KKR Private Equity Investment Committees Alex Navab July 17, 2012
Process Overview
Investment Committee • Main decision making forum for all new investments for private equity • Meets formally two times per week – Monday and Thursday mornings (NY time) • Iterative process – not just the last step • All key decision points should come to the Committee •
Meaningful money to be spent on analysis
•
Initial bid proposal (excluding early stage and explorato exploratory ry first round bids)
•
Interim and final bids
•
Formal approach to company or board
s ounding board, and we are actively encouraging coming to the • Committee should also be used as sounding Committee earlier in your evaluation/thinking •
Controversial issues
•
Specific guidance on issues
•
Quick read before a lot of work done (e.g., minority investment)
• Most investments will be discussed with the Committee four or more times before a final decision •
Also encouraging using regional heads/other IC members as a sounding board before coming to the Committee
• Memos to be submitted Friday for Monday meeting and Tuesday Tuesday for Thursday meeting • Email Erika Stadtlander prior to memo submission, copying Alex Navab and Johannes Huth, to get on the agenda
Investment Committee Members North American IC
European IC
Asian IC
China Growth IC
Henry Kravis
Henry Kravis
Henry Kravis
Henry Kravis
George Roberts
George Roberts
George Roberts
George Roberts
Paul Raether
Mike Michelson
Mike Michelson
Joe Bae
Mike Michelson
Johannes Huth*
Johannes Huth*
David Liu
Johannes Huth*
Alex Navab*
Alex Navab*
Ming Lu
Todd Fisher
Mike Calbert
Mike Calbert
Alex Navab*
Brian Carroll
Joe Bae
Mike Calbert
Dominic Murphy
David Liu Ming Lu
* Co-Chairs
Guidelines and Logistics • Memo: We encourage concise memos that highlight the key investment thesis, issues, opportunities, financials, etc. All memos should be in readable font • Early stage ideas and exploratory first round bids (i.e., transactions where we have not met management and are not spending money) do not require coming to the IC. To keep the IC informed of deal flow we would ask you however to send a short (one page) note to the IC describing the transaction that you are working on • Interim updates for a transaction in process or important follow-ups should be no more than 10 pages, including appendices • 2nd / Final round bid memos should be no more than 20 pages, including appendices. See attached for Key Topics to be covered in memos • IC Follow-Ups: To ensure detailed and consistent feedback on each meeting, we have asked a principal or director in the US, Europe and Asia to assist us by taking detailed notes; highlighting specific feedback and follow-up items for deal teams • The initial executives are Webster Chua in North America, Edouard Pillot in Europe and Rupen Jhaveri in Asia • We would expect this role to initially last until year end and thereafter rotate every 6 months • Downside Case / “Devil’s Advocate” / Red Team: For each investment that is nearing a final decision, a member of the team would be assigned a "devil’s advocate role" to dig deep into the key issues and concerns of the investment • That person would need to vet those issues with the team in advance of the IC discussion • That person is also responsible for taking the lead in presenting the "devil’s advocate case" to the IC including both the qualitative and quantitative aspects of a true downside scenario • Open Discussions: We require all members of a deal team (including the junior members) to clearly state their position on the investment in question during an IC meeting • It’s critical that all team members feel the responsibility and accountability to speak up
What to Cover
Suggested Topics and Timeline Early Stage Macro Perspective / y r 1 t o r s 2 Industry Thesis c u a d n M I 3 Long Term Industry Analysis and Performance 4 Company Thesis and Long Term Performance 5 Competitive Positioning
s i s 6 Management y l a n 7 Scenario Analysis A k 8 Exhaustive Risk Analysis / Downside Case s i R 9 Evolution of Cases / y n 10 Exit and Entry Valuation Assumptions a p m 11 Rationale for Investment o C 12 Disaggregate Source of Returns 13 Financing
r e h t O
14 Cross Function / Geography Involvement 15 Deal Process, Partnership/Consortia & Other 16 Follow Up Items
Mid Stage
Late Stage
Macro / Industry Analysis • Detailed discussion around how macro environment is expected to impact the sector (to be incorporated with firm’s macro view) Macro Perspective
• Include deal team’s view on key macro risks and opportunities as part of their analysis of key investment highlights and considerations • Provide overview of how deal performs under various macro outcomes
E a r l y M i d
• If relevant, highlight correlation to certain key macroeconomic statistics • Respond to the question: “Why is it good to invest in the sector today?” • Medium and long-term thesis on industry / sector and why it is attractive Industry Thesis (1)
• Walk-though how value has been created in the industry historically (including how private equity has been involved in the sector) • Outperforming and underperforming deals have often captured or missed potential technological / industry shifts. Include view on ability to create value through (or defensibility of industry to) technological / industry shifts
E F a r r l e y q u ( U e p n d t a l y ) t e d
• Discuss other big risk areas (regulatory, competition from overseas, etc.)
