funeral directors provide services to bereaved including collection of deceased, viewing of the deceased, arranging funeral, disbursements and arranging memorials Co-Op has 18% share, Dignity 12%, independents 70%
Unusual market dynamics (1) 4 4 4 Market is highly stable – death rate is steady and predictable 70% of sales from referrals from family, friend, hospital, priest, etc. This makes it hard for new entrants to make an impact. Minimal price comparison or competition – 92% approach only one person
Unusual market dynamics (2) 4 4 4 Heavy operational gearing – low marginal cost per funeral but need to cover fixed cost of premises, staff, cars etc. Each additional funeral is therefore highly profitable. Major benefits from owning multiple sites in one area, given that the average undertaker only does two funerals per week Only Dignity and Co-Op can offer pre-paid, pre-arranged funerals since people move home, requiring national coverage
Why Montagu liked Dignity 4 4 4 Dignity had predictable and resilient earnings 4 Death rate x market share x average revenue per funeral = turnover Dignity is growing revenues and profits 4 5% pa historic EBITDA growth Dignity was a highly leverageable asset 4 Pre-completion indications that a £ 250 m refinancing was possible
Why it was right for our fund 4 4 4 Low risk investment 4 Resilient, predictable, not affected by economic sentiment Biggest issue was no obvious exit 4 However, refinancing was a possibility Under the refinancing case we expected a five year IRR of between 23% and 29%
Outcome 4 4 MBO @ £ 235 m (inc. costs) in February 2002 4 7. 8 x historic EBITDA Refinanced in December 2002 @ £ 250 m 4 Returned 92% of our original investment Exited through an IPO in April 2004 @ £ 394 m 4 IRR of 91% 4 Money multiple 2. 8 x 4 9. 9 x historic EBITDA Shares doubled since we sold out ….
Working for a PE firm
How are we structured ? 4 4 4 7 execution Directors (3 in London) each with 1 -2 Investment Directors / Investment Managers in support At four deals per year each team will complete one deal every two years on average Dedicated origination, portfolio support and investor relations units in London
What sort of people are we ? 4 4 All firms have different cultures – finding a match is key Firms can be banker-driven, strategy consultant-driven, industrialist-driven Smaller than you think – we have only 35 executive staff Older than you think – unlike investment banks, entry age (for us, anyway) is 28 -30
The way we hire has changed …. 4 4 4 Typically, an undergraduate would join KPMG, qualify, move internally to tax or PE advisory, work on a Montagu deal, impress us, get hired In the last three years we have moved to hiring top flight MBAs (Harvard, Insead) with pre-MBA experience at an investment bank or consultancy Why change? Are we getting better people?
Other firms have different models 4 4 4 Some run an analyst pool – a two year contract post Uni with a view to moving on to an MBA. Some will return, others will join another firm or change career. Smaller funds still pick up accountants, bankers, etc. Little undergraduate recruitment into execution. (perecruit. com is a good site) Core skill is administration, marshalling 100 lawyers, accountants, pension consultants, environmental consultants, etc to pull together feedback for an investment case
Is it good money ? 4 4 Main driver is ‘carried interest’ – a 20% profit share paid fund by fund Montagu’s current fund (3 -4 years of investment) is € 2. 3 bn. If we double our money, the ‘carry’ will be € 460 m. Tax rate is 10%. Bulk of profit share retained on deals done during your tenure even if you leave However …. requires a long-term horizon. Our 2005 fund is unlikely to pay anything until 2010. New joiners will rely on basis / bonus until then.
An Introduction to Private Equity Robert Burgess Director Montagu Private Equity www. montaguequity. com
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