SLIDE 1
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The Industrial Sector Through the Eyes
- f a Private Equity Investor
2
The Industrial Sector Through the Eyes of a Private Equity Investor - - PowerPoint PPT Presentation
The Industrial Sector Through the Eyes of a Private Equity Investor - - PowerPoint PPT Presentation
The Industrial Sector Through the Eyes of a Private Equity Investor September 21, 2006 1 The im portance of private equity ~ 70% of you work for companies that have been touched by private equity. Not Touched by P rivate Equity 30.0%
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Agenda
- How and why does private equity impact you?
– Why is private equity important? – How does private equity work?
- How important is the industrial sector to private
equity?
- What does private equity look for in industrial
companies?
- What does a private equity firm look like?
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4
Historical Perspective on Private Equity
The private equity industry has grown dramatically over the last 30 years and now has a major impact on all sectors of the economy.
Sources: Meketa Investment Group; Buyouts Magazine
1971 1978 1983 1984 1986 1987 1989 1994 1996 1997 2000 2004 2006 NASDAQ formed Kohlberg Kravis, Roberts &
- Co. (KKR)
Founded AT&T broken up by U.S. regulators First private equity transaction over $1bn (Wometco Enterprises) Driven by Michael Milken (Drexel Burnham Lambert), leveraged buyouts first account for the largest percentage of high yield bond issuance Black Monday (S&P loses over 20% in
- ne day)
“Barbarians at the Gate; ” KKR acquires RJR Nabisco – largest LBO to date Netscape & Yahoo founded Private equity funds raise over $50bn in a single year for the first time Asian financial crisis Private equity funds raise over $200bn; stock market bubble bursts Google IPO; Carlyle Group raises $10bn Numerous record-size funds raised
(e.g. Blackstone Group ($15.6B) Texas Pacific Group ($14.3B) Permira Advisers ($14.1B))
$32bn deal for HCA announced; largest private equity deal in history “Thirty years ago, the private equity industry was not really an industry at all. Today, private equity is mainstream, sophisticated and huge. It accounted for about $200bn worth of deals in 2005, and the vast majority of that sum was spent on buy-outs of established companies”
- The Financial Times
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Private Equity in the Press
“Increasing emphasis lies on improvements in the fundamental performance [ through] motivation of employees and managers of the acquired business [ and] direct involvement of the acquiring buy-out group in the transaction. Importantly, some of these improvements persist even after the buy-out group re-sells the business.”
- The Financial Times
“Private-equity firms now possess more than $2 trillion in buying power. This year they have bought some of the world’s best-known brands, worth more than $347 billion, twice last year’s pace and roughly equal to the gross domestic product of Belgium. Private-equity firms spent $12.3 billion for Univision last month; $22 billion for Kinder Morgan in May; as much as $14 billion for General Motors’ finance unit, G.M.A.C., in April; and $17.4 billion for Albertsons, the grocery chain, in January.”
- The New York Times
“Private money is also playing a growing role in mergers and acquisitions, an area long dominated by companies. So far this year, buyout funds have been involved in 24% of mergers and acquisitions by value, according to Thomson Financial, up from the 14% in 1988, the peak of the previous buyout boom.”
- Wall Street Journal
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Size of the Private Equity Market Relative to GDP
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
0.0 0.5 1.0 1.5 2.0%
P rivate Equity Investment as a % of U.S. GDP
Despite coming down from their peaks, the rates of private equity investment as a percentage of GDP and as a percentage of total M&A activity are still well above historical averages.
Source: Meketa Investment Group
1 9 9 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5
0.0 5.0 10.0 15.0 20.0%
P rivate Equity Investment as a % of U.S. M&A Market
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LBO volum e and returns have surged in recent years
Deal volum e is up sharply
Source: Buyouts Newsletter, Thomson Venture Economics; Bain & Company
50 100 150 $200B
95 96 97 98 99 00 01 02 03 04 05 06
Annualized Q1
LBO transactions by US-based firms
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New cycle of fund raising: Leads to a capital overhang
Note: Capital raised includes foreign funds raised by US-based LBO firms Source: Buyouts Newsletter, Bain LBO fund database, S&P LCD
50 100 150 $200B 50 100 150 $200B
92 5 93 6 94 12 95 18 96 23 97 35 98 55 99 35 00 63 01 35 02 17 03 24 04 42 05 174
Capital raised vs. deal volume (equity portion)
Equity invested
Creates a capital
- verhang of more
than $200B implying a lot of capital left to be invested
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Agenda
- How and why does private equity impact you?