Long Term Industry Analysis and Performance (1)
• Incorporate long-term analysis (as available and relevant) on performance of industry through economic and industry-specific cycles • Breakdown of underlying growth drivers (volume, price, margin, etc.) • If relevant, include analysis around industry performance as the sector evolved (evolution of companies as industry matured, new entrants, substitutes, etc.) • Discussion of supply / demand dynamics of industry (such as customer concentration, supplier power, input cost trends, etc.)
(1) When presenting the above items, keep in mind guidelines provided by the legal team on the appropriate language, tone and descriptions to use. Additionally, remember that sensitive topics should be discussed verbally.
M i d
Company Specific / Risk Analysis – Overview and Business Model Company Thesis and Long Term Performance
• Respond to the question: “Why is this a good Company?” • Historical, projected, comparative ROIC and opportunity to invest behind • Other quantifiable metrics and comparisons • Provide clear description of products and services of the Company • Discuss long-term historical performance of the Company • Include performance through various economic cycles. Include both general financial metrics (revenue, EBITDA, margins, capex, etc.) as well as key operating statistics (same store sales, volume/price, etc.) • Historical performance relative to peers and reason for under / over performance. Outline market share trends of company (include commentary around shifts in share and drivers)
Competitive Positioning(1)
• Outline competitive nature of industry, implications thereof and specific value proposition of Company. Outline Company’s competitive advantages (cost, service, technology, etc.) and the sustainability of the competitive advantage • Provide customers and key suppliers feedback (collected on primary basis) on customer satisfaction, vendor satisfaction, competitive position, etc.
Management
• Provide full assessment of company culture and management (2) • Provide plan for management team – Highlight key weaknesses of management pool and provide IC with color around certain important roles (i.e. relative importance of a CEO, COO, CFO, sales leadership, etc.) • If turnaround, include basis for expected improvement of culture and management • During late stages, conduct and provide update on background checks for key senior managers (Kroll reports)
M i d
M F i r d e q ( u U e p n d t a l t y ) e d
M i d L a t e
(1) When presenting the above items, keep in mind guidelines provided by the legal team on the appropriate language, tone and descriptions to use. Additionally, remember that sensitive topics should be discussed verbally. (2) Colorful characterizations of management are better handled verbally, as IC decks can be produced in litigation and seen by managers and descriptions of mangers can be requested by managers in some countries under data privacy laws.
