8/14/2019 Lesson 05 Private Equity Funds November 2012

1/39

Universit di TorinoFacolt di Economia

CourseofBusinessCombination

November2012

PrivateEquityFunds

8/14/2019 Lesson 05 Private Equity Funds November 2012

2/39

Agenda

PrivateEquity

2

Definition andClassification

CaseStudy

The

Investment Process

Exit

8/14/2019 Lesson 05 Private Equity Funds November 2012

3/39

PrivateEquity:Definition

3

Acquisitionofmajorityandminoritystakesinthesharecapital offinancialand(mainly)industrial

companies

Theobjectiveistoinvesttosupportacompanyatdifferentstagesofitslifecycle,injectingcapital

andmanagerialskillstocreateavaluehigherthantheinitialinvestmentcost

Investmentscan

be

made

in

two

ways:

Usingthebuyersowncapital,or

Creatingaclosedendfundfinancedbyinvestorsandmanagedbyaspecialistteam, i.e.a

privateequityfund

A

private

equity

fund

is

an

investment

vehicle

that

realizes

between

7

20

investments

during

its

existence(512years)

Investmentsatdifferentdevelopmentstagesofacompany:

Venture/StartUp/SeedCapital:earlystage

ExpansionFinancing:growthstage

ReplacementCapital:

to

restructure

/change

the

shareholder

base,

typically:

o LeveragedBuyOut:acquisitionwithlargeuseofdebt

o ManagementBuyOut/In:acquisitionbyexternalorinternalmanagerswithlargeuse

ofdebt

Turnaround:fixingcorporatecrisis

8/14/2019 Lesson 05 Private Equity Funds November 2012

4/39

PrivateEquity:Classification

4

Earlystagefinancing(seed

capital/startup):createa

newcompany

Expansioncapital:

realise

developmentprojectswithan

internalorexternalgrowth

Replacementcapital/buy

out/bridge:changethe

corporateownership/financial

structure

Turnaround:execute

restructuringandrecovering

ofacompany

Investmentswithmediumlonghorizonrealisedbyprincipalsorclosedendfunds

Theobjectiveistorealiseaperformanceof1530%ofInternalRateofReturn(IRR)bybuyingand,

fewyearslater,sellingastakeinatargetcompany

Businesscycle

of

the

target

company

Majorityinvestments(industrialrationale)

Investors handsoninvolvementinthe

operationalmanagement,alsothrough

trustedmanagementteams

Noconstraintsforextraordinarytransactions

Exitusuallyviathesaleofthecompany

Minorityinvestments(financialrationale)

Agreementbetweenthemajorityshareholder

andtheindustrialpartnerto:

Discipline

the

companys

governance

Setthebusinessplanstargets

Formalizetheexitparameters

Investments

Venture

Capital

Private

Equity

8/14/2019 Lesson 05 Private Equity Funds November 2012

5/39

8/14/2019 Lesson 05 Private Equity Funds November 2012

6/39

PrivateEquity:Classification

InvestmentinanentrepreneurialideaorventurePrincipalfeatures:

Highlyspecialised

investors

Highriskofprojectfailure

Seedinmanysituations,ofwhichonly

fewwillusuallysucceed

SeedCapital

Aproduct/serviceisalreadyexisting(prototype),butitscommercialeffectivenesshasnotbeentestedyetPrincipal

features:

Highlyspecialisedinvestors

Highriskofprojectfailure

StartUp Earlystage

Acceleratethetargetcompanysgrowthwiththeuseofcapitalfinalisedtosupportinternalorexternalgrowthstrategies Growth

of

capacity/volumes/market

share

Expansioninnewmarkets/productsor

verticalintegration

Acquisitions

Expansion/DevelopmentCapital

Replacement:Assetacquisitionfromothershareholders(eg,generationaltransition,secondary)

Buyout:

Acquisitionofmajoritystakes

togetherwithamanagerialandstrategicchange

Significantuseofleverage(LBO,MBO)

ReplacementCapitalandBuyOut

6

8/14/2019 Lesson 05 Private Equity Funds November 2012

7/39

PrivateEquity:Organization

LegalStructure:

Limitedpartnerships(sponsoredbyPEfirms)

PEfirmsaresmallorganizations(averaging10professionals)whoserveasthe

GeneralPartners(GP)forPEfunds

Investors:

Pensionfunds,banks,insurancecompanies,foundations

Committoinvestoveracertainnumberofyears

Fees:ManagementFee:TypicalarrangementisforLPstopayasetpercentageof

committedcapitaleveryyear,mostcommonly2%

Sometimesthefeeisconstantovertime,sometimesitdropsafterthefirstfive

years

CarriedInterest

(Carry):