– Why is private equity important? – How does private equity work?
- How important is the industrial sector to private
equity?
- What does private equity look for in industrial
companies?
- What does a private equity firm look like?
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W hat is private equity?
It’s not as glamorous as “Pretty Woman”
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W hat is private equity?
It’s not as ruthless as “Wall Street”
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W hat is private equity?
And it’s a bit more complicated than…
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W hat is private equity?
Private Equity investing is essentially the practice of… 1) raising money to invest 2) investing in companies with strong teams and growth opportunities 3) helping to build and grow companies over time, and 4) eventually, realizing a happy return for all of the shareholders
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Purpose of Financing
Increasing leverage improves returns
Provide a cushion in the instance that things go wrong
Capital structure must fit company's needs
–
Working capital
–
Capex
–
Seasonality
–
Add-on acquisitions
Financing must be "doable" in current market
–
Interest rate pricing
–
Bond market
–
Amortization schedule Maximize Returns While Minimizing Risk Optimize Financing Given Market Conditions and Company Situation
Private equity firms use the equity that they have raised from limited partners along with debt (collateralized by the companies they purchase) to buy portfolio companies.
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100 equity 147 equity
Y ear 1 Y ear 4 100 147 50 100 150 Enterprise Value
10 equity 90 debt 57 equity 90 debt
Y ear 1 Y ear 4 100 147 50 100 150 Enterprise Value 13.7% IRR 1.5x 78.6% IRR 5.7x 100% Equity 90% Debt/10% Equity 3 Years 3 Years
Value of Leverage
Leverage enhances equity returns.
- Debt enhances the
rate of return on an equity investment
- However, debt also
increases the risk to equity holders by increasing the volatility
- f returns and risking
debt default
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How Private Equity Firm s I nteract w ith Portfolio Com panies
Value added resource to our portfolio companies.
Work with management to build a board of directors.
Jointly develop a strategic plan for achieving growth, including key resources.
Jointly establish metrics to measure performance against plan.
Analytic and investment expertise to evaluate major
- perating and investment decisions such as new
capital investments, acquisitions or new market initiatives.
Regular communication focuses on financial and strategic metrics.
Managers seek our counsel regarding people and organizational issues.
We draw on appropriate external professional resources.
We provide opportunities for sharing of experiences across Berkshire portfolio companies.
Berkshire’s role in a portfolio company Berkshire’s interactions with a portfolio company
Firms have a range of approaches to working with portfolio companies, but often take an active role in supporting them.
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Agenda
- How and why does private equity impact you?
– Why is private equity important? – How does private equity work?
- How important is the industrial sector to private
equity?
- What does private equity look for in industrial
companies?
- What does a private equity firm look like?
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The I ndustrial sector represents 1 3 % of GDP & $ 3 .9 T of Gross Output
1,000 2,000 3,000 $4,000B Segments Power/ utilities 356 Chemicals 331
Capital Equipment 314
Home building 429 General Manufacturing 547 Automotive 442 Energy 432 Transportation 243
Pulp/ Paper 88 Mining 51 Pipelines 31 Aerospace 122
Building Products 228
Metals 152
Packaging 128
$3,894B 2003 Revenues ($B) * Excludes truck and rail transportation * * Includes: Wood and non-metallic mineral products, printing and support activities, other services (excluded Government) Source: BEA, Department of Commerce; Bain & Company
$19,733B 2,500 5,000 7,500 10,000 $12,500B 2003 Value Added $B (GDP) Sectors
Agricolture Com puter/ electronic products Transp & wareh* Food/ beverage, textile/ apparel Other* * Arts/ entert.