Company Specific / Risk Analysis – Projections / Cases • Provide scenario analysis (Base, Upside, Conservative) to provide IC with a range of potential outcomes • Discussions should include: Scenario Analysis
• Key breakout upside opportunities and impact to returns • Key issues that would result in conservative case
M i d L a t e
• Provide summary financials (including cash flow / deleveraging), commentary and return distributions for each potential scenario • “Devil’s Advocate Case” presented to the IC Exhaustive Risk Analysis / Downside Case
• Create substantive, aggregate review of risks in a deal (assessment of probability, quantify impact on returns, strategy to diligence risk) • Provide updates to IC at each meeting on status of diligence regarding key risks
M i d L a t e
• Construct and present a true downside case • Deal team should be prepared to outline the case not to do the deal • Explicitly show reasons for movements of forecast cases up and down through IC process and rationale (only after early stage)
Evolution of Cases
• Include changes in revenue, margin, cash flow, entry / exit multiple assumptions • Show development of leverage assumptions over time and provide analysis on supportability of leverage
M i d L a t e
Company Specific / Risk Analysis – Valuation / Returns / Other • Walk through rationale for purchase multiple and exit multiple assumptions Exit and Entry Valuation Assumptions
• Support assumptions with risk profile, growth, cash conversion, etc. • Outline shifts in variables above and resulting exit multiples • Compare multiple assumptions vs. relevant comparable transactions done in the past
M i d L a t e
• Present thinking around exit alternatives (strategic sale, IPO, etc.) as well as impact of exit alternatives to returns (for example, multiple share sales) • Respond to the Question: Why is this a good investment? • Attractiveness of return opportunity given risk profile Rationale for Investment
• Walk-through the key value creation drivers, thesis and strategy • Outline key drivers of growth (market growth, market share gain, new product introductions, margin expansion, etc.) and confidence level on ability to achieve each driver by the Company standalone and with KKR-involvement
E F a r r l e y q u ( U e p n d t a l y ) t e d
• Preliminary views on 100-Day plan initiatives • Break down returns into value generation components and provide basis for assumptions Disaggregate Source of Returns
• Source of EBITDA Growth: Industry growth, market share gain, pricing growth, operating leverage, cost takeout / rationalization, etc. • Debt Paydown: Incorporate commentary around changes in operations (cash flow conversion) and impact of refinancings / recapitalizations
M i d L a t e
• Multiple Expansion / Contraction: Provide basis as discussed above • Provide sensitivity of returns to financing assumptions (leverage, flex terms) Financing
• Provide a summary of commitment terms (covenants and other limitations) • Provide commentary around risk to achieving assumed capital structure
T h r o u g h o u t
IC Process Suggestions • Include other geographic / industry vertical teams that have had significant experience in the space and / or cover suppliers or customers of the Company Cross Function / Geography Involvement
• Teams should reach out early to relevant executives to review materials • Relevant executives should directly participate in IC discussions • Include KCM, KKR Capstone, Public Affairs, KAM as relevant and address plans to use them post-deal
T h r o u g h o u t
• Any discussion of fees and allocations should be avoided in the IC materials
Deal Process, Partnership/ Consortia & Other
• Teams should be prepared to walk the IC through the following verbally • Overview of process dynamics (including motivation for sellers, other bidders, potential partners and others) • For consortia, address early who the partners are, partnership dynamic, and ability to involve other parts of KKR (KCM, Capstone, etc.) • Provide download on findings of advisors (consulting, accounting, legal, tax, environment, labor, insurance, gov’t relations, etc.). For sensitive points that may be legally privileged, please run by outside or internal counsel in advance • Investment Committee to provide deal team with discreet structured follow-up items
Follow Up Items
• Deal teams to respond to each follow-up item from prior session during every IC meeting
T h r o u g h o u t
T h r o u g h o u t
Appendix 1: Sample Macro / Industry Analysis
Sample Macro / Industry Analysis 1: Willis (2010) Specific Opportunity: Take Private of Willis (3 rd Largest Global Insurance Broker) Objective: Show impact of broader economy on the insurance industry and outline a specific thesis on industry growth. Conclusions: a) The insurance sector follows the economy over the long-term, but has industry-specific cycles. b) Timing the insurance cycle is important to generating attractive returns in the insurance brokerage space given the tying of the growth of the broker space to commercial P&C premiums. c) Q: Why is it good to invest in the sector today? A: Visibility on hardening cycle in the medium term, opportunity to enter market before valuations reset when insurance cycle hardening is more visible. d) No visible positive or negative technological / industry shifts expected to impact the industry.
