8/10/2019 Private Equity Investment Committee
1/31
KKR Private Equity InvestmentCommitteesAlex Navab
July 17, 2012
8/10/2019 Private Equity Investment Committee
2/31
2
Process Overview
8/10/2019 Private Equity Investment Committee
3/31
3
Investment Committee
Main decision making forum for all new investments for private equity
Meets formally two times per week Monday and Thursday mornings (NY time)
Iterative process not just the last step
All key decision points should come to the Committee
Meaningful money to be spent on analysis
Initial bid proposal (excluding early stage and exploratory first round bids)
Interim and final bids
Formal approach to company or board
Committee should also be used as sounding board, and we are actively encouraging coming to theCommittee earlier in your evaluation/thinking
Controversial issues
Specific guidance on issues
Quick read before a lot of work done (e.g., minority investment)
Most investments will be discussed with the Committee four or more times before a final decision
Also encouraging using regional heads/other IC members as a sounding board before coming to theCommittee
Memos to be submitted Friday for Monday meeting and Tuesday for Thursday meeting
Email Erika Stadtlander prior to memo submission, copying Alex Navab and Johannes Huth, to geton the agenda
8/10/2019 Private Equity Investment Committee
4/31
8/10/2019 Private Equity Investment Committee
5/31
8/10/2019 Private Equity Investment Committee
6/31
6
What to Cover
8/10/2019 Private Equity Investment Committee
7/31
8/10/2019 Private Equity Investment Committee
8/318
Macro / Industry Analysis
Detailed discussion around how macro environment is expected to impact thesector (to be incorporated with firms macro view)
Include deal teams view on key macro risks and opportunities as part of theiranalysis of key investment highlights and considerations
Provide overview of how deal performs under various macro outcomes
If relevant, highlight correlation to certain key macroeconomic statistics
MacroPerspective
Respond to the question: Why is it good to invest in the sector today?
Medium and long-term thesis on industry / sector and why it is attractive
Walk-though how value has been created in the industry historically (includinghow private equity has been involved in the sector)
Outperforming and underperforming deals have often captured or missedpotential technological / industry shifts. Include view on ability to create valuethrough (or defensibility of industry to) technological / industry shifts
Discuss other big risk areas (regulatory, competition from overseas, etc.)
IndustryThesis(1)
Incorporate long-term analysis (as available and relevant) on performance of
industry through economic and industry-specific cycles Breakdown of underlying growth drivers (volume, price, margin, etc.)
If relevant, include analysis around industry performance as the sectorevolved (evolution of companies as industry matured, new entrants,substitutes, etc.)
Discussion of supply / demand dynamics of industry (such as customerconcentration, supplier power, input cost trends, etc.)
Long TermIndustry
Analysis andPerformance
(1)
E
arly-Mid
Ea
rly
(Updated
Frequently)
Mid
(1) When presenting the above items, keep in mind guidelines provided by the legal team on the appropriate
language, tone and descriptions to use. Additionally, remember that sensitive topics should be discussed verbally.
8/10/2019 Private Equity Investment Committee
9/319
Company Specific / Risk Analysis Overview and Business Model
Respond to the question: Why is this a good Company?
Historical, projected, comparative ROIC and opportunity to invest behind
Other quantifiable metrics and comparisons
Provide clear description of products and services of the Company Discuss long-term historical performance of the Company
Include performance through various economic cycles. Include bothgeneral financial metrics (revenue, EBITDA, margins, capex, etc.) as wellas key operating statistics (same store sales, volume/price, etc.)
Company
Thesis andLong Term
Performance
Historical performance relative to peers and reason for under / overperformance. Outline market share trends of company (include commentaryaround shifts in share and drivers)
Outline competitive nature of industry, implications thereof and specific valueproposition of Company. Outline Companys competitive advantages (cost,service, technology, etc.) and the sustainability of the competitive advantage
Provide customers and key suppliers feedback (collected on primary basis) oncustomer satisfaction, vendor satisfaction, competitive position, etc.
CompetitivePositioning(1)
Provide full assessment of company culture and management(2)
Provide plan for management team Highlight key weaknesses of
management pool and provide IC with color around certain important roles(i.e. relative importance of a CEO, COO, CFO, sales leadership, etc.)
If turnaround, include basis for expected improvement of culture andmanagement
During late stages, conduct and provide update on background checks for keysenior managers (Kroll reports)
Management
Mid
Mid
(Updated
Fr
equently)
Mid-Late
(1) When presenting the above items, keep in mind guidelines provided by the legal team on the appropriatelanguage, tone and descriptions to use. Additionally, remember that sensitive topics should be discussed verbally.
(2) Colorful characterizations of management are better handled verbally, as IC decks can be produced in litigation and seen by managers
and descriptions of mangers can be requested by managers in some countries under data privacy laws.
8/10/2019 Private Equity Investment Committee
10/31
8/10/2019 Private Equity Investment Committee
11/31
8/10/2019 Private Equity Investment Committee
12/31
12
IC Process Suggestions
Include other geographic / industry vertical teams that have had significantexperience in the space and / or cover suppliers or customers of the Company
Teams should reach out early to relevant executives to review materials
Relevant executives should directly participate in IC discussions
Include KCM, KKR Capstone, Public Affairs, KAM as relevant and addressplans to use them post-deal
Any discussion of fees and allocations should be avoided in the IC materials
CrossFunction /Geography
Involvement
Teams should be prepared to walk the IC through the following verbally
Overview of process dynamics (including motivation for sellers, other
bidders, potential partners and others) For consortia, address early who the partners are, partnership dynamic,
and ability to involve other parts of KKR (KCM, Capstone, etc.