I nformation Construction
Wholesale trade Retail Trade
Education/ health care
Prof svcs Industrial Government Finance $11,004B
GDP (Value Added) I ndustrial Sector (Gross Output)
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Other
Other rubber product mfg Ship building/repairing Other engine equipmt mfg Surgical appliance/supplies mfg Surgical/medical instrument mfg Machine shops P lastics plumbing fixtures/ all other plastics products
Other
MV body mfg HD truck mfg
Tire mfg
Motor vehicle parts mfg
Auto/light truck mfg
Other
Drilling oil/ gas wells
- Supp. activities
- il/gas ops
Oil/gas extraction P etroleum refineries
New farm hous units/add's/alt's
New multifamily housing structures, nonfarm
New residential additions/ alterations, nonfarm
New residential 1-unit structures, nonfarm
Water, sewage/
- ther sys
Natural gas distribution
P
- wer generation/supply
Other
Organic fiber mfg
P hoto film/ chem mfg Misc chem prod mfg
P etrochem mfg
Soap/other detergent P aint/coating mfg Other basic inorganic chem
Toilet prep mfg
P lastics material/ resin mfg
Other basic
- rganic
chem mfg Agri. equipmt
Construct/ mining equipmt
Electrical equipmt
Industrial equipmt
Flow Control
Rail
Truck
Other
M etal wind/ door mfg Wood wind/ door mfg Fabr struc mtl mfg Glass except glass cont Sheet metal work mfg Ready- mix concrete mfg
Saw- mills
Other
Alum- inum mfg Other forg/ stamp Ferrous metal found
Iron/steel mills
Other
P las bottle
Metal can, box,/
- ther container mfg
Coated/laminated paper/packaging materials
P lastics packaging materials, film/sheet
P aperboard container mfg
Other
M issile/ space veh.
Aircraft Mfg
Aircraft engine/ parts
Other P aper/paperboard mills
Other C
- al mining
P ipeline transp.
- Gen. Mfg
Auto- motive Energy Home Building
P
- wer/
Utilities Chemicals Capital Equipment ansportation Building products Metals P ackaging Aerospace P ulp/P aper Mining P ipelines
547 442 432 429 356 331 314
243 228 152 128 122 88 51
31
Total = $3,894B 20 40 60 80 100%
2003 Revenues ($B)
Note: Revenues/ Gross output represent the market value of an industry's production Source: BEA, Department of Commerce; Bain & Company
The I ndustrial sector is com prised of m ultiple sub-segm ents
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20
20 40 60 80 100%
Value of LBO deals
00
Other
Health Care
Finl Svcs
Media Services CP & Retail Tech & Tel
Industrial Products & Materials
$44B
01
Other
Energy & Utilities Health Care
Finl Svcs
Media Services CP & Retail Tech & Tel
Industrial Products & Materials
$25B
02
Other
Energy & Utilities
Health Care
Finl Svcs
Media Services CP & Retail Tech & Tel
Industrial Products & Materials
$47B
03
Other
Energy & Utilities
Health Care
Finl Svcs
Media Services CP & Retail
Tech & Tel Industrial Products & Materials
$91B
04
Other
Energy & Utilities Health Care
Finl Svcs
Media Services CP & Retail Tech & Tel
Industrial Products & Materials
$136B
05
Other Energy & Utilities
Health Care
Finl Svcs
Media Services CP & Retail Tech & Tel
Industrial Products & Materials
$194B
36% 71% 174% 20% 37% 21% 63% 36% 00-05 CAGR
LBO deals by industry
Source: Bain & Company
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W hile autom otive and capital equipm ent w ere the m ost popular industrial LBOs from 1 9 9 5 -2 0 0 2 …
Note: 61 LBOs did not have disclosed deal values; Other recent losers include Essex Crane Rental Corp and Profile Metals; Bain & Company
Other
Jason Inc
American Electric Auto Co Inc
Safelite Glass Corp Simpson Industries Inc
Knowles E lectronics Inc
Delco Remy International Inc
MascoTech Inc
Mark IV
Kumho Tire Tac-Trim TRW Other
Micron Custom Manufacturing Aavid Thermal Technologies Inc Details(Chase Capital) United R entals Inc Global Energy Equipment Group Watkins-Johnson Co P &H Material Handling Tidewater Compression Service Juno Lighting Inc Anthony Crane R ental LP
Nortek Inc
Thermadyne Holdings Corp
Rexnord Corp
Tyco Intl-P ipe & Valve Op(2)
Amphenol Corp
Dresser Equipment Group Other
US C an C
- rp
BWAY C
- rp
Appleton P apers Inc
Huntsman P ackaging Corp
Tenneco- Containerboard
R aytheon
United Defense
Northrop Grumman-Coml
Other
Arnold Indus
NA Van Lines
Great Lakes Dredge & Dock
Amtrol
CSX
Oth.