Sample Macro / Industry Analysis: Willis (2010) (cont’d) Insurance broker organic growth is highly correlated with growth in commercial P&C premiums… Hard Cycle
25%
Comm'l P&C NPW Growth
18%
Broker Industry Organic Growth
20%
Willis Organic Growth
15%
12%
15% 10%
8%
5%
5%
5%
3%
4%
2%
4%
(5%) 1997
1998
1999
2000
2001
2002
2003
2004
Over the long term, P&C premiums grow in-line with the economy… 500 450 400
P&C Net Premiums Earned (Left Axis) Nominal GDP (Right Axis)
2006
2007
2008
2009
YTD 6/10
But over shorter-term horizons, P&C premium growth is highly cyclical… 16,000
25%
14,000
20%
4.0% 3.8% 3.6%
12,000
350
2005
300
10,000
250
8,000
15%
3.4% 3.2%
10%
3.0% 5%
200
2.8%
6,000
150
4,000
100
2,000
50 -
'67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09
Source: KKR Analysis, Company Filings, A.M. Best, SNL, Bureau of Economic Analysis
2.6%
-
(5%)
NPE Growth (Left Axis)
2.4%
NPE / GDP (Right Axis)
2.2%
(10%)
2.0%
'67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09
Sample Macro / Industry Analysis: Willis (2010) (cont’d) Although Commission Rates Have Modestly Grown, Revenue is Driven by Volume Growth (P&C Premiums) with EBITDA Further Accelerated by Margin Expansion 1997
1998
1999
2000
200
2001
2002
2003
Revenue
2004
2005
2006
2007
2008
2009
YTD 6/10
EBITDA
40
150
30
100 50
20
0
10
Vol Growth (P&C Prems) Comm Rate Growth Broker Revenue Growth
(0.9%) 5.9% 5.0%
Broker EBITDA Margin 16.4% Broker EBITDA Margin Change Broker EBITDA Growth 5.2%
(1.8%) 6.0% 4.2%
0.3% 6.5% 6.8%
5.4% 2.4% 7.8%
9.5% 0.3% 9.8%
21.3% (5.7%) 15.6%
12.8% (0.7%) 12.2%
7.2% (6.2%) 1.0%
2.5% (3.6%) (1.2%)
6.7% (3.6%) 3.1%
(0.9%) 3.1% 2.2%
(3.6%) 5.0% 1.4%
(6.9%) 6.4% (0.5%)
(3.6%) 3.8% 0.2%
16.6% +0.2% 5.5%
16.9% +0.3% 8.7%
17.3% +0.4% 10.3%
18.1% +0.8% 14.9%
18.7% +0.6% 19.4%
19.5% +0.8% 17.0%
20.2% +0.7% 4.7%
21.0% +0.8% 2.7%
21.9% +0.9% 7.5%
23.0% +1.1% 7.4%
23.2% +0.2% 2.3%
23.7% +0.5% 1.7%
24.1% +0.4% 1.9%
Most Significant Value Creation Event in Recent History Was Willis' Initial Buyout Willis Out/Underperformance
Willis Rev Growth
Broker Ind Rev Growth
8%
c 6% n a m r 4% o f r e 2% p r e d 0% n U / t (2%) u O (4%) s l l i W (6%) (8%) (10%)
20% 15% 10%
t w o r 0% G e 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD 6/10 (5%) u n e v e (10%) R - Significant desire by insurance carriers and corporates alike to create a third 5%
1997
1998
option to Marsh & McLennan and Aon, who were the only large brokers of scale - KKR partnered with insurance carriers in 1998 on the acquisitions - This was a large driver of shift from underperformer to outperformer
(15%) (20%) (25%)
Sample Macro / Industry Analysis: Willis (2010) (cont’d) A Hardening Cycle May Be Getting Closer… Statutory cash flows have deteriorated, indicating carriers may soon look to raise rates… 100 90 80 70 60 50 40 30 20 10 -
And rates may be approaching the unprofitable levels of the late 1990s…
