Lecture on Private Equity

Introduction

• Speaker: Paul Gammore, an investment banker
• Setting: Domino's Pizza kitchen
• Focus: Middleby Corp and private equity

Key Topics

The Role of Private Equity

• Private equity funds pool capital to invest in privately held businesses, and sometimes in publicly traded companies (referred to as PIPEs).
• Two main approaches: Buyouts (acquiring controlling stakes) and Growth Equity (minority stakes for growth).
• Capital sources: Retirement funds, sovereign wealth funds, individual investors.

Formation of Private Equity Funds

• General partnership sets up a limited partnership.
• Private equity professionals raise capital from limited partners.
• Capital deployment occurs in the first 2-3 years.
• Focus on value creation during the middle of the fund's life cycle.
• Exits are typically through public offerings or sales.

How Private Equity Makes Money

• Through capital appreciation and management fees.
• Typical structure: "2 and 20" - 2% management fee and 20% carry (portion of capital appreciation).

Case Study: American Capital and Middleby

• American Capital invested in Middleby during challenging market conditions post-9/11.
• $25 million in convertible debt and equity for a 5% stake.
• Exited with a 37% return.

Partnership with Private Equity

• Benefits: Access to capital markets, growth support, operational expertise, corporate governance.
• Considerations: Oversight, potential loss of control, reporting requirements.

Types of Private Equity Firms

• Generalists vs. Specialists (e.g., industry-specific funds).
• Thematic investors focus on consolidating specific industries.

Deal Structuring and Strategy

• Private equity evaluates businesses based on potential for internal rate of return (IRR).
• Deal structures vary based on control, equity stake, and strategic goals.

Private Equity in Practice

• Example scenarios where business owners engage with private equity: Full exit, growth partnership, minority interest.
• Importance of due diligence on private equity firms.
• Strategy and vision alignment with the private equity partner.

Process of Partnering with Private Equity

• Initial email outreach is common for proprietary deal flow.
• Importance of a formal process to ensure competitive offers and alignment with strategic goals.
• Due diligence phase is critical, involving operational, financial, and accounting scrutiny.

Misconceptions about Private Equity

• Not typically focused on layoffs or asset stripping.
• Focus is on growth and improving business value.

Conclusion

• Private equity is about transformation, not just transactions.
• Business owners should be proactive in managing the process and selecting partners.
• Importance of competitive sellside processes to maximize deal value.