True Temper
Neenah Corp Citation Corp Dayton Superior Corp Other Tremco Inc Atrium Cos
Orius
Automotive
Capital Equipment
P aper, P ackaging & Forest
Aerospace & Defense Distribution Services
Mining/metals
C
- nstruction and
building products
$12.3B $11.9B $4.6B $2.4B $1.5B $1.1B $0.6B
Total = $35B
20 40 60 80 100% Industrial deals with disclosed deal values > $50M (1995-2002)
LBO deals: 49 76 29 8 20 35 23
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20 40 60 80 100%
Aerospace & Defense
MTU Aero Engines TransDigm Inc Intelsat Fiat Avio Standard Aero
Other
K&F Industries DynCorp Intl
$13B
Automotive & Components
UIS: Auto Parts
Bombardier: Rec Prodts
Progress Rail Svcs
TRW: Auto Parts Cooper-Standard Automotive
Dana Corp's: Auto Grp
Stanadyne Corp Advanced Accessory Edscha
Other
Breed Technologies Oxford Autom otive Douglas Dynam ics
$12B
Distribution Svcs
CSX Lines
Horizon Lines
Rexel SA
TDS Logistics
Other
Alpha Shirt Co Baker & Taylor
$8B
Paper, Packaging & Forest
Autobar Group
Clondalkin Group
Boise Cascade's U.S. Timber- lands
Owens- Illinois: containers
Landis Plastics
Other
Kranson I ndustries Duales System s
$6B
Mining & Metals
Horizon Natural Resources
Rhodia: Phos- phates
Bethlehem Steel
RAG American Coal Hldg.
Autocam Corp.
Republic
- Engr. Prdts
Other Kia Steel BWAY
$6B
Maax Formica Ply-Gem Ind. Nortek Holdings
Georgia Pac: Bldg. Prodts
Ready Mixed Concrete
Other
InfraSource
MW Mfrs.
N.A Cnstrn
$6B
Capital Equipment
Culligan Intl' Dresser-Rand Co Aearo Corp.
Other
Baker Tanks
$3B
11 25 17 13 13 10 17 # LBO's
Total = $53B
Industrial deals with disclosed deal values > $50M (2003-1Q2005)
Construction & Building Prdts
…since 2 0 0 3 , LBOs have been spread m ore equally across sectors
Source: Buyouts Magazine; Private Equity Analyst; Bain & Company
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Agenda
- How and why does private equity impact you?
– Why is private equity important? – How does private equity work?
- How important is the industrial sector to private
equity?
- What does private equity look for in industrial
companies?
- What does a private equity firm look like?
