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PrIVATE

EQUITY

CAPITAL MARKETS AND FINANCIAL

INSTITUTIONS

İNGİLİZCE İŞLETME DOKTORA PROGRAMI

ALAATTIN YOLAÇTISlide2

PresentatIon

layout

PRIVATE EQUITY – OVERVIEW

1 PRIVATE EQUITY FUNDS2

KEY ISSUES IN PRIVATE EQUITY APPLICATIONS

3

PRIVATE EQUITY MARKET

4Slide3

PRIVATE EQUITY - OVERVIEW

1Slide4

WHAT IS PRIVATE

EQUITY (PE)?

Financing

is a

critical key succes of a business Private Equity (hence on PE) is alternative method to that

may

meet

the

needs

of

entrepreneurs

PE is the provision

of

equity

capital

by

financial

investors

over

the

medium

or

long

term

on

companies

with

high

growth

potential

Equity

owner

can

join

in

management

of

the

business

or

can

join

by

information

sharing

due

to

reasons

;

The

entreprise

may

have

less

experience

than

the

investor

The

investor

may

want

to

have

a

control

over

the

company

to

lower

riskSlide5

WHAT IS PRIVATE

EQUITY (PE)? -2

The

system

briefly works as follows ;Equity owner supplies capital to entrepreneur in return

for

stocks

of

project

by

participating

risks

of projects in opposition to

other

financial

associations

After

5-10

years

when

the

stocks

come into value at the market , equity owner sells them and gains revenue from this investment.The expected profit rate for the investor is annually %18-%35 or more in developing markets Slide6

WHAT IS PRIVATE

EQUITY (PE)? -3

PE is

largely

applied to the companies whose investments arenot quoted to the capital market

It

is

classified

under

the

title

of “

alternative

investments”

PE is

high

-risk

high

profit

class

as

well

as an

alternative

finance

type for the small and medium sized enterprisesPE can also used for buyouts where investor take the controlof the company , reconstruct it and finally sell it to a strategic buyer

or

offer

it

to

public

BUYOUT :

The purchase of the entire holdings or interests of an owner or investor.Slide7

PRIVATE

eQUITY

VS.

lISTED EQUITYPRIVATE EQUITY LOW LIQUIDITY LONG INVESTMENT HORIZON HIGH ACTIVE INVOLMENT

LOW MARKET EFFECIENCY

NO PUBLISHED INFORMATION

LOW REGULATORY OVERSIGHT

LISTED EQUITY

STRONG LIQUIDITY

SHORT OR LONG TERM

LITTLE ACTIVE INVOLVEMENT

HIGHER MARKET EFFECIENCY

PUBLISHED INFORMATION

HIGHLY REGULATEDSlide8

Why

do

companIES

SEEK PE?

Private

Equity is an alternative option for a company on similiar cases listed as follows

;

Create

a

business

Improve

and

develop

the

export

performance

Recruit

highly

qualified

personnel

Sell

part

or

all of the companyChange the size of the business and take one over competitionLaunch a new productImprove the management capacityLiquidise some of the assets Slide9

What

IS A PE FIRM LOOKING FOR?

High

growth

, competitive products or services In the case of disposal or transfer, a loan

capacity

and

recurring

profits

A

quality

and

stable management

team

,

capable

of

turning

the

negotiated

goals

into

reality

A solid management procedures either already in place or able to to be put in placeA transparent legal structure where personal and professionnal assets are not entangledAn agreement on the investor’s exit with

or

with

out the head

of

companySlide10

Cons

&

pros

CONS High Revenues Increases portfolio variety Able to reach the information

of

the

enterprise

legally

. (

Insider

trading

is not legal in the stock Exchange market)more secure

to external economic fluctations than that

stock

exchange

market

PROS

Excessive

levels

of

debt

to

acquire

corporatipns Long term investment (minimum 3 years) Investors rights to exit is restricted within the period High liqudity risk CONS High Revenues Increases portfolio variety Able to reach the information of the enterprise legally. (Insider trading is not legal in the Stock Exchange Market)More secure to external

economic

fluctations

than that Stock Exchange Market

PROS

Excessive

levels

of

debt

to

acquire

corporatipns

Long

term

investment

(minimum 3

years

)

Investors

rights

to

exit

is

restricted

within

the

period

High

liqudity

riskSlide11

PRIVATE EQUITY VS.

