GTCR A Fund Above the Rest Conference Annual Meeting 2010 February - - PowerPoint PPT Presentation

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GTCR A Fund Above the Rest Conference Annual Meeting 2010 February - - PowerPoint PPT Presentation

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GTCR A Fund Above the Rest Conference Annual Meeting 2010 February 25, 2011 April 28, 2010 1 Confidential Confidential 1 www.gtcr.com www.gtcr.com 2 Confidential 2 www.gtcr.com Fundraising Troubles Mean Danger for PE Funds

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GTCR Annual Meeting 2010 April 28, 2010

A Fund Above the Rest Conference

February 25, 2011

www.gtcr.com Confidential

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  • “Fundraising Troubles Mean Danger for PE Funds”
  • Institutional Investor
  • “One of the Least Amenable Fundraising Environments Ever”
  • Buyouts
  • “The Grimmest Capital-Raising Environment in Years”
  • Private Equity Beat
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A Look at the Next Five Years

  • Historical Snapshot
  • Current Environment
  • Realistic Scenarios for the Future
  • What Investors are Looking for
  • GTCR’s Blueprint for Success
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A Snapshot of the Last Thirty Years

Source: Steven N. Kaplan (Chicago Booth), Pitchbook Data, Inc., GTCR.

100 200 300 400 500 600 700 $0 $50 $100 $150 $200 $250 $300 $350 Average Number of U.S. PE Firms by Decade Commitments to U.S. Private Equity Partnerships

($ in billions)

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What is Happening Today

Source: Prequin, Pitchbook Data, Inc., GTCR. Note: Cumulative Total Overhang for 2010 represents data through January 2011. Investment period expirations assume a 5-year commitment period for new investments.

PE Callable Capital Reserves / Dry Powder vs. Investment Period Expirations

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Lots of Money Looking for Returns

  • Private equity dry powder (U.S.) = $446 billion
  • Cash of non-financial S&P 500 over $1 trillion
  • Both can and will be levered
  • Financing is available and CHEAP
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Acquisition Capital vs. GDP Very High!

Total buying power of $4.0 trillion represents ~34% of Non-Government GDP!

Source: GTCR.

  • 1. The S&P 500 had a Total Debt / EBITDA ratio of ~1.8x as of 9/30/10. Assuming 3.0x total leverage, the S&P 500 has an additional $1.6bn in buying power.
  • 2. PE leveraged buying power assumes 35% equity minimum investments.

($ in billions)

$3,989 Corporate balance sheet cash Addt’l corp. leveraged buying power(1) Private equity dry powder Addt’l PE leveraged buying power(2)

Non-Government Expenditures

$11,830

$1,045 $1,598 $446 $900

$0 $3,000 $6,000 $9,000 $12,000 $15,000 Buying Power U.S. Non-Government GDP

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Prices Will Continue to Go Up

Average LBO Transaction Multiple

Transaction Multiple Source: S&P Leveraged Lending Review, “Large Corporate LBO Loans”.

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Expect a Lot of Private Equity Exits in the Near Term

2,315 3,039 3,883 4,808 5,433 5,736

1,000 2,000 3,000 4,000 5,000 6,000 7,000 2004 2005 2006 2007 2008 2009 2010 2008 - 2010 2005 - 2007 2000 - 2004

5,994

Number of U.S. PE-Backed Companies

Source: Pitchbook Data, Inc.

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Remember the Stairs?

Source: Prequin, Pitchbook Data, Inc., GTCR. Note: Cumulative Total Overhang for 2010 represents data through January 2011. Investment period expirations assume a 5-year commitment period for new investments.

PE Investment Period Expirations

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How is It Going to Play Out?

“Re-ups are being closely scrutinized, and managers will need to think carefully about their terms and conditions in addition to their proposed strategies in

  • rder to achieve success.”

– Tim Friedman, Prequin, January 12, 2011

“Increased competition will lead to a significant number of firms failing in the fundraising market and quietly ceasing to exist once their current vehicles are liquidated in the next few years.”

– Tim Friedman, Prequin, January 12, 2011

“Funds haven’t performed as well as advertised, and the jury is still out on mega buyouts… In 2006, managers were showing 25 percent returns in marketing materials. Now they have to pitch for commitments with much less impressive numbers.”

– Lawrence Schloss, CIO for NYC Pension Fund, January 24, 2011

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PE Industry Gets Reshaped in the Next 2 – 3 Years

  • Everyone survives
  • Fund sizes go down
  • Pressure on GP organizations
  • Hard to differentiate
  • Returns rebound modestly from poor

levels of 2005 – 2008

  • Firms culled
  • Winning firms grow capital and people
  • Firms can differentiate
  • Returns rebound to levels seen in

vintages between 1995 – 2005

Muddle Along Winners Emerge

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The Case for Muddling Along

  • Recovery of S&P 500
  • Recent fundraising success
  • New sources of capital
  • Big firms targeting less capital
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A Bull Case for “Winners Emerge”

  • 45% of firms that launched fundraising since the beginning of 2008 have not hit

target

  • LPs doing more diligence than ever:
  • Returns and return drivers
  • Strategy
  • Organization
  • Per The Deal Magazine, the following funds are considered imperiled:

($ in billions)

Imperiled: Sponsors Least Likely to Survive Sponsor Year Fund Closed Size % Invested Value / Cost IRR(1) J.C. Flowers & Co. LLC 2006 $7.0 100% 0.36 (39.7%) Candover Partners Ltd. 2005 $4.1 82% 0.50 (26.4%) Terra Firma Capital Partners 2007 $7.3 64% 0.27 (47.7%) Elevation Partners 2004 $1.9 80% 0.82 (9.9%)

Source: The Deal Magazine.

  • 1. Estimate as of 3/31/10.
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What are Investors Looking for?

  • Great returns
  • Differentiated strategy
  • Well-run organization
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Great Returns

  • Either you have them or you don’t
  • Surprisingly low realizations
  • Return drivers matter
  • Are the drivers replicable?
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Differentiated Strategy

  • Sourcing deals
  • Having an edge
  • Differentiated knowledge
  • Differentiated performance
  • Pretty hard
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Well-Run Organization

  • Investment teams
  • Investment process
  • Portfolio management
  • Back-office
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GTCR’s Blueprint for Success:

  • Focus on Great Returns
  • Differentiated Strategy
  • Well-Run Organization
  • Ratable pace
  • Bias toward contrarian
  • Leaders Strategy
  • Human capital development
  • Building investment teams
  • Teams interaction with IC & functional areas
  • Partnership model
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A Fund Above the Rest

  • Emerge as winner
  • Dominate a strategy
  • Attract best from others

Winners Emerge

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Summary

  • PE industry is under pressure
  • Industry will get re-shaped
  • Shake-out?
  • Winners will emerge