Private Equity

Linköping

January 8, 2009
Stefan Glevén
Private Equity
Private Equity – A catalyst for growth?

“In finance, Private Equity is an asset class consisting of equity securities in

operating companies that are not publicly traded on a stock exchange.”

“Growth can come from a rational organization of talents”

David Ricardo (1772-1823)

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Strictly private and Confidential
Agenda

I. Introduction to EQT

II. Private Equity

- Process
- Valuation
- Financing
- Value Creation & Exit
III. EQT Infrastructure

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EQT in brief
Industrial approach to private equity

y Founded 1994 New York

y Almost 200 employees - 11 offices

y 80+ Senior Industrialists Oslo
Helsinki
y Around €11 billion capital raised in 11 Stockholm
funds with four investment strategies Copenhagen
Frankfurt
– Equity Warsaw
– Expansion Capital Munich
– Opportunity Zurich
– Infrastructure

y Invested in more than 70 companies, realizing

37 exits
y Top quartile performance over time
Shanghai

Hong Kong

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Industrial heritage

Access to industrial leaders and companies through relationship with

Wallenberg family and its tradition of building and developing companies
► Active, long-term owner of highly successful international industrial
companies
► Support portfolio companies in their strategic and financial development
► International network used to exchange experience, knowledge and
competence

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Strictly private and Confidential
Agenda

I. Introduction to EQT

II. Private Equity

- Process
- Valuation
- Financing
- Value Creation & Exit
III. EQT Infrastructure

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Transaction Process

Target Due Deal

Ownership Exit
identification Diligence Execution

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Deal Sources

y Families/corporations seeking partners for the development of their

companies
y Non-core divisions in large corporations
y Privatizations
y Forced divestitures
y PTP (public-to-private)
y From other PE houses and other Funds

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Key Participants

Investment
Committee

Auditors /
Lawyers
Accountants
Financial
Sponsor
Industry
Specialists M&A Bankers

Leverage
Finance
Bankers

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Agenda

I. Introduction to EQT

II. Private Equity

- Process
- Valuation
- Financing
- Value Creation & Exit
III. EQT Infrastructure

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General Valuation
There are primarily three valuation techniques used when
valuing a company

y Discounted cash flow valuation (DCF)

y Comparable valuation based on trading comparables
– EV/EBITDA…
y Comparable valuation based on precedent transactions
– EV/EBITDA…

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General Valuation
Enterprise value is the actual economic value of a company

EBITDA x Multiple Debt - Cash

Enterprise value = Equity value + Net debt

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LBO Valuation
LBO valuation of a company is dependent on projections, debt structure
and required return

Main assumptions:
y Projections for income statement and operational balance sheet
– Dependent on market, market position, management, profitability, cost structure etc
y Debt structure
– Dependent on cash flow generation and banks willingness to finance the investment
y Exit multiple
– Dependent on company and industry profile
y Required return for the investment
– Dependent on EQT

Most important is to build a solid Base Case, based on assumptions for

growth, margins and cash flow

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General Valuation
Illustrative Example
Step 1. Define Base Case
Year 0 Year 1 Year 2 Year 3 Year 4
Revenues 100 110 121 133 146 Step 3. Define Exit Multiple
Growth % 10% 10% 10% 10% Year 4
EBITDA 12.0 13.2 15.7 17.3 20.5
EV/EBITDA Multiple: 7.0x
EBITDA Margin % 12.0% 12.0% 13.0% 13.0% 14.0%
EBITDA 20.5
Free Cash Flow 7.0 8.0 10.0 12.0 15.0 Enterprise Value: 143
Debt: 23
Net Debt/EBITDA 5.0x Equity Value: 120
Debt Year 0 60

Net Debt 60 53 45 35 23
Step 4. Define Required IRR
Required IRR 30%
Step 2. Define Debt
Structure
Year 0
Debt 60
EV = 102 Equity 42
Enterprise Value 102
EV/EBITDA 8.5x

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 Valuation Summary
Illustrative Example
70 75 80 85 90 95 100 105 110 115 120 125 130

LBO:
95 110
20-25% IRR; 6x-7x EBITDA Exit

DCF:
105 130
7.5%-8.0% WACC; 6x-7x EBITDA TV

Trading Comparables:
95 105
7x-8x 2009E EBITDA

Trading Comparables:
100 110
11x-12x 2009E EBIT

Precedent Transactions:
105 115
8x-9x LTM EBITDA

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Agenda

I. Introduction to EQT

II. Private Equity

- Process
- Valuation
- Financing
- Value Creation & Exit
III. EQT Infrastructure

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 General debt Financing
Debt financing is a fundamental component for a leveraged buy-out
The Past… Before Lehman After Lehman

Common Equity/
Common Shareholder Loan
Equity/Shareholder Loan
Common
PIK Loan PIK Note
Equity/Shareholder Loan
Unsecured Note Unsecured Note

Mezzanine Mezzanine
PIK
2nd Lien 2nd Lien
Loan Note

Senior Debt
Senior Debt
Senior Debt

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 Debt Volumes
LBO volume has been significantly lower in YTD 2008
LBO Loan Volume Annual Senior LBO Loan Volume