VENTURE CAPITAL-2

THE PHILOSPHY IS SIMILIAR IN NATURE

VENTURE CAPITAL IS THE SUB-BRANCH OF PRIVATE EQUITY BESIDES INVESTING IN EARLY STAGES

Definition of PE by NVCA (Natioanal Private Equity Assosication ) : Venture Capital is the capital provided by investing

professionals

who

have

the

potential

to be a significant participant

Definition by SPK (Turkish Capital

Markets

Board):

Venture

Capital

is a form of

investment

which

enables

dynamic

and creative entrepreneurs who don’t have adequate financial power to fullfil their investment ideas.Slide12

PRIVATE EQUITY VS.

VENTURE CAPITAL

VENTURE CAPITAL

Venture

capital investors invest companies

at

earlier

stages

Provide

an

initial

capital

to an idea or 1-3 years

old

companies

. (

Deloitte

,2007)

Includes

the

financial

support

in early stagesIt has a particular emphasis on on entrepreneural undertakings rather than nature of the business. PRIVATE EQUITY Investors of private equity generally donot invest on idea or premature companyrequire a background of 3-10 years including operations

.

Private

equity

not

only includes the financial

support

in

early

stages

but

also

in

the

expansion

stages

More

emphasis

on

business

itself

Venture

capital

and

private

equity

terms

are

largely

used

as a

substitute

for

one

another

but has

slight

differencesSlide13

Stages

of a

company

development

SEED :

Seed financing is designed to research, asses, an develop an idea before a company has reached start up

phase

.

Investors

are

mainly

business

angels

.

START UP : Start

up

financing

is

used

for

product

development

and

initial marketing phase . Capital is mainly required for R&D of the product and train personnel. (Especially for electronics, life sciences sectors.)POST CREATION : Business has already developed its product and needs capital to

begin

manufacturing

and

sell it. Yet no profit has

been

created

EXPANSION DEVELOPMENT :

Business

has

approached

or

near

break

even

point

.

High

growth

period

,

capital

is

used

to

increase

capacity

and

sales

power

TRANSFER/SUCCESSION :

The

total

or

partial

retirement

of

the

head

of a

company

is

often

an

opportunity

to

implement

a

leveraged

operation

. Slide14

EXPECTED

RETURN VS RISK DIAGRAMSlide15

PE INVESTMENTS

& FUNDS

2Slide16

PE INVESTMENT

METHODS-1

DIRECT INVESTMENT :

The

investor himself finds the company to investAnalysis, invests and terminates

it

when

it is time.

High

revenue

but has a risk of

loosing

invested

capitalOnly suitable

for

experts

in PE /

Less

used

way

II. IN HOUSE PE FUND INVESTMENT :

Investors

invest

their extra funds to a PE investment fundProffesionals in this fund are experts in finding enterprises which will be invested in Analysis, investments ,management and time to quit the investment are done by

these

professionals

III. INVESTING IN FUNDS OF FUNDS :

A fund

manager

evaluates

various

private

equity

funds

and

chooses

among

them

and

distributes

the

selected

funds

Investors

have

to

pay

extra

expenses

to

the

manager

as a

consultancy

service

feeSlide17

PE INVESTMENT

METHODS-2

TYPES OF PE INVESTMENTS

Source

:

M.Yardım,Private Equity as an alternative financial method that support Entrepreneurship:

Turkey

mcıoğlu

, N.Demirel, 2008,

Case

,

KMU İİBF Dergisi Yıl: 10 Sayı14 Haziran/2008Slide18

HOW DO PE FUNDS WORK?

Source

:

Guide

on

Private Equity and Venture Capital for Enterpreneurs, European Venture Capital Assosiation Publications,

November

2007Slide19

LIFECYCLE

OF PE FUND :

underwrITINGS

-1

CREATION OF A FUND AND UNDERWRITING BY PROFFESSIONAL INVESTORS :

PE management companies (General partners) after obtaining the agreement of controlling authorities establish investment funds

that

collect

capital

from

investors

known as Limited partners

This capital is used to buy high

potential

companies

known

as

the

portfolio

or

investee

companies PE fund managers invite the institutional investors to subscribe an investment fund for a period (usually 10 years) The fund raising period lasts for 6 months to one yearSlide20

