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Day-to-day work in an international PE fund

Dott. Raffaele Legnani

Managing Director

H.I.G. Capital

Università Commerciale Luigi Bocconi, Tuesday 3rd May 2016

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The speaker

Raffaele Legnani

•Graduated with honors in Finance and Business Administration from Bocconi

University in Milan, after a term at the Wharton School of the University of

Pennsylvania

•Worked in investment banking for Goldman Sachs in London

• Investment Professional / Partner of Special Situations private equity funds: the US based Wexford

Management and the London based Stellican

•Directly invested in a significant number of successful buyout and restructuring transactions serving as

operating board member for several portfolio companies

•Founding partner of Atlantis Partners, private equity investor and managing company of the first

independent Turnaround and Special Situation fund dedicated to mid sized companies in Italy

•Managing Director of H.I.G. Capital, heading up the Italian office

•20+ years of experience in private equity

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Snapshots on the PE role in Italy

H.I.G.: description, philosophy and activity

Everyday life in a PE fund and examples from H.I.G.

Q&A

Today’s agenda

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1. Investments valued at historical cost

Source: AIFI, AFIC, ASCRI, BVCA, BVK

Some numbers of PE activity in Italy

PE is playing an important role in the

Italian M&A arena …

3,5

7,1

8,7

5,9

3,5

Italy UK Germany France Spain

… but still at lower levels compared to

the main European countries

125 PE funds, of which <15 international

with offices in Italy

3,8 billion Euro invested on average in

the last 3 years in Italy (4,6B€ in 2015)

~1.200 companies in PE fund portfolios…

…for a total invested amount of 24,41

billion Euro…

…revenues of over 90 billion Euro…

…and more than 400.000 employees

Invested capital, € bn (2014)

#

investments 728 1,650 1,396 248 580

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PE funds in Italy largely invest in buy-out and expansion deals

EV

t

VENTURE CAPITAL

Capital for R&D,

product development,

beginning of

production and distribution

of start-up companies

GROWTH/EXPANSION

Expansion of

production capacity,

distribution, M&A etc.)

REPLACEMENT/BUYOUT

Majority investments

through leverage finance

TURNAROUND

Financial and managerial

support to companies

facing restructuring and

complex situations

2% (36%)

7% (24%)

89% (39%)

1% (1%)

% of PE investments in Italy in 2015 value (number)

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Snapshots on the PE role in Italy

H.I.G.: description, philosophy and activity

Everyday life in a PE fund and examples from H.I.G.

Q&A

Today’s agenda

7

>19 billion dollars under management

>200 investments since foundation in 1993 globally

80 PE investments and add-ons realized since 2008 in Europe

>100 portfolio companies with …

… >30 billion dollars of cumulative sales

>300 experienced investment professionals

Based in Miami with offices in Atlanta, Boston, Chicago, Dallas, New York and San Francisco

in the US, and Rio de Janeiro in Brazil; in Europe offices in Hamburg, London, Madrid, Milan and Paris

Funds active in Europe

A family of funds with over 19 billion dollars under management

H.I.G. Capital: leading global investment firm focused on medium-sized companies

Private Equity

H.I.G. Capital

Credit

Opportunities Direct Lending Real Estate Venture Capital

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H.I.G. in Europe has a broad investment mandate

Revenues between €50m and €500m

EBITDA > €10m

Equity investment between €10m and €50m

Mainly majority investments but also minorities

Possibility to invest in all industries

Complex deal structures, including carve outs and asset deals, also from bankruptcy procedures

Middle Market

Flexibility

Established

businesses (no Venture Capital)

Organic growth and acquisitions

Management buy-out

Management buy-in

Orphan companies

Consolidation projects

Underperforming businesses

Financial restructuring

Corporate carve-out

Complex situations

ST. GILGEN

INTERNATIONAL SCHOOL

AUSTRIA

Bezier

Growth / Expansion capital

H.I.G. Deals

in Europe

Replacement/ Buyouts Turnaround / Special Situations

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Snapshots on the PE role in Italy

H.I.G.: description, philosophy and activity

Everyday life in a PE fund and examples from H.I.G.