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24
I nvestm ent them es
Under-managed full potential
- Drive full potential
from under-managed / under-invested players (often carve-outs) Profitable niches
- Identify small,
profitable players with highly defensible market positions Cyclical plays
- Time entry and exit to
shifts in industry cycle Build-ups
- Drive consolidation
where scale creates differential economics Turnarounds
- Turnaround ailing
player in fundamentally stable market Sector evolution
- Identify businesses
likely to benefit from – Product/ technology substitution – New market segments – Regulatory changes – Distribution shifts
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I nvestm ent them es
Under-managed full potential
- Drive full potential
from under-managed / under-invested players (often carve-outs) Profitable niches
- Identify small,
profitable players with highly defensible market positions Cyclical plays
- Time entry and exit to
shifts in industry cycle Build-ups
- Drive consolidation
where scale creates differential economics Turnarounds
- Turnaround ailing
player in fundamentally stable market Sector evolution
- Identify businesses
likely to benefit from – Product/ technology substitution – New market segments – Regulatory changes – Distribution shifts
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28
Key success factors- Build-ups
Build-ups
- Tangible cost-driven scale economies
- High-quality standalone platform
- First mover advantage
- Add-on acquisitions at the right price
- Management talent, depth, and bandwidth
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I nvestm ent them es
Under-managed full potential
- Drive full potential
from under-managed / under-invested players (often carve-outs) Profitable niches
- Identify small,
profitable players with highly defensible market positions Cyclical plays
- Time entry and exit to
shifts in industry cycle Build-ups
- Drive consolidation
where scale creates differential economics Turnarounds
- Turnaround ailing
player in fundamentally stable market Sector evolution
- Identify businesses
likely to benefit from – Product/ technology substitution – New market segments – Regulatory changes – Distribution shifts
SLIDE 28
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Due to its greater accum ulated experience, PackCo should realize a cost advantage vs. com petitors
B P ackCo A
Cost $/M Accumulated Experience
PackCo Experience Curve Slope= 8 5 %
Note: Chart is in Natural Log (LN) scale Source: Bain & Company
0.4B 0.5T $0 $88 $343
- D
- C
- E
~ $40MM
- pportunity
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Key Success Factors – Full Potential
Full Potential
- Define “full potential” using outside-in, fact-based approach
- 100 day plan ready for day one of ownership
- Focused vision; aggressive management of assets
- Invest to support and grow the business
- Challenge management and organization
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I nvestm ent them es
Under-managed full potential
- Drive full potential
from under-managed / under-invested players (often carve-outs) Profitable niches
- Identify small,
profitable players with highly defensible market positions Cyclical plays
- Time entry and exit to
shifts in industry cycle Build-ups
- Drive consolidation
where scale creates differential economics Turnarounds
- Turnaround ailing
player in fundamentally stable market Sector evolution
- Identify businesses
likely to benefit from – Product/ technology substitution – New market segments – Regulatory changes – Distribution shifts
SLIDE 31
36
Hexcel
SLIDE 32
37
Key Success Factors – Cyclical Plays
Cyclical Plays
- Understand drivers of cyclicality
- Build robust forecast of the cycle
- Understand competitor, customer and supplier behavior
through the cycle
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I nvestm ent them es
Under-managed full potential
- Drive full potential
from under-managed / under-invested players (often carve-outs) Profitable niches
- Identify small,
profitable players with highly defensible market positions Cyclical plays
- Time entry and exit to
shifts in industry cycle Build-ups
- Drive consolidation
where scale creates differential economics Turnarounds
- Turnaround ailing
player in fundamentally stable market Sector evolution
- Identify businesses
likely to benefit from – Product/ technology substitution – New market segments – Regulatory changes – Distribution shifts
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39
I nsights into industry changes can lead to successful investm ent decisions
Sector evolution
P roduct penetration New product sales Likely success Potential disaster
SLIDE 35
40
Advanced Drainage System s
SLIDE 36
41
Key Success Factors – Sector Evolution
Cyclical Plays
- Understand key trends affecting industry
- Realistic forecasting and scenario modeling
- Question straight-line projections of growth
- Know penetration curve and inflection point
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42
I nvestm ent them es
Under-managed full potential
- Drive full potential
from under-managed / under-invested players (often carve-outs) Profitable niches