LIFECYCLE

OF PE FUND :

underwrITINGS

-1

Usually institutional investors cannot leave the funs before their terms completedInvestors get

prenegotiated

stake

in

the

equity

of

the

investment and they become

fully fledged shared holders, sharing the

risks

The

investors

aim

usually

is not

to

take

the

control of the company (there are exceptions) but to help create value to realise a capital gain. Slide21

LIFECYCLE

OF PE FUND : INVESTING

2. INVESTING THE FUND :

Once

the target amount of capital has been raised, the subscription is closed In some cases (in Europe %30) PE funds come together

to

form a “

financial

syndicate

to

make

an

investment in case of large size capital

needs and high risk. One of

the

investment

company

represents

the

group

in

the

syndicate

dealing with the enterpreneurThe private equity team usually makes the investments in the first five years of the fundSlide22

LIFECYCLE

OF PE FUND :

managIng

3. MANAGING THE INVESTMENT

The fund manager on behalf of the investors is concerned with creating value in the company,

He

will

follow

the

investment

over

long time period and prepare

exit conditions.Slide23

LIFECYCLE

OF PE FUND :

exIT

4. REDISTRIBUTION :

When the fund manager decides to exit their investment, the capital recovered from the

exit

is

redistributed

to

the

original

investors on a pro-rata basis

depending on their initial investmentEXIT ROUTES :

Trade

Sales

(

Merger

&

Acquisition

trade

sales

,

more

common way)Enterpreneur or management team repurchase Sale of the investment to another financial purchaser (Secondary Market Investor) IPO (Initial public offering) : Flotation on a public stock marketLiquidation Slide24

TYPES OF PE FUNDS

PE FUNDS CAN BE CLASSIFIED ACCORDING TO THE SHAREHOLDER

PERCENTAGES AS FOLLOWS

INDEPENDENT FUNDS :

funds

which the third parties are the main source of capital and in which no one shareholder holds a majority stake. An independent fund is

the

most

common

type

.

CAPTIVE PE FUNDS :

Funds

which one shareholder contributes the most of the

capital

.

SEMI CAPTIVE FUNDS :

Funds

in

which

again

the

large

part

of the company belongs to one share holder, but a significant share of the capital is raised from third parties.Slide25

KEY ISSUES IN PE

APPLICATIONS

3Slide26

Process

chart

Slide27

BUSINESS PLAN

The

process

of attracting a private equity company starts with a Business PlanIt is the main tool used by financial investor to evaluate business

CONTENTS OF BUSINESS PLAN :

Executive

Summary

Company

History

Managemet

Team

Products

&

Services

Analysis

of

the

market &

competitors

Commercialisation

Operational

management

Financial Projections Capital RequiredExit PossibilitiesSlide28

Due

dILLIGENCE

Avabiality

of

the marketManagement qualityGeographical situationProximity to the marketFinancial ForceSWOT analysisEffeciency of

the

Project

owner

Advantage

over

rivals

Sharing

of stocks

Patent rightsLegal infrastructureSlide29

Company

valuatIon

Valuation between PE Firm and the target company should be covered in the agreement

No

pure

quantitative

methods

,

usually

based

on hypothesis that may be subjective

Diffucult to apply especially for

start

up

companies

GENERAL METHODS USED IN VALUATION

Discounted

Cash

Flow

-

If

company

has already has a positive cash flowComparative Methods – Using similiar price/earning ratios for a similiar company, have wide application areasOpportunity Cost - Opportunity Costs of the investors if they invest in different tools Slide30

What

do

the

pe

fund managers do?

Fund

Managers

have

four

principal

roles

:Fund Raising : Funds are

raised

from

international

investments

,

many

of

which

are

pension funds, banks, insurance companies and high networth individuals. The investments are usually as limited partnership. Sourcing investments: A PE found must source and complete succesful transactions to generate profit.Active Management of Investments : PE managers have become hands-on managers of their investments. They don’t involve day to day control, instead actively involved in setting

and

implementation

of

the

strategy.Releasing Capital Gains :

The

academic

evidence

shows

that

there

is a

wide

variation

in

the

length

of time of

the

PE

investment

.

Slide31

How

are

pe

fund managers rewarded

?

SALARY

FEE INCOME

:

Receive

management

fees

that

are

expressed

as a

percentage

of

the

funds

raised

.