P&C Statutory Op. CF (bn) Total P&C % of Surplus Comm'l P&C % of Surplus
22%
12% 12% 6%
25% 19% 20%
18% 5% 3% 4%
13% 8% 7% 7%
1 99 6
1 99 7
1 99 8
1 99 9
2 00 0
2 00 1
2 00 2
2 00 3
2 00 4
2 00 5
2 00 6
2 00 7
2 00 8
2 00 9
Y TD 6/10
But It Is Not Yet Imminent… It took three years of unfavorable reserve developments prior to the last hard cycle, and we have had none to-date…
Underwriting profitability still appears to be much better than in the late 1990 s… 125%
20 15 10
Cum. Dev't To-Date
120%
2-Year Dev't
115% 110%
1-Year Dev't
5
115% 114% 109% 110%
114%
103%
110%
105% 100%
-
100%
95%
95%
(5)
90%
(10)
85%
97%
96% 93% 95% 92%
80%
(15)
1 99 6
(20) 1987
1989
1991
1993
1995
1997
1999
2001
2003
Source: KKR Analysis, SNL, The Council of Insurance Agents and Brokers
2005
2007
2009
1 99 7
1 99 8
1 99 9
2 00 0
2 00 1
2 00 2
2 00 3
2 00 4
2 00 5
2 00 6
2 00 7
Reported Combined Ratio Combined Ratio ex. PY Reserve Dev't
2 00 8
2 00 9
Sample Macro / Industry Analysis: Willis (2010) (cont’d) The Next Hard Cycle May Not Be As Amplified As The Last Without A Large Catastrophe… The '00-'03 cycle was magnified by the tech bust and 9/11…
Industry capitalization levels remain robust… NPW / Surplus (Left Axis)
Change in Stat Surplus
P&C Industry Surplus / GDP (Right Axis) 150%
30%
4.0%
25% 129% 126% 125%
20%
109% 100% 87%
9%
0%
3.0%
89% 85%
83%
87% 87%
-5% -10%
75%
3%
9%
5%
98%
12%
7%
10% 106%
103%
100%
15%
12%
15%
3.5%
115%
19%
24%
2%
Tech Bust / Sept. 11th
(1%) (5%)
(7%)
-15%
2.5%
1 99 6
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1 99 7
1 99 8 1 99 9
2 00 0
2 00 1
Katrina / Rita / Wilma
2 00 2 2 00 3 2 00 4
2 00 5
2 00 6
(13%) 2 00 7
2 00 8 2 00 9
Y TD 6/10
Based On This Analysis, We Have Formed Three Cases For P& C Cycle Assumptions… Conservative Case: Pricing does not harden, but flattens over three years; volumes grow at 2% Base Hardening Case: '11-'13 same as Conservative Case; '14, '15 and '16 grow at 10%, 10% and 7%, respectively Aggressive Hardening Case: '11-'12 same as Conservative Case; '13-'16 replicate growth in '01-'03 (10% / 21% / 13% / 7%) Projected P&C Industry Net Premiums Written: 25% 20% 15%
Aggressive Hardening Case
10% 5%
Base Hardening Case
-
Conservative Case
(5%) (10%) 1 99 7
1 99 8
1 99 9
2 00 0 2 00 1
2 00 2
2 00 3
Source: KKR Analysis, SNL, Bureau of Economic Analysis
2 00 4
2 00 5
2 00 6
2 00 7
2 00 8
2 00 9
2 01 0
2 01 1
2 01 2 2 01 3
2 01 4
2 01 5
2 01 6
Appendix 2: Sample Preliminary Competitive Positioning Analysis
Preliminary Competitive Analysis: Supervalu (2011) Specific Opportunity: Take Private of Supervalu Objective: Outline key competitors, positioning and relative trends. Conclusions: a) Share trends for grocery channel and Supervalu troubling and unlikely to moderate. b) Importance of banner / market level operating performance and regional market share. c) Meaningful investments in price likely needed across most banners.