Q&A

Today’s agenda

10

What do we do in an international PE?

1. Fundraising 2. Origination 3. Screening

4. Deal

structuring and

execution

5. Portfolio

management 6. Exit

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• International PE funds look for large institutional

investors (“at the top of the food chain”) such as:

• universities

• endowments

• pension funds

• family offices

• insurance companies

with long term investment horizon.

• Fundraising activity does not vanish at the closing of a

PE fund but it’s rather a continuous communication

activity with investors to create long lasting

relationships and it is targeted to broaden the range of

products offered by the fund

• Large international funds manage their fundraising and

investor relationship activities centrally with dedicated

teams

• H.I.G. has specific teams dedicated to investor

relationship based in London and Miami; this allows

investment professionals to focus on…

1. Fundraising activity and relationship with investors

Fundraising

… what we love the most:

investing!

In an international PE fund, fundraising is a

continuous activity… …with specific team dedicated to this function

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Deal origination Marketing

2. Origination: scouting of new operations

Origination

Network Proactive searches

• Mapping of the 3.500 Italian

companies relevant for size

• Investigation on potential

triggers for opportunity arising

(plans to grow, succession

issues, financial distress..)

• Proactive contacts through

intermediaries or company’s

advisors or banks

• More than 150 marketing meetings

to present H.I.G. in Italy per year

• Constant presence on media

• Newsletter with updates on H.I.G.

global investment activity

• Several initiatives (breakfast

meetings, marketing corporate

events, road show by provinces,

presence at industry exhibitions) to

enlarge the network and increase

deal flow

• H.I.G. originates deals in Italy from a

network of 3.000 Italian contacts (of which

450 classified and periodically contacted)

• H.I.G. international network (foreign

colleagues) generates 15% of total

opportunities in Italy (% much higher for

add-on opportunities abroad)

• One professional of H.I.G. Italian team is

fully dedicated to coordinate this activity

Investment

bankers

Lawyers

M&A advisors

Local

chartered

accountantsManagers

Foreign

Colleagues !

The whole activity generates in Italy 450 investment

opportunities / year to be screened

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First check of minimal

requirements

• First go/no go analysis on

target company’s

requirements such as:

• company size

• deal size

• business or geographies

restricted

Business & financial analysis

Business and market analysis

• Comprehension of company’s market and product dynamics through

internal analysis, expert interviews and brainstorming with colleagues

Identification of avenues of value creation

• H.I.G. internal organization by verticals greatly facilitates a quick

understanding of main business dynamics and opportunities on

European and global markets, leveraging on internal industry

competence and contacts of the H.I.G. global teams

Financial analysis

• Analysis of company’s historical financials and business plan

• Preparation of LBO model and preliminary hypothesis on deal returns

3. Opportunity screening: focus on business value creation in targets

Screening

TMT Healthcare Natural

resources

Business

services Industrial

16 professionals

(6 Europe, 10 US)

>30 investments

>16 professionals

(6 Europe, 10 US)

>50 investments

12 professionals

(7 Europe, 5 US)

>30 investments

16 professionals

(3 Europe, 13 US)

>40 investments

9 professionals

(4 Europe, 5 US)

>20 investments

Consumer &

retail

>15 professionals

(6 Europe, 9 US)

>30 investments

Deal context analysis

• We prefer proprietary deals

(we generally avoid

overcrowded sale processes

and auctions)

• We prefer primary deals (not

PE exiting)

• Strong relationships with

management, seller or

intermediates help

• Looking for strong angle in

terms of H.I.G. credentials in

the industry, possibility to

bring add-on opportunities or

experienced management

Out of 450 opportunities, 70% passes the first check

Nearly 50% of the “surviving” dossiers is rejected after a first desktop analysis

With the aim of finding

opportunities in which

we can create corporate

and shareholders value

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Pricing

• Price must be consistent with

the risk associated to the

growth plan

• H.I.G. Italy presents roughly

30 NBOs per year

Financing

• Financing is provided by

local or international banks

depending on size and it is

negotiated by local teams

Due diligence

• Involvement of international

advisory firms but also local

specialists, industry or

functional experts

Structuring and SPA

• Maximum flexibility in

structuring to meet sellers’

and target company needs

• In H.I.G. we also like

complex structures: for

instance we completed 16

carve-outs in the last 7 years

4. Deal structuring and execution

Deal execution

We target 4/8 LOI and formal due diligence processes to

execute 2/3 deals per year

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5. Portfolio management: how do we create value?

