BUILDING VALUE IN THE FIRM BUILDING VALUE IN THE FIRM 1 BUILDING - - PowerPoint PPT Presentation

THINK TANK: Business Models Institutionalization of the Hedge Fund Industry

Succession Planning and Exit Strategies: Implications and Challenges April 20, 2006 November 2005

Cary J. Meer Kirkpatrick & Lockhart Nicholson Graham LLP 1601 K Street, NW Washington, DC 20006 (202) 778-9107 Franklin H. Kettle Colchester Partners LLC 175 Federal Street Boston, MA 02110 (617) 896-0200

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BUILDING VALUE IN THE FIRM BUILDING VALUE IN THE FIRM

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BUILDING VALUE IN THE FIRM

Second Generation and Succession Planning

Must have 2nd/3rd Generation Must be in place and functioning well for a period of time 1st/2nd/3rd Generation should cover all required functions (i.e. investing, operations, distribution (sales and service), compliance, business management) Single Generation Firms have limited value to third parties

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BUILDING VALUE IN THE FIRM

Enfranchising the Second Generation

Equity Participation Cash Compensation Opportunities Deferred Compensation Opportunities Firm/Product Strategy Leadership Opportunities Quid pro quo for combination of the above are Business Protection Covenants

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BUILDING VALUE IN THE FIRM

Develop a Business Plan

Correlation to Success and Growth Promotes a focus on People, Product, Distribution and Business Issues Run the Firm as a Business

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BUILDING VALUE IN THE FIRM

Develop Additional Product Strategies

One product strategy firms have less value to third parties unless a specialized niche Additional products can be offshoots of original or new through lift-outs

• f teams/people (examples)

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BUILDING VALUE IN THE FIRM

Develop Additional Distribution Channels

Institutional, High Net Worth Various sub-markets within these channels Direct, Indirect through intermediaries (brokerage firms and consultants) Domestic, International

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BUILDING VALUE IN THE FIRM

Protect Intellectual Property

Product Strategies Proprietary systems Clients and Prospects

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Structural Matters

Separate Governance from Economics Separate Compensation from Ownership Distributions Establish an objective system for rewarding people Estate/tax planning

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Further Structural Matters

Choice of the Firm Entity(s) matters now and later (C corps, S corps, LLCs and limited partnerships) Get good advice and address issues, if any, now before the business is very valuable Choice of Ownership Entity(s)

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EXIT STRATEGIES EXIT STRATEGIES

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EXIT STRATEGIES

Initial Public Offering/Spin-Off

Realistic or not? Volatility of Revenues and Earnings Size constraints Public Reporting Sarbanes-Oxley and other regulatory issues

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EXIT STRATEGIES

Sale to a Strategic Partner Issues to Consider

What do they bring other than money? (Distribution, infrastructure) Synergies are almost always overstated 100% Sale vs. Majority Sale vs. Minority Sale Degrees of Autonomy vs. Integration

Investments Operational Distribution Major business decisions

Managing the Process Managing the client/investor perception

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EXIT STRATEGIES

Sale to a Strategic Partner Pricing and Structure

Pricing

Recurring Revenues and EBITA Performance Fee Revenues and EBITA

Payment Structures

Upfront Consideration Contingent, Earn-out Consideration Consideration for Performance Fee EBITA

Liquidity Mechanisms for Minority Equity Retained

Puts and Calls Timeframes Pricing

Governance

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EXIT STRATEGIES

Sale to a Strategic Partner Social Issues and Personal Commitments

Meeting of the Minds Expectations and Responsibilities Reporting Relationships Integration/Autonomy for all functions Employment Agreements Non-competes/Non-solicitations of clients and employees

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EXIT STRATEGIES

Internal Buyouts for Ownership Transitions

Pricing Structures Timeframes Financing

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EXIT STRATEGIES

The Role of Private Equity for Ownership Transitions

Pricing Structures Private Equity Exit Plan