The

basic

idea

issimple:

ifthe

committed

capital

is100

ml.andtotalexitproceedsare200ml.,thetotalprofitis100ml.A20%carried

interestwouldproduce20ml.Thestandardcarriedinterestisindeed20%

Timing:5yearinvestmentperiod,10yearfundhorizon

PriorityReturn,Clawback

7

8/14/2019 Lesson 05 Private Equity Funds November 2012

8/39

8

InvestmentType Operator

Earlystage Venturecapitalist

Spinoff Generalistfund

Expansion/

Development Generalistfund

Countryfund

IndustryfundReplacement/

Buyout

Bridge

financing Generalist

fundTurnaround

Specialsituationfunds

IndustryfundsExtrajudicialrestructuring

Dualroleofbanks,giventheirroleofcreditintermediaries:

preventivefunction

monitoringfunction

PrivateEquityClassification:Summary

8/14/2019 Lesson 05 Private Equity Funds November 2012

9/39

D D

PrivateEquity:LeverageImpact

E

9

E100

50

P=200

PD=150

150vs.50

Return3x

D

E

D

E

100

P=200

110

PD=110

110vs 10

Return11x

10

90 90

150

5050

8/14/2019 Lesson 05 Private Equity Funds November 2012

10/39

PrivateEquity:Classification

Theobjectiveofturnaroundinvestmentsistorestructureacompanyinacritical

state,viaextraordinaryoperationsthatprovide:

Financial

resourcesFinancialdiscipline

Managerialskillsandknowhow

Synergies

Challenges:

Managerialexpertiseisrequired

Potentialconflictofinterestsandnegotiationswiththestakeholdersinvolved

(existingshareholders,lenders,unions,management)

Turnaround

Inturnaroundsituations,theprivateequityfundassumescontrolofthecompany

throughdirectmanagementoftherestructuringprocess

10

8/14/2019 Lesson 05 Private Equity Funds November 2012

11/39

Turnaround:StrategicAlternativesinManagingaCompanyinCrisis

11

Write

off

of

part

of

the

loansbythebanks

DebtRenegotiation

Bankruptcy/Liquidation

Debt/EquitySwap

Company

inastate

ofcrisis

Restructuring

Liquidation

Judicial

Extrajudicial

Merger

Liquidation

Temporarycrisis:e.g.,causedbyliquidity

shortage, thenrescue

planisfeasible

Structuralcrisis:ifthe

fairvalue

of

the

assets

issignificantlylower

thantheliabilities,

thenliquidation

Oncethecrisisbecomesevident,the

companyand

its

lendershaveto:

agreeonarestructuringplan

oftenappoint

consultants

lookforalternativecapitalsources,

suchasprivate

equityfunds

Usuallyan

investment

bank

and

alaw

firm

act

as

advisors

Success

Not

Success

L=Valueofthecompanyintheevent

ofliquidation

V= Value

of

the

company

after

restructuring

L>V Liquidation

L

8/14/2019 Lesson 05 Private Equity Funds November 2012

12/39

Turnaround:StrategicAlternativesinManagingaCompanyinCrisis

12

Oncechosenthe

recoveryplan,the

investmentbya

privateequity

fund

representsjustone

ofthepossible

alternatives

Original

Founder/

Ownership

Injectionof

New

Capital

/Resources

Lending

Banks

ThirdParty

Investors

Injectionofcapitalby theoriginalowners representsoneofthefirstoptions

Lack of commitmentof capital by the original owners could

makeitdifficult

to

pursue

arestructuring

plan

Asecondalternativeisadirectinvolvementofthelenders inthetargetcompanyscapital,throughadebtequityswap,i.e.

thetransformationofloansintoastakeinthecompany

Fromanaccountingpointofview,theeffectisanincreasein

the

companys

equity

and

a

reduction

in

its

debt,

without

changingitscashposition

This alternative could result in extreme cases anddependingonthelevelofleverage inthebankstakingover

thecompany.Thisisusuallyanoptionnotfavouredbybanks

Anotheralternative

isthe

entry

of

athird

party

investor,

either:

Anindustrialpartner,or

A financial partner, i.e. a private equity fund, or anotherinstitutional investor specialized in distressed/critical

situationswiththeskillstopursueacorporateturnaround

8/14/2019 Lesson 05 Private Equity Funds November 2012

13/39

Turnaround:StrategicAlternativesinManagingaCompanyinCrisis

13

Redefinethecompanysstrategicpositioningthrough: Rationalizeproduct/marketstrategies

Recoverthecashrequiredtorelaunchthebusiness

Redefinetheoperating/organizationstructureandrecoverproductivity

Selectedactions:

Replacemanagement

Disposeofnoncoreactivitiesandrefocusonthecorebusiness Revampproductionprocesses Industrialpartnerships/JVs Redefinecommercialandmarketingstrategies