( € in billions) ( € in billions)
€160B €140B 320

€140B €120B 280

240
€120B €100B

200
€100B €80B
160
€80B €60B
120
€60B
€40B
80

€40B
€20B 40

€20B
€0B 0
1998 2000 2002 2004 2006 2008
€0B
1Q 2Q 3Q 4Q Deal Count*
2003 2004 2005 2006 2007 YTD 2008
Source: Standard & Poor’s LCD

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 Impact on Leveraged Finance Transactions
The debt structures has clearly changed during 2008
LBO Debt Structure Average Leverage
7.0x
100%
5.9x
6.0x
80%
5.0x 4.5x
60%
4.0x

40%
3.0x

20% 2.0x

0% 1.0x
2003 2004 2005 2006 2007 Jan-Sep 08
0.0x
Sr Only Sr + 2nd Lien Sr + Mezz Sr + 2nd Lien + Mezz
2007 3Q08

Average Purchase Multiple Average Equity Contribution

12.0x 50%
44%
10.1x 45%
10.0x
8.7x 40%
34%
35%
8.0x
30%
6.0x 25%
20%
4.0x
15%
10%
2.0x
5%
0.0x 0%
2007 3Q08 2007 YTD Sep 2008

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Agenda

I. Introduction to EQT

II. Private Equity

- Process
- Valuation
- Financing
- Value Creation & Exit
III. EQT Infrastructure

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The Path to Value Creation
There are several ways to create value in a portfolio company

• Accelerate organic opportunities

• Add-on acquisitions to expand product range and/or
Sales Growth geographical reach and/or provide synergies

• Operational Improvements
Margin • Product mix enhancement
Expansion

• Equity “Story” Improvement

Strategic • Consolidation, Critical Mass
re-positioning

• Using the target company’s cash flows to increase the equity component of
enterprise value by repaying debt
Debt pay down

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EQT’s Industrial Acceleration Strategy

EQT
Industrialists
Industrial
Industrial Acceleration
Acceleration
Management
Team

Network

Strategy People Incentives

ƒ Board defines and ƒ EQT appoints key personnel ƒ Board, management and
monitors roadmap for - The chairman always owners interests are
creating shareholder appointed from EQT network of aligned through
value international experienced investments
- Strategic industrialists ƒ Common mindset
positioning - EQT partner always member of established through
- Internationalization the board as owner but never - Joint business plan
- M&A chairman
- Transparency
- Financing issues - EQT active in assisting in the
- Open
- Preparation for exit recruitment of first line
communication
management
ƒ EQT contributes
industrial and financial - Internationally experienced
expertise executives appointed to the
board or as consultants

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Exit General
EQT has not made a good deal until exit – the goal is to achieve a
return of at least 2-4 times investment in three to five years

• Has delivered on the plan? (financials)

Company • Has the right structure? (reporting etc)
• More to do? (marginal return)

• Equity Markets
• Debt Markets
Market
• Competing Offerings

• Many
Buyers • Willing
• Able

• Return vs requirements
EQT • Need for exits (fund raising etc)
• Portfolio Management issues

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 EQT Value Creation
EQT has historically created value through accelerated revenue growth,
increased efficiency and strategic re-positioning
Focus on Growth and Efficiency Proven Ability to Drive Growth

Historic Breakdown of Value Creation Average growth of all EQT portfolio

companies in Europe (1) 20%
100%

80% 42%
Revenue growth 13%
12%
60%

40% 36%
Margin
improvements

20%
Strategic re-
19%
positioning
0% 3% Debt pay-down
Employee growth Sales growth EBITDA growth

(1) Includes organic and acquisitive growth. Analysis based on Carl Zeiss having acquired Sola and Dragoco Haarmann &
Reimer. If base for these acquisitions is adjusted, EQT portfolio companies recorded an average +10% employee growth, ® 2008 EQT – All Rights Reserved 25
+11.3% sales growth and +18% EBITDA growth Strictly private and Confidential
Agenda

I. Introduction to EQT

II. Private Equity

- Process
- Valuation
- Financing
- Value Creation & Exit
III. EQT Infrastructure

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EQT Infrastructure
The EQT Infrastructure fund was launched in November 2008

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EQT Infrastructure
EQT will invest €6–7 billion in infrastructure assets in the next years with a
focus on the Northern and Eastern Europe
y Fund size: ~€1.2 billion

y Focus on Northern and Eastern Europe

– Advising teams in Stockholm, Helsinki, Munich and New York

y Medium-sized infrastructure operating assets/companies – control or co-control
positions
y Primary targets;
– Regulated basic infrastructure (e.g. power generation, power transmission and
distribution, wind power, gas pipelines, telecom)
– Concession-based essential infrastructure (e.g. airports, ports, toll roads, rail
transport, water and waste treatment facilities)

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1. Source: OECD “Infrastructure to 2030 Telecom, Land, Transport, Water and Electricity” Strictly private and Confidential
EQT Infrastructure
Infrastructure - macro perspective

y Global need for new and improved infrastructure

– Rising global population

– Focus on competitiveness
– Huge investment need (some €52 trillion for basic infrastructure worldwide
through 20301)
y Privatization important part of infrastructure investment solution - risk split, free up
capital, strengthen competitiveness
y Decreased government spending on infrastructure

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1. Source: OECD “Infrastructure to 2030 Telecom, Land, Transport, Water and Electricity” Strictly private and Confidential
Infrastructure fundamentals
Decreased government spending on infrastructure

Source: OECD ® 2008 EQT – All Rights Reserved 30

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