Preliminary Competitive Analysis: Supervalu (2011) (cont’d)
Banner Overview, Rank and Key Competitors Banner
# of Stores
Share/Rank
Key Locations
Regional Competitors
Traditional Food Retail (40,000-60,000 sf / store) 125
#1 (2010)
Philadelphia (PA, MD, NJ)
• ShopRite (co-op) • Stop&Shop (Ahold)
463
#3-4 (2010)
NV, Northwestern United States, and Southern CA
• Kroger • Safeway
78
#2 (2010)
Minneapolis/St. Paul
• Rainbow Foods (Roundy’s) • Wal-Mart
44
#2 (2010)
Richmond, VA; Elizabeth City, NC
• Kroger • Wal-Mart
6
--
ND and MN
• Sunmart Foods (Private) • Wal-Mart
182
#1 (2010)
Chicago, IL
• Dominick’s (Safeway) • Wal-Mart
5
--
Southern CA
• Kroger • Safeway
194
#2 (2009)
Boston, MA; New England
• Stop&Shop (Ahold) • Hannaford (Delhaize)
41
#4 (2010)
St. Louis, MO
• Schnucks (Private) • Wal-Mart
62
#3-4 (2010)
Baltimore, MD, N. Virginia, Washington D.C.
• Giant (Ahold) • Safeway • Costco
Midwest (east of MS river), Eastern Seaboard , Texas
• Wal-Mart • Dollar Stores
Smaller, Value Concept (15,000 sf / store) 1,188 (333 owned) Note: Per Company website.
--
Preliminary Competitive Analysis: Supervalu (2011) (cont’d)
Market Share Analysis •
Nearly all new food retail formats have consistently gained share from traditional grocers in recent history
•
SVU and SWY have been the largest share donors by size, while Kroger has been able to keep its share
•
However, recent trends seem to indicate donation of share seems to be slowing, although alternative format share growth remains strong
– The primary driver of this has been slowing store growth at Wal-Mart and others – It is unclear whether traditional retailers are narrowing the gap in terms of traffic
Food at Home Market Share by Retailer
Market Share Change ’10 vs. ’06
SVU(w/ Save-ALot) SWY KR
0.4% 0.6%
Alternatives
share Δ 11% 8% 11%
9%
8%
7%
7%
8%
8%
8%
7%
10%
11%
11%
11%
-4.4%
-1.1%
flat
0.3%
Clubs
0.7%
0.4%
WMT
Other large grocers
23%
22%
22%
22%
22%
-0.7%
+5.3%
+2.3%
WMT
6%
9%
10%
11%
11%
Club stores Alternative s (TJ, WF, Aldi,
10%
11%
12%
12%
13%
4%
4%
5%
5%
6%
+2.1%
28%
26%
24%
24%
24%
-3.7%
TGT)
All other
2007
2008
2009
0.1%
All other majors
-0.2%
-0.4% -0.2%
SWY
SVU 2006
1.6%
-0.6%
'09-'10
-1.3%
'06-'09 Avg
2010
-2.0%
-1.0%
0.0%
1.0%
2.0%
Preliminary Competitive Analysis: Supervalu (2011) (cont’d)
Consumer Positioning Analysis Consumer surveys suggest that Acme, Albertsons, and Shoppers (~50% of Supervalu grocer revenue) elicit strong customer loyalty … Jewel and Shaw’s currently score weak on customer loyalty and relative (non-price) performance
) e c i r p n o n ( e c n a m r o f r e P e v i t a l e R
g n o r t S
So-Cal
k a e W Nor-West
Low
High Customer Loyalty
Note: Arrow indicates trending of relative perfor mance according to consumers; Relative performance measured on 28 attributes based on topics such as convenience, service, merchandising
Preliminary Competitive Analysis: Supervalu (2011) (cont’d)
Financial Benchmarking Analysis ID Sales Trend (Annual)
ID Sales Trend (Last 4 Appx. Calendar Qtrs)