Short/mediumtermforecast(e.g.,volumes,sales,GOP) keyelementsofthebusinessplan

KeyElements

of

the

Restructuring

Plan

8/14/2019 Lesson 05 Private Equity Funds November 2012

14/39

Turnaround:StrategicAlternativesinManagingaCompanyinCrisis

14

KeyElements

of

the

Restructuring

Plan

Actionstoreestablishanappropriatefinancialstructureofthecompany:

Setnewtermstoremunerateandrepaytheoutstandingdebt

Definetheoptionstoprovidethecompanywithnewresourcesinorderto(i)continuethe

ordinarybusiness

activity,

and

(ii)

pursue

new

projects

Debtrenegotiationcanbeachievedwiththefollowing:

Extendmaturitiesanddefinenewrepaymentschedule(generallybetween38years)

Lenderstowriteoffpartofcapital/interests

Lower ranking in repayment however, senior ranking to certain lenders (e.g., new

investors)

datio insolutum, i.e.agreement to transfer theownershipofassets/rights inplaceofaloanrepayment

Debt/equityswap

Replaceoutstandingbondswithanewbondissue

Sweeten writeoffs of part of the capital / interests by offering warrants and/or

convertiblebonds

8/14/2019 Lesson 05 Private Equity Funds November 2012

15/39

Agenda

PrivateEquity

15

Definition andClassification

CaseStudy

The

Investment Process

Exit

8/14/2019 Lesson 05 Private Equity Funds November 2012

16/39

ProcessofaPrivateEquityInvestment

Theprocessofaprivateequityinvestmentconsistsofthefollowingactivities:

Identification of Opportunities /Dealsourcing

Apotentialdealcanbesourcedthroughtheshareholdersofthetargetcompany,whoapproachestheprivateequityfund,orabrokerwhowilltrytobringbothpartiestoclosethedeal

Alternatively,theprivateequityfundcanapproachcompanieswhoareexpandingandwishtogrowfurther

Structuring andExecution

Thebusinessduediligenceisperformed bytheprivateequityteamondifferentareas/potentialofthe

company.

Auditors

and

consultants

are

appointed

to

conduct

the

financial, tax

and

legal

due

diligence Thepartiesandtheirlegaladvisorsnegotiatetheagreements

PostAcquisition Management

Themanagementteamappointedbytheprivateequityfundclosely monitorsthecompanysperformance,

fromanoperationalandfinancialpointofview,benchmarkingit againsttheoriginalbusinessplan

Thenewshareholderusuallydrivesimprovementsin manyareasofthecompany,suchasoperations,

corporategovernance,

financial

structure/discipline

and

general reporting

Exit

ExecutedviaIPO,atradesaleoraBuyBackbytheoriginalowners

Afterexitingthetargetcompany,theprivateequityfundreturnstoinvestorsthecapitalinvestedwiththe

profitearned

16

8/14/2019 Lesson 05 Private Equity Funds November 2012

17/39

8/14/2019 Lesson 05 Private Equity Funds November 2012

18/39

StructuringaPrivateEquityInvestment

BusinessPlan

Mainbasetoassesstheexpectedvaluecreation

Setthemediumlongtermobjectivesofthecompany,itscompetitivepositioning andstrategies,the

development

of

the

financial

structure/economic

results

Valuation

Basedondifferentmethodologies(e.g.tradingcomparables,prepaids andDCF)

Sensitivityanalysisisperformedonthebusinessplansmainassumptions

DueDiligence

Analysisconducted

to

review

the

companys

data

and

information

and

to

identify

potential

areas

of

riskandvaluecreation

Usuallyfocusedonthefinancialaccounts,managementcontrol,legalandtaxrisk

Agreements

Thelegaladvisorsprepareandnegotiateallthedocumentsneededforthetransaction(e.g.

ConfidentialityAgreement,

Memorandum

of

Understanding,

Share

Purchase

Agreement)

Governance

Definethecompanysdecisional,reportingandmanagementprocesses

Regulate therelationsbetweentheprivateequityinvestorandtheothershareholders

Principalstages

of

the

investment

process

18

8/14/2019 Lesson 05 Private Equity Funds November 2012

19/39

Agenda

PrivateEquity

19

Definition andClassification

CaseStudy

The

Investment Process

Exit

8/14/2019 Lesson 05 Private Equity Funds November 2012

20/39

ValueCreationinaPrivateEquityInvestment

ThevaluecreationisalwaysmeasuredintermsofIRR ortimestheinitialcost

Leversofthevaluearethefollowing:

entryprice

expectationsontheexitprice

investmentduration

thevaluecreationpotential

Theseaspectsreflect:

theeconomicresults

thepotentialmarket

the

companys

attractiveness themultiplevaluesatthetimeoftheexit

20

8/14/2019 Lesson 05 Private Equity Funds November 2012

21/39

Exit

ExitfromaPrivateEquityInvestment

Keyisthechoiceoftheexitstimingandmethodinordertomaximizethereturnonthe

investedcapital:

IPO:floatationofthetargetcompany

Tradesale:saletoathirdparty,generallyanindustrialbuyer

Buyback:repurchasebytheoriginalfounder

Putoption:givestheprivateequityinvestortherighttosellinthefuture

Secondarybuyoutoreplacement:saletoanotherprivateequityinvestor

Writeoff:followingavaluereductionoftheshareholdinginthetargetcompany

EXIT

Size

Sector Organizationandmanagement

TargetCharacteristicsTargetCharacteristics EconomicCycleEconomicCycle

Macroeconomicsituation

Financialmarket

conditions

Regulatorychanges

IndustrialIndustrial

Achievementsoftargetsof

businessplan

Peersposition/strength

21

8/14/2019 Lesson 05 Private Equity Funds November 2012

22/39

Agenda

PrivateEquity

22

Definition andClassification

CaseStudy:

Banca Profilo

The

Investment Process

Exit

8/14/2019 Lesson 05 Private Equity Funds November 2012

23/39

Autumn2008:TheGlobalFinancialEarthquake

23

160

180

200

220

240

260

280

300

320

02-set 04-set 08-set 10-set 12-set 16-set 18-set 22-set 24-set 26-set 30-set 02-ott 06-ott 08-ott 10-ott 14-ott 16-ott 20-ott 22-ott 24-ott 28-ott

DJ EU Stoxx Banks

Source Bloomberg as at 28 October 2008

7-Sep-08

GSE bailout

22-Sep-08

$9 bn Mitsubishi /MS (LoI)

23-Sep-08

$5 bn Berkshire /Goldman Sachs

6-Oct-08

Fortis carve

upRescuepackage forHRE

6.0 bn Govtrecap of Dexia

8-Oct-08

Central banks rate

cuts

UK Govt

announces

UK bank

recapitalisation

Iceland takescontrol of Glitnir

and Landsbanki

9-Oct-08

IcelandicFSAtakes overKaupthing'soperations

16-Oct-08

CHF10 bn CScapital increaseCHF6 bn Govtrecap of UBS

21-Oct-08

10.5 bnGovernmentrecap of French

banks

27-Oct-08

3.5 bn Govtrecap of KBC

30-Sep-08

Irelandguaranteesdeposits

16-Sep-08

AIG bailout

18-Sep-08

Lloyds / HBOS

29-Sep-08

Congress fails topass TARP

Fed expandsliquidity programs

Citi / WachoviaB&B nationalizedGovernment supportto Fortis,HRE and Glitnir

25-Sep-08

JPMorgan / WaMu

3-Oct-08

WFC / Wachovia

3-Oct-08

TARP approval

14-Oct-08

US Governmenttemporary liquidityguarantee

$250 bn Govt recapof US Banks

20-Oct-08

10 bn Govtrecap of ING

7-Oct-086.6 bn UniCreditcapital increase

17-Sep-08

Barclays buysLehmans NorthAmer ica ops

28-Oct-083.0 bn Govtrecap of Aegon

13-Oct-08

Eurozone Govtsannounce actionplan

37 bn Govt. recapof UK banks

MUFJ / MS close

15-Sep-08

Lehman bankruptcy

BofA / Merrill Lynch

Bankruptcies

GovernmentInterventionsMergers

Recapitalizations

8/14/2019 Lesson 05 Private Equity Funds November 2012

24/39

8

9

12

15

50

35

33

15

15

33

1996 ( bn) 2007 ( bn)

+298%

1.UBS

10.SocGen

2.Allianz

3.HBOS

5.CS

4.HSBC

6.Barclays

7.ING

8.CA

9.AXA

1.HSBC

2.UCI

3.UBS

4.RBS

5.BNP

7.ING

6.Santander

9.SocGen

10.Barclays

Average:89.6bnAverage:22.5bn

68

69

73

73

161

99

93

84

87

89

8.IntesaSP

The10biggest bankinggroups by marketcapitalization

24

2008 ( bn)

1.HSBC

2.BNP

3.Santander

4.UBS

5.Intesa

SP

7.CS

6.BBVA

9.SocGen

10.CA 20

21

23

30

116

49

48

31

32

35

8.UCI

54% Average:40.7bn

InthelasttenyearstheEuropeanbankenvironmenthaschangedintermsofplayersandmarketcapwiththecreationofPan

Europeanbanks

Europeanbanks,alongwithUSbanks,arethosethathavesufferedthemostduringthelastcrisisintermsofcapitalization

Top10marketcap:225 bn Top10marketcap:896 bn Top10marketcap:407 bn

8/14/2019 Lesson 05 Private Equity Funds November 2012

25/39

BancaProfilo:Overview

25

Founded

21

years

ago,

Banca Profilo is

a

private

banking and brokerage boutique, headquartered in

Milan

TheBanksmainactivitiesare:

PrivateBanking:performedthrough9branches

mostlylocatedinthewealthyareasofNorthern

Italy,and

by

its

Swiss

60%

owned

subsidiary

Socit Bancaire Prive (SBP)inGeneva.The

GroupsFuM amountedto1.5bn asof31/12/08

CapitalMarketsandBrokerage:oneofthelargest

domesticplayersinequityandfixedincome

products

ProprietaryTrading:centeredona897mln bond

andsecuritiesportfolioanda1bn derivatives

portfolioasof31/12/08,bothintheprocessof

beingdownsized

AssetManagement:managedaccounts

Investment

and

Merchant

Banking:

performed

by

Profilo Merchant, focusing on SMEs and private

equity

In2008theBankreportedaconsolidated lossof78

mln,mainlyresulting from thenegativeperformance

ofitsproprietarytradingactivities

Banca

Profilo

Group

Structure

3Q2009

KeyFinancialData( mln)31/12/07(1) 31/12/08 1H09

P&L

TotalIncome 59.0 (13.0) 23.9OperatingIncome 17.2 (52.3) 3.7NetIncome(Loss) 10.6 (77.9) 0.9BalanceSheetTotalAssets 2,402 2,363 1,903TradingAssets 1,755 1,632 1,242ShareholdersEquity 115 29 33OtherDataFuM 2,386 1,494 1,420Employees 208 194 196

(1) 2007P&LfiguresdonotincludeSBP

9M09

33.3

3.8

0.9

1,595

967

103

1,489

194

8/14/2019 Lesson 05 Private Equity Funds November 2012

26/39

27/03

CompletedtheFirstPhaseoftheTurnaround

TimetableandMainAchievements

FirsteveracquisitionofcontrolofabankbyaprivateequityfundinEurope

Received5regulatoryauthorizationswithin3months(ie,BankofItaly,Consob,ItalianAntitrust,FINMA,FSA)

Nolossof

Private

Bankers

and

increase

offundsundermanagement(+5%in6months)

19/02

Signingof

the

Agreement

withSator

Regulatory

authorization

sandclosing

8/06

Capital

increase

reservedto

Sator

6/07

Rightsissue

5/10

January09 Feb.09 March09 April09 May09 June09 July09 August09 October 09Sept.09

Restructuring

Planapproved

November09

Business

Plan

approved

19/11

26

Completerestructuring ofgovernance,managementandorganizationinlightofthenewbusinessmodel,inItalyandSwitzerland

Significantrestorationoffinancial

stability,bringing

the

Bank

to

break

even

8/14/2019 Lesson 05 Private Equity Funds November 2012

27/39

BancaProfilo:Restructuring andGrowth/Value Creation Potential

27

RestructuringPhase1

Refocusonprivatebankinganddisposalofnoncorebusinessesandnonperformingbranches

HeavyrestructuringoftheItalianoperationsthrough:

ReorganizationanddownsizeoftheFinancedivision

Strengtheningofthirdpartybrokerageactivityoncashandderivatives

Rationalizationofstaffandcostdiscipline

Downscaleofproprietarytradingactivityandrestructuring/runoffofcurrentportfoliosthrough:

Saleofthemostcomplexsecurities

UnwindingofCDSandotherderivatives

Optimizationof

funding

sources

StrengtheningthemanagementteamthroughtheinjectionofSator resources

Growth/ValueCreationPhase2

GrowAuM:

RevampboththeItalianandSwissbanks

Hirenewprivatebankersandattractnewcustomers

Implementaninnovativeapproachtoprivatebanking:highend,highqualityfamilyofficetype

services,open

architecture,

ancillary

services

such

as

advisory

Growrevenues:

Advisoryservices

Revampedassetmanagementproducts

Purebrokerageactivity

Turnaroundbasedonthreepillars:

1. Strong capitalbase:TierIratioexpectedabove23%(oneofthehighestinEurope)attheendof2009

2. Managerialapproachaskeydrivertobusinessrelaunch:Sator willhavegovernancecontrolandkeymanagementinvolvement

3. Disciplineinaccountingandbusinessrestructuring:tacklingcurrentissuesaffectingfinancialmarkets

8/14/2019 Lesson 05 Private Equity Funds November 2012

28/39

ShareholderStructurePostCapitalIncrease

Arepo BP

S.p.A.

