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The first session from N. Bulent Gultekin’s Advanced Seminar in Private Equity relives the intense bidding for RJR Nabisco in 1988, a multibillion-dollar battle that gave birth to big-time leveraged buyouts. The lesson at hand: how do you value a target company?
The “B” in BRIC is a big country that is getting much bigger — its middle class alone grew by about 20 million from 2002 through 2008 and during the next two decades more people overall will be added in Brazil than in Europe and the United States combined. GP Investments, the country’s largest private equity firm, has positioned itself to grow in tandem. In GP’s view, the problems of Brazil’s past — notably hyperinflation and political turmoil — have been tamed. A stable democracy has been in place for about 20 years, inflation is way down, interest rates are relatively low and government debt levels are relatively healthy. The formula is just right, says GP: Brazil combines the growth rate of an emerging market with the stability of a more developed country.
One of the oldest private equity firms in the world, Warburg Pincus has seen its share of good and bad deals in emerging markets. Chang Sun, managing director of the firm’s Chinese business, has plenty of war stories to tell to illustrate the critical issues that determine whether a PE firm can successfully develop a company in its portfolio. In Sun’s view, there are four such hurdles: deciding whether a company is a good buy, figuring out the right structure and terms, dealing with the firm’s management and making the right call on when to exit.
The business elements of private equity can vary, sometimes depending on the culture in which deals are being struck. For Amwal AlKhaleej, a firm based in Saudi Arabia, leverage is not an option and only a minority stake is sought. The firm operates in the Middle East and North Africa, where debt is frowned upon and most businesses are family-owned. Those twin realities put the pressure on Amwal to negotiate the right deal up front and to clearly understand what life will be like working with the existing management and majority owners.
The PE concept looks easy on paper. But what it actually takes to make deals work can be daunting. Start with a deep knowledge of an industry and a sophisticated understanding of finance and corporate structures. Then add a high tolerance for risk and an ability to see and capitalize on opportunities. And don’t forget endless patience and the luck to get a break or two. One firm that focuses on the energy business has a CV that lists all of those things — plus bragging rights to the payoff that comes to those who make it to the end of the PE rainbow.
For much of its history, the private equity model was essentially a license to print money. But the financial crisis had its way with PE along with every other segment of the investment world. Now, new funding is down and competition is up. What’s more, good deals are harder to find and exit strategies are harder to implement. Edward J. Mathias, a director of The Carlyle Group, one of the biggest PE players, gives a short course in the industry’s celebrated past and recent change in circumstances.
A consolidation play looks like an easy winner in the private equity world. Roll up a number of companies in the same industry and you’ve got scale and pricing power, among other good things. There’s just one problem — such plays are really hard to pull off. Due diligence is the key, the more thorough the better. But even then, surprises can lurk and assumptions can prove wrong.
How can a limited partner bow out of a private equity fund before the partner’s commitment is over? The opaque and illiquid nature of PE funds by definition makes the leave-taking difficult. Sometimes a limited partner needs the help of an outside advisor to navigate the potential landmines in the secondary market. Jean-Marc Cuvilly, a partner at one such advisor, Triago, offers a guide to the problems and the potential of looking for a buyer.