8.0%
6.0%
4.0% 2.7%
2.4%
5.6%
5.3%
5.0%
2.0%
2.4%
1.2%
4.0% 3.4%
3.3%
2.1%
–
2.0% 0.8%
–
(2.0%)
(2.5%)
0.5%
0.4%
(2.0%)
(3.1%) (4.0%)
(2.0%)
(1.2%)
(4.1%)
(2.5%) (4.9%)
(6.0%)
(4.0%)
(6.5%) (5.1%)
(6.0%) 2006
2007 Kroger
2008 Safeway
(6.4%)
(6.8%)
(7.2%)
(8.0%)
2009
Q409
Q1 10
Supervalu
Q2 10 Kroger
Safeway
Q3 10
Q4 10
Supervalu
EBITDA Growth (CY 2007 – LTM CAGR)
EBITDA Margin 7.5%
– (0.1%) 7.0%
6.9%
7.0% (2.0%)
6.7% 6.5%
6.3%
6.5%
6.0%
6.1%
6.0%
(4.0%)
5.5% 5.5%
5.4%
(6.0%)
5.6%
(5.9%)
5.1%
5.4% 5.2%
5.0%
(8.0%)
5.0% 4.5%
4.7% (10.0%)
4.0% 2006
2007
2008
2009
LTM
(11.3%)
(12.0%) Kroger
Safeway
Supervalu
Kroger
Safeway
Supervalu
Appendix 3: Sample Management Analysis
Management Analysis: Company X Organizational Chart and Management Overview • The quality of the management team was an important part of our investment thesis on Company X • Based on our assessment to-date, the Company’s senior leadership talent is of high quality and is capable of operating a much larger company • As a result, it will be critical for us to ensure that each of the key members of the management team remains highly motivated and is provided with sufficient responsibility and upside opportunity CEO successor potential In question Resigned
Strong—no issues Under strength—to leave New Person 1 Chief Executive Officer
Person 2 Chief Operating Officer
Person 4 Unit A
Person 5 Unit B
Person 6 Unit C
Person 3 Chief Financial Officer
Person 7 Unit D
Person 8 Unit E
Person 9 Unit F
Searches in Progress Position
Timing to Fill
Open Position 1
ASAP
Open Position 2
Not Urgent; When Larger Company
Management Analysis: Company X (cont’d)
Senior Management Assessment Executive
Position
Roll % /$
Early Assessment
Concerns/Action
Person 1
CEO
[ ]% / $[ ]mm
Strong, sales-oriented CEO. Has command and respect of his people
Need to mentor on softening leadership style
Person 2
COO
[ ]% / $[ ]mm
Highly talented, execution focused COO. Overqualified for role
Need to monitor to ensure being provided with enough responsibility
Person 3
CFO
[ ]% / $[ ]mm
Capable and detail oriented. Good at blocking and tackling
Need to push to be more strategic
Person 4
Unit A
[ ]% / $[ ]mm
Long tenure at Company. Capable steward of Unit A franchise but not a high-powered leader
Responsibility scope declining as other leaders step up. Not sufficiently aggressive/commercial to drive Unit A
Person 5
Unit B
[ ]% / $[ ]mm
Extremely valuable to the franchise. Directly responsible for growth of Unit B
Need to ensure she continues to be motivated
Person 6
Unit C
[ ]% / $[ ]mm
Capable leader of Unit C segment and has been able to grow the business meaningfully
Need to ensure he continues to be motivated
Person 7
Unit D
[ ]% / $[ ]mm
Highly talented young leader of Unit D. Important to the growth of the segment
Need to ensure he continues to be motivated
Person 8
Unit E
[ ]% / $[ ]mm
Overqualified for the core Unit E job. Good at thinking of operational and strategic implications of technology to Company X