55.8%

Market

25.7%

ReferenceShareholders

18.5%

1)CapitalStrengthening

Capitalincreaseofupto110mln

30mln viaarightsissuefullyunderwrittenbythemarketon5/11/2009

80mln without

pre

emptive

rights,

of

which70mln alreadyunderwrittenbyArepo BPon6/7/2009and10mln tobeallocatedbyyearend

CapitalstructuresignificantlystrengthenedtolevelsofexcellencebyEuropeanstandards

RecapitalizationStructure

Arepo BPS.p.A.: parentcompanyoftheBanca

Profilo Group,100%ownedbySator PEFund

28*After

the

allocation

of

the

additional

10

mln,

Arepo BPs

shareholding

will

be

diluted

to

52%

>25%

Tier1Ratio

2007 2008 09/09PF

23.6%

2009F

10.2%6.1%

Amongthe

highestin

Europe

Shareholders EquityEvolution

0.21

pershare

mln2007ConsolidatedShareholders'Equity 115,52008NetLoss (77,9)o/wNetTradingLosses (49,6)o/wGoodwillwriteoff (15,0)o/wProvisions (9,4)2008ConsolidatedShareholders'Equity 29,520099MOrdinaryChanges 3,9 Sator CapitalIncrease(6/07/09) 70,0 RightIssues(5/11/09) 29,820099MConsolidatedShareholders'EquityPF 133,2

8/14/2019 Lesson 05 Private Equity Funds November 2012

29/39

2)RenewalofManagementandOrganization

Appointednewmanagementteam,streamlinedorganizationoftheBank

Strongmanagementrenewal,particularlyinthe

businessareas,inordertoimplementthechangein

strategy

NewOrganization Personnel

Turnover

Private

Banking

(R. Lagorio)

CEOF. Candeli

Risk Mgmt

Planning &Control

ChairmanM. Arpe

GMN. Angileri

Compliance

Legal

Treasury & FX

Sales &Trading

Markets

HR

Accounting

Regulatory

Reporting

Middle Office

Back Office

Administration

(G. Panzeri)

Organizationand IT

(P. Muselli)

Organization

IT

GeneralServices

AssetManagement

WealthPlanning

Research

Credits

ClientRelations

Family Office

Central Office

Communications

Advisory

- Milan

- Brescia

- Rome

- Turin

- R. Emilia

- Genoa

- Forl

- Pistoia

NewResponsibiliti

es

New Hirings

Strongorganizationaldrivethroughinvestmentsin

people,systemsandprojects

NewOngoingProjects

Completereview

of

Management

Controlin

terms

ofmodelandmetrics,supportedbynewITsystems

Overhaul of Risk Management in terms of modelandsystem,to guaranteefullcontrolofrisks

Riskbasedreviewofoperatingprocesses

DevelopmentofFrontEndsystems tosupportthecommercial

network

Headcountat

01/01/09

HiringsDismissals HeadcountYTD

Savings:

1.9mln

Investments:

2.1mln

142 18 21 145

29

Board ofDirectors

Internal Audit

Finance

(C. Marino, L.Barone)

Products and

Services

(P. Moia)

Topmanagement

salariesreducedand

noncompetition

agreementsreviewed

8/14/2019 Lesson 05 Private Equity Funds November 2012

30/39

3)SignificantReductionofFinancialAssetsandRebalanceofFunding

Deleveragingprocesstobecompletedby2009withadditionaldisposals

FundingDevelopmentFinancialAssetDevelopment

*

It

takes

into

account

the

capital

increase

underwritten

on

06/07/09

and

5/10/09

Reducedpositionsinexoticsecurities(75%YTD)

Exposureto

interest

rates

effectively

down

to

zero

Reducednetexposuretoderivates(77%YTD)

Rebalancedfinancialstructure

Createdliquidity

reserves

Extendedmaturities

10

6.7

3.9

2.7

VAR(99%,10days mln)

879

717

474

Funding( mln)

46%

FinancialLeverage

30x

7x

Securities&CDSPortfolios( mln)

12/08 06/09 09/09 12/08 06/09PF* 09/09PF*

4x

1,225

700

586

12/08 06/09 09/09 12/08 06/09 09/09

60% 87%52%

LoansSensitivity:11

mln (100bp shift)

InterestRateSensitivity:

0.1mln (100bp shift)

Averagematurityfunding:

>30days(+36%vs.2008)FundingfromECB at15

Nov:22%(78%vs.2008)

8/14/2019 Lesson 05 Private Equity Funds November 2012

31/39

FeaturesoftheItalianPrivateBankingMarketToday:theGoodNews

Underdevelopedmarketvs.

the

rest

of

Europe,

polarized

betweenlargecommercialbanksandfewnicheplayers

Hugegrowthpotentialswithfewclientsservedby

specialized operators

Attractivemomentum

as

aresult

of

pressure

on

off

shore

markets,despitethecyclicaldownturnsufferedin20072008

Consolidatedtrendofrepatriationofcapitals

Concentratedmarketintermsofnumberofclientsand

geography Abroaddistributionnetworkisnotaprerequisiteforthe

business

Negativecurrentsituationformanyplayersduetothe

internationalcontext(e.g.,SwissandUSbanks)