Larger the funds greater the income although 3 % in smaller funds, 1-1.5% in larger funds for operating costs (sometimes cause principal agent problems between fund management and

investors

)

CARRIED INTERESTS :

Share

in the

profits

of

the

of

the

fund

known

as

carried

interest

Once

the

investors

have

achieved

the

a

certain

pre

-

agreed

rate of

return

(

hurdle

rate) ,

the

fund

managers

shared

in

the

excess (usually

the

%20 of

the

excess

amount

)

The

hurdle

rate is

around

%8

per

annum

Slide32

How

are

pe

fund managers rewarded

?-2Slide33

HOW IS

pe

company’s

succes MEASURED?Slide34

Success

Slide35

PRIVATE EQUITY MARKET IN THE WORLD AND IN TURKEY

4Slide36

PE APPLICATIONS

IN THE WORLD

PE has

been

a major driving force in technological advance in the USA, Japan, Germany, Canada and England

Historically

Digital

company

was

the

first one

constructed

with

venture

capital

.

Constructed

with

70,000 $

and

in

five years time reached a value of 3,5 billion $ sold to Compaq for 10 billion $ in 1998PE houses announced more than 2,000 deals globally worth a total of over $236 billion in 2010Slide37

PE

funds

raISING

2005-2010Slide38

PE

ACQUISITIONS BY REGIONSSlide39

PE

ACQUISITIONS BY SECTORS IN 2010Slide40

PE APPLICATIONS

IN TURKEY

In

Turkey

, financial system mostly depends on banking sectorEspecially the SME (KOBİ) cannot benefit from traditionally

recognised

banking

system

adequately

due

to Mc Millan Gap

According to a survey made

by

ITO

and

piar

among

4671

small

enterprises

%78 of

their

capital

is provided by themselves, only %7 by short time banking creditsFirst legal regulations are made by CMB (SPK), after that the first found was constructed by Vakıf Risk Capital established in 1996 MC MILLAN GAP : The name for the research which succeded in detecting the fact that traditional banking system is largely divirted to large well known

corporations

therefore

hindering SMEs Slide41

PE INVESTMENTS

IN TURKEY

(

Between

1996-2007) –

cont.YEAR

BUYER

TARGET COMPANY

SECTOR

OWNERSHIP

ESTIMATED INVESTMENT AMOUNT (million USD )

1995

Nomura (Sparx Group)

Ünal Tarım

Food

Minority

2

1995

Nomura (Sparx Group)

Arat Tekstil

Textile

Minority

2

1995

Vakıf Risk

Teknoplasma

Production

Minority

1

1996

Nomura

(

Sparx

Group

)

Eka Elektronik

Elektronics

Minority

2

1996

Nomura

(

Sparx

Group

)

Aba Ambalaj

Packaging

Minority

6

1997

Nomura

(

Sparx

Group

)

Rant Leasing

Leasing

Minority

2

1997

Nomura

(

Sparx

Group

)

GSD Holding

Textile

Minority

8

1997

Nomura

(

Sparx

Group

)

Biomar

Biotech

Minority

1

1998

Merrill Lynch Investment

Termoteknik

Radiator Panel Producer

Minority

5

1998

FMO

Tüyap

Arts&Entertainment

Minority

7

1999

Vakıf Risk

Innova

Biotechnology

Medical

Minority

2

1999

Merrill Lynch Investment

BIM

Retail

Minority

15

1999

Citicorp Inv. Services

Merko

Food

Minority

2

1999

Safron Advisors Ltd.

Alfa Menkul

Brokerage

Houes

Minority

5

2000

Commercial Capital

Işıklar Ambalaj

Packaging

Minority

10

2000

Safron Advisors Ltd.

Net One

ISP

 

4

2000

AIG Blue Voyage Fund

Galatasaray Sportif

Soccer Marketing

Minority

21

2000

AIG Blue Voyage Fund

AFM

Arts&Entertainment

Minority

7

2000

Vakıf Risk

Ortadoğu Yazılım

Internet, ISP

Minority

1

2000

EFG Hermes Group

Probil

System Integrator

Minority

21

2000

EFG Hermes Group

Gorbon Işıl

Tablewear

Minority

1

2000

Taurus/Bank of America

BIM

Retail

Minority

19Slide42

PE INVESTMENTS

IN TURKEY

(

Between

1996-2007) –

cont.YEAR

BUYER

TARGET COMPANY

SECTOR

OWNERSHIP

ESTIMATED INVESTMENT AMOUNT (million USD )