- Identify small,
profitable players with highly defensible market positions Cyclical plays
- Time entry and exit to
shifts in industry cycle Build-ups
- Drive consolidation
where scale creates differential economics Turnarounds
- Turnaround ailing
player in fundamentally stable market Sector evolution
- Identify businesses
likely to benefit from – Product/ technology substitution – New market segments – Regulatory changes – Distribution shifts
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43
Ensuring there are defensible barriers to entry is critical in a niche play
Proprietary Assets High Sw itching Cost Heavy Prior I nvestm ent Favorable Regulation Best Scale & Cost Position
Defensible Niche
- Patents
- Proprietary
technology or process
- Long-term
customer contracts
- No product
substitutes
- Strong brand equity
- Substantial capital
investments
- Licensing
requirements
- National
security/ environmental regulations
- Steep learning
curve
- Proprietary
access to low- cost inputs
Niche
SLIDE 39
44
Note: Dashed lines indicate estimates Source: Freedonia; Plastics World; Paine Webber; Company Financials; Bain & Company
Plastic Co had a highly profitable niche position in m otor oil containers
P lastic Co Motor Oil P lastic Co Total HDP E Competitor 1
49% 35% 17% 10 20 30 40 50%
EBITDA Margin Comparison (% of Sales)
Other
I H
G
F
E
D
C
P lastic Co B A P lastic Co A
Other
A
P lastic Co
HIC
P ersonal Care
Beverages and food
Motor
- il
1.3B
0.4B
1.6B
0.3B Total = 3.5Blbs
20 40 60 80 100%
North American Blow-molded HDP E Market - Total P
- unds (%)
Other
E F
Other
A
B
Plastic Co
Niche
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Key Success Factors – Niche
Cyclical Plays
- Differentiate defensible niche vs. “bubbles”
- Identify switching costs for customers
- Evaluate adjacent niche businesses
- Know upside and exit opportunities
- Cost and cash management across value chain
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47
I nvestm ent them es
Under-managed full potential
- Drive full potential
from under-managed / under-invested players (often carve-outs) Profitable niches
- Identify small,
profitable players with highly defensible market positions Cyclical plays
- Time entry and exit to
shifts in industry cycle Build-ups
- Drive consolidation
where scale creates differential economics Turnarounds
- Turnaround ailing
player in fundamentally stable market Sector evolution
- Identify businesses
likely to benefit from – Product/ technology substitution – New market segments – Regulatory changes – Distribution shifts
SLIDE 42
48
ElectroMotive Diesel
SLIDE 43
49
Key Success Factors – Turnarounds
Cyclical Plays
- Focus on core strategic platforms
- Act quickly to get control
- Exit unprofitable, non-core business
- Look to balance sheet for value
- Seek proven operators with turnaround experience
- Align management and staff incentives
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50
Agenda
- How and why does private equity impact you?
– Why is private equity important? – How does private equity work?
- How important is the industrial sector to private
equity?
- What does private equity look for in industrial
companies?
- What does a private equity firm look like?
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51
Berkshire’s investments have been concentrated in six areas in both the U.S. and overseas.
Percent of invested capital
as of 12.31.05
Transportation: 12% Communications: 10% Business services: 19% Other: 1% Industrial manufacturing: 18% Retailing: 25% Consumer products: 15%
Berkshire Partners Overview
SLIDE 46
52
31%
21% 15% 10% 4%
9%
10%
Berkshire Partners Overview
Fund VI Investor Base - Representative Investors
Berkshire has experienced tremendous continuity in its investor base. Berkshire’s team invests significantly alongside our investors in each transaction we complete.
University Endowments:
Dartmouth Harvard M.I.T.
- Univ. of Michigan
- Univ. of Pennsylvania
Princeton Stanford The CommonFund Williams Yale
Special Relationships:
Berkshire CEOs, etc. Other entrepreneurs
Foundations:
Carnegie Foundation Ford Foundation Hewlett Foundation Howard Hughes Medical Institute Investment Fund for Foundations Robert Wood Johnson Foundation Metropolitan Museum of Art Rockefeller Foundation
Insurance:
AIG Global New York Life Northwestern Mutual Life
Pensions:
Calpers/Grove Street EDS IBM L.A. County Employees Lockheed Martin Massachusetts PRIM State of Michigan Employees
Financial Institutions:
Adams Street Partners Bank of America GE Capital Goldman Sachs HarbourVest Partners
Non U.S. Institutions:
Allianz Government of Singapore Ontario Municipal Employees Wellcome Trust
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53
Berkshire consistently exits its investments w ith management’s full support.
Full realizations
as of 12.31.05
Recapitalizations / sales to management: 10 Initial public offerings: 11 Sales to strategic buyers: 26 Sales to financial buyers: 8
Berkshire Partners Types of Exit
SLIDE 48
54
Berkshire Partners Portfolio Com panies
SLIDE 49
55
Not Touched by P rivate Equity 30.0% Touched by P rivate Equity 70.0%