Independentandfocusedplayersfavoredbythemarket

environment

Thecombinationofstructuralandcyclicalelementscreatessignificantgrowthopportunities,

particularlyforaspecializedplayerwithasmallshare(0.1%)ofahugemarket(836bn)

bn

2008 2009

83

6

2009(incl.Tax

Shield)

80

4

31

No.ofHo useh old s Asset s

Above10ml n 510ml n 15ml n 0.51

5%

30%

+4%

88680

4

+10.2% CAGR 1012

+4%

836

ExpectedMarket

Evolution

WealthConcentration

NonSpecializedPlayers(58%)PrivatePlayers(42%)

8/14/2019 Lesson 05 Private Equity Funds November 2012

32/39

andtheBadNews:theCurrentBusinessModelisNoLongerSustainable

Anewparadigmisnecessarytotakeadvantageofthemarketopportunities

Strongcompetition

in

the

acquisition

of

new

assets

through

externalhiringofprivatebankers

Highacquisitioncosts

Lowanddecliningprofitabilityasaresultof distrusttowards

managedproducts andlowpenetrationofbankingservices(61

bpsvs.

94

bps

in

Europe)

Profitabilitydeclineoffsetbyriskierproductsforclients

Clientsrequireincreasinglygreatertechnicalskillsandthe

abilitytosolvecomplexproblems

Lowimpact

of

traditional

client

and

product

segmentation

strategies

StrongcommercialandorganizationalimpactofrecentEU

regulations(MiFid)

Organizationalflexibilityistheprerequisitenecessarytomanage

regulatorydevelopments

Widespreaduseofmultiplebanks(64%ofclientsusemore

thanonebank)

32

10

6

2

6

Italy Europe

Asset

Management

Loans

Insurance

products

TotalIncome

Margin

53

61

78

94

AssetProfitability

64% 68%

NumberofBanksRelations

36% 32%

40% 41%

16% 16%

5% 5%3% 4%

2008 2007

5Istituti4Istituti3Istituti2Istituti1

Istituto

8/14/2019 Lesson 05 Private Equity Funds November 2012

33/39

Banca Profilo:theNewBusinessModel

Modifytherevenuestructureinasustainableway

1

Increasetherangeofassetsundermanagement

Provideauniqueandnotsimplyreplicablerangeofservicesorproducts,alsoin

exclusivity

Movefromabankmanaging:

Financialwealthonly

toabankmanaging:

Financialwealth

Corporatewealth

Realestate

wealth

Familywealth

Services/RelationCultureProduct/InvestmentCulture

MainLevers

Implications

PillarsoftheNewBusinessModel

33

8/14/2019 Lesson 05 Private Equity Funds November 2012

34/39

Banca Profilo:TheNewBusinessModel

34

RedefinetherelationbetweenthePrivateBankerandtheBank2

TransformationfromdistributionnetworktoagroupofManagers, partnersoftheBankinthe

corporatedecisionprocessesandinsharingitsresults

MainLevers

Implications

FortheBank: ForthePrivateBanker:

Highmanagerialskills

Abilitytomanagemoreassetsand

moreclients

Abilitytomakeclientsloyalwithunique

servicesofhighquality

Fromdistributorofproducts to

banker

Possibility

to

operate

in

a

flat

and

independentorganization

PillarsoftheNewBusinessModel

Scalabilityof

business

Newcompensationmodel:

Noentrybonus

Nobonus

on

net

inflows

Nobonusonamountofmanagedassets

Yesbonusontherelationdepth

Yesparticipationatriskadjusted

profitability

New

participation

model

in

corporate

decision

making

Costreduction

(noagreements)

PrivateBankerowneroftheclient

Makeclientsloyal throughnoncompetitionagreementswithPrivateBankers

PrivateBankings Cost/IncomeRatiohigherthanthatofInvestmentBanking

Lowappreciation

of

the

commercial

network

for

high

value

products/services,

that

imply

sharing

of

clients

Current

Logic

8/14/2019 Lesson 05 Private Equity Funds November 2012

35/39

Banca Profilo:theNewBusinessModel

35

MakeclientsandPrivateBankersloyaltotheBank,

overcomingthetraditionaltradeoff

3

Fromcommercialpoliciesaimedatmaximizingprofitabilitytocommercialpolicies

aimedatmaximizingtheanswerstoclientneedsandthesolutionstotheirproblems

MainLevers

Implications

Reliability:

Fullyindependentbank

Excellentcapitalstrength

ServiceLevels:

Qualityof

offer

and

management

at

all

levels,supportedbyprovenexperienceandprofessionalskills

Breadthofofferrange(onestopshop)

Uniqueservices(servicesinexclusivity)

Nonaggressivecommercialpolicy

(profitability

not

linked

to

risks)

Benefitsfor

clients:

Shareofwallet

increaseand

reductionofclient

turnover

Relations:

Oneonlyreferencepointforthemanagementofwealthandanyothercomplexneed

Opportunitytoaccessdirectlythe

TopManagement

of

the

Bank

RelationBank

Pillarsof

the

New

Business

Model

8/14/2019 Lesson 05 Private Equity Funds November 2012

36/39

BancaProfilo:2012Consolidated Targets

36

TotalClientFuM

bn

8.4

09/200

9

2012E

1.7

Revenues

mln

>100

09/200

9Ann.*

2012E

33

Cost/Income

%

58%

09/200

9

2012E

89%

ROAE

%

17%

09/200

9

2012E

2%

RecognizedBrand

Cohesiveteamwithstrong

corporatespirit

at

all

levels

Satisfied

clients

TangibleTangible

IntangibleIntangible

*NetProfit9Mannualized,excludingpreviousportfolio

8/14/2019 Lesson 05 Private Equity Funds November 2012

37/39

BancaProfilo:StockPerformance

37

Banca Profilo sharesarelistedontheItalianStockExchange

Sharepriceof0.62asof30October2009 MarketCapof389mln

UntiltheannouncementofthedealwithSator*(19Feb2009),Banca Profilo stockhadperformedinlinewiththe

Italianbankingsystem,ie60%LTM and70%L6M

Thestockwasup30%onthedayoftheannouncement,atmorethantwiceSators issueprice,showingthepositive

marketreactiontotheinvolvementofSator inBanca Profilo

Sincethe

deal

announcement,

Banca Profilo stock

price

has

increased

by

nearly

threefold,

despite

the

large

dilution

resultingfromthecapitalincrease

Source:BloombergandCompanydataProfilostockpricereinstated to reflect thecapitalincrease *SatorPrivateEquityFund completed theacquisition of BancaProfiloviaArepo BP,currently holdingcompanyof theBancaProfiloBankingGroup

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Jan07

Feb

07

Mar07

Apr07

May07

Jun07

Jul07

Sep07

Oct07

Nov07

Dec07

Jan08

Feb

08

Apr08

May08

Jun08

Jul08

Aug08

Sep08

Oct08

Dec08

Jan09

Feb

09

Mar09

Apr09

May09

Jun09

Aug09

Sep09

Oct09

BancaProfiloshareprice ItalianbankingIndex rebased

SigningoftheAgreementwithSator Sator

CapitalIncrease

RightsIssueStarts

Sator'sInvestmentPrice

BancaProfiloSharePrice(since Jan2007;)

8/14/2019 Lesson 05 Private Equity Funds November 2012

38/39

Banca Profilo:InvestmentCase

AttractiveMarket

Potentialand

Timing

Italyhasoneofthehighestsavingsratesintheworld

Lack

of

a

real

independent,

high

quality

serviceoriented

private

bank

in

Italy

due

to

historical

attractionofoffshorebankingmarket(Switzerland,Monaco)

Appropriatetimingduetocurrentturmoilinthebankingindustry,withclientsinsearchofsafehavens Possiblepotentialrepatriationoftheoffshorewealthduetointernationalpressureonbankingsecrecy

andtaxhavens

Noloanportfolio(90%Afinancialassets,noCDO,subprimeorothertoxic assets)

Turnaround

Upside

Goodplatformtorelaunch theprivatebankingbusiness

Potentialto

reshape

the

service

model,

leveraging

on

existing

infrastructure

while

revamping

brand

andproductportfolio

Injectionofnewexperiencedmanagementteam Downsizingofproptradingactivity/risksandoptimizationoffundingsources

Attractive

Valuation

Attractivevaluationat26mln fortheGroup,reflectingadiscountoncurrentNAV (vs.premia forEuropeanBanks)

Issue price at 0.20 per share, implying a 93% discount to peak market price in 2007, and

approximately1/3

of

the

current

price

38

LandmarkDeal

First bank bailout with private capital in Europe as an alternative to the current Governmentinterventions

FirsteveracquisitionofabankscontrolbyaprivateequityfundinItaly FirsteverexemptiononaminoritytenderofferforabankinItaly

Exit

Expectedtradesalewhenthebusinesshasreachedcriticalmassandprofitability

Scarcitypremium

attached

to

asuccessful

Italian

private

bank

by

strategic

buyers

FitwithSator

Investment

Strategy

Sator PEssweetspot:Italy,turnaround,financialservices,managerialinvolvementandcontrol Complextransactionstructuringandnegotiationsduetothepubliclistingandregulatoryrequirements Criticalduediligenceasaresultofdistressedsituationandfundingconstraints

8/14/2019 Lesson 05 Private Equity Funds November 2012

39/39

Universit di Torino

Facolt di Economia

CourseofBusinessCombination

November2012

PrivateEquityFunds