Prtf management

Value creation levers

Industrial levers

(EBITDA growth)

Financial lever

(@ entry)

Marginality

growth

Optimal deal

structure (D/E)

Revenues

growth

Financial lever

(@ exit)

Multiple

expansion

Deal structuring and

execution Portfolio management Exit

Main focus area to create value

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Internationalization External growth Operational excellence

5. In H.I.G. we focus on 3 way to create value

Industrial levers

(EBITDA growth)

Marginality

growth

Revenues

growth

• H.I.G. believes that being

international is key for a company

to be competitive today

• We have an extensive network

worldwide which support our

portfolio companies to growth

outside Italy

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35

80%

Offices in 7 countries:

USA, Brazil, UK,

Germany, France,

Spain, Italy

Countries where we

operates through our

portfolio companies

of our portfolio

companies saw their

export growing more

than 40% during

holding period

• H.I.G. strongly supports a

buy&build strategy, being able to

structure, evaluate and complete

acquisitions of add-on

opportunities in Italy and abroad

1.4B$

36+34

3,200

Our 36 portfolio

companies completed

34 add-on acquisitions

Companies

met/analyzed each

year in Europe that

could be add-on

opportunities

Size of the European

funds for the Private

Equity activity; ability

to provide portfolio

companies with

additional capital

• H.I.G. targets the operational

excellence of its portfolio

companies:

Leveraging on

competencies and

expertise of H.I.G.

Investment Professionals,

all with a deep operating,

consulting, industry and

work-out experience

Reinforcing the

management team,

when needed, thanks to

a network of approx. 350

managers in Italy and

3,500 managers abroad

Through the hands-on

approach of HIG

professionals, granted by

a longer holding period

(from 5 to 8 years)

One size does not fit all!

Each investment requires different levers

Prtf management

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Shareholders’ role Management team’s role

5. Who does what to create value?

Guide Execute &

propose

Support &

incentivize

Share

Facilitate Communicate

• Select Top Management team

• Assess and validate long term

strategic guidelines

• Support implementation of the

strategic plan

• Motivate and inspire managers to

undertake activities / processes /

operations that aim at value

creation (i.e. M&A)

• Facilitate the development of the

company providing access to

skills, competences,

professionals’ network and

financial resources

• Implement strategic plan in

autonomy

• Propose long-term strategic

guidelines to shareholders

• Potential opportunities as well as

risks connected to company’s

operations

• Keep shareholders up to date on

company’s milestones and

involve them on the development

of the identified growth plans

Prtf management

In every deal is key to align the objectives of the shareholders

and management in order to drive value creation

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6. Exit: evaluate different options to maximize value

Exit

IPO

Trade- sale

Secondary buy-out

• Possible higher valuation

• Great visibility for management

• Management or minority shareholders

can gain control after listing

• Partial exit

• Regulation / need of disclosure

• Subject to equity market conditions

• Full exit

• Higher valuation (possibility to partially

include synergies in company

valuation)

• Confidentiality issues during due

diligence process

• Management may see its role at

risk

• Full exit

• Speed of execution

• Full understanding of bidder’s

rationale

• No valuation benefit from synergies

• Price depressed by high targeted

returns of bidders

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Snapshots on the PE role in Italy

H.I.G.: description, philosophy and activity

Everyday life in a PE fund and examples from H.I.G.

Q&A

Today’s agenda

20

Contacts

We are looking for candidates for an internship starting in late June

Please refer to Bocconi JobGate Online Platform

H.I.G. European Capital Partners Italy

Via Dante, 14 - 20121 Milan

Tel.: +39 02 4537 5200

Fax.: +39 02 4537 5250

www.higeurope.com