2002

İş Risk Sermayesi

Probil

System Integrator

Minority

6

2003

İş Risk Sermayesi

Nevotek

IT

Minority

3

2003

Soros

Investment

Unikom Gıda

Food

Minority

13

2003

İş Risk Sermayesi

Mars Sinema

Arts&Entertainment

Minority

5

2003

Turkven

Private

Equity

/

Advent

UNO

Food

Minority

13

2003

İş Risk Sermayesi

ITD

IT

Minority

4

2004

İş Risk Sermayesi

Step Halıcılık

Furniture

Minority

3

2004

MT Invest

Karyateks

Textile

Minority

1

2005

İş Risk Sermayesi & FMO

Tüyap

Arts&Entertainment

Minority

36

2005

Turkven Private Equity/Pound Capital

Trendtech

and

Retomedia

IT

Minority

25

2005

The International Investors KCSC

Docar Filo Kiralama

Real

Estate

& Leasing

Minority

29

2005

Turkven Private Equity

Intercity

Real

Estate

& Leasing

Minority

15

2006

Providence Equity Partners

Digiturk

Broadcasting

Minority

150

2006

Texas Pasific Group

Mey İçki

Tobacco

Product

Man

.

Majority

810

2006

Partners in Life sciences & Citigroup

Biofarma İlaç

Pharmaceyticals

Majority

240

2006

Turkven & Advent International Group

Roma Plastics

Plastics

Majority

76

2006

AIG Capital

For you

Retail

Minority

25

2006

Global Finance, IDB, Goldman Sachs

TAV

Airport Operations

Minority

650

2006

Turkven and FMO

Pronet Güvenlik

 

50-50

10

2006

Bancroft PE

Standart Profil

Automative

Majority

90Slide43

PE INVESTMENTS

IN TURKEY

(

Between

1996-2007) –

cont.YEAR

BUYER

TARGET COMPANY

SECTOR

OWNERSHIP

ESTIMATED INVESTMENT AMOUNT (million USD )

2006

İş risk Sermayesi

Beyaz Oto Kirlama

Rental

 

10

2006

Ottoman Fund

riva (GS)

Real Estate & Leasing

 

110

2006

GEM Global equities

Deva Holding

Pharmaceuticals

Majority

162

2007

Citicorp Inv. Services

Boyner

Retail

Minority

46

2007

Citicorp Inv. Services

Beymen

Retail

50-50

143

2007

İş Risk Sermayesi

Ode Yalıtım

Mineral Products

Minority

5

2007

National Bank ofKuwait

Yudum

Oil

Majority

unknown

Source

:

Resource: Deloitte, “Private Equity in Turkey – A Practical Guide for Turkish Companies and Investors”, 2007, pp.16-17. Slide44

PE INVESTMENTS

IN TURKEY

(

Between

1996-2007) –

Cont.Slide45

ConcludING

REMARKS

Researches

show

that the countries that have high entrepreneurial activities had provided a growth above

avarages

KOBI’s which are supposed to vitalize economy and

Industry life has to work out alternative financial methods

Private Equity

Applications

should

be

improved

to

s

upport

e

ntrepreneurship

in

TurkeySlide46

Thank

you

for

your attentIonSlide47

REFERANCES

M.Yardımcıoğlu

, N.Demirel, 2008,

Private

Equity as an alternative financial method that support Entrepreneurship: Turkey “Case”, KMU İİBF Dergisi Yıl: 10 Sayı14 Haziran/2008Akkaya G.C., İçerli, M.Y., 2001, “Kobilerin Finansman çözümünde risk sermayesi finansman modeli”

, Dokuz Eylül Üniversitesi Sosyal Bilimler Dergisi, Cilt 3, Sayı 3,2001

Guide

on

Private

Equity

and

Venture

Capital for Enterpreneurs

,

European

venture

capital

Assosiation

Publications

,

November

2007

Private

Equity Demistified, An Explanatory Guide, J.Gillian, M. Wright, 2nd edition, Corporate Finance Faculty PublicationsGlobal Private Equity Watch, Ernst Young Yearly Report, 2011

By: olivia-moreira
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Type: Public

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EQUITY CAPITAL MARKETS AND FINANCIAL INSTITUTIONS İNGİLİZCE İŞLETME DOKTORA PROGRAMI ALAATTIN YOLAÇTI PresentatIon layout PRIVATE EQUITY OVERVIEW 1 PRIVATE EQUITY FUNDS ID: 332677 Download Presentation

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