Need to keep motivated as he is critical to the Company
Person 9
Unit F
[ ]% / $[ ]mm
Very capable salesperson want to see more significant desire to achieve more
Need to monitor ability to execute on new wins and if right person going forward
Appendix 4: Rationale for Investment / Sources of Return
Rationale for Investment / Sources of Return Rationale for Investment Value Driver
EBITDA
Key Assumptions
Risk Level
At Acquisition
$200
Industry Growth
+$32mm
3% estimated industry growth, 2% from general macroeconomic growth and 1% from secular growth
Macro Secular
Market Share Gain
+$11mm
1% addn’l growth via share gain vs historical outperformance of 3%
Op Leverage
+$31mm
Flow-through rate of revenue growth based on variable cost analysis
Cost Takeout
+$30mm
Already identified cost initiatives; supplemented by Capstone revie w
Subtotal
$304mm
Implies 9% EBITDA CAGR
Cash Flow / Deleveraging
$716mm cash flow
Based on historical capex levels and assumed working capital optimization initiatives
Acquisition Information Acquisition TEV (w/ Fees) $1,700
Capitalization Information Debt Funding $1,200
EBITDA Multiple (Current) EBITDA Multiple (Forward) EBITDA - Capex (Current) EBITDA - Capex (Forward)
Leverage Interest Coverage Equity Requirement % Equity
8.5x 7.8x 9.2x 8.4x
6.0x 2.1x $500 29.4%
Net Return Profile 3-Year
Base Case Upside Case Conservative Case Downside Case
25.6% 36.3% 18.9% (2.4%)
5-Year
22.9% 32.2% 16.7% 1.2%
We believe that Company X represents an attractive investment opportunity given the return profile of the investment relative to the risks • We have a high confidence level on most of the drivers of value (both controllable and uncontrollable) • The upside opportunity is meaningful while our conservative case (which we have high confidence we can exceed) still generates an attractive return profile • Finally, in a severe downside scenario, our capital investment is still preserved
Rationale for Investment / Sources of Return (cont’d)
Disaggregate Sources of Returns Revenue EBITDA At Acquisition
EBITDA EBITDA Margin Multiple
TEV
Net Debt
$1,700
($1,200)
Equity Value
∆ in
% of
Eq Value
Total
5-Year IRR
$1,000
$200
20.0%
8.5x
Revenue Growth - Industry
$1,159
$232
20.0%
8.5x
$1,971
($1,200)
$771
$271
22%
9.0%
Revenue Growth - Share Gain
$1,217
$243
20.0%
8.5x
$2,068
($1,200)
$868
$98
8%
11.7%
Operating Leverage
$1,217
$274
22.5%
8.5x
$2,327
($1,200)
$1,127
$259
21%
17.6%
Cost Takeout
$1,217
$304
25.0%
8.5x
$2,585
($1,200)
$1,385
$259
21%
22.6%
Sub-total Revenue/EBITDA Growth $1,217
$304
25.0%
8.5x
$2,585
($1,200)
73%
22.6%
$1,217
$304
25.0%
8.5x
$2,585
($716)
Sub-total Growth and Cash Flow
$1,217
$304
25.0%
8.5x
$2,585
Multiple Expansion / Contraction
$1,217
$304
25.0%
$1,217
$304
25.0%
Cash Flow / Deleveraging
Total Sources of Value
Management Options Package Sponsor Carry Net IRR
8.0x 8.0x
$2,433 $2,433
($716)
($716) ($716)
$500
$1,385
$1,869 $1,869
$1,717 $1,717
$885
$484
40%
$1,369
112%
($152)
(12%)
$1,217
100%
30.2% 30.2%
28.0% 28.0%
(1.4%) (3.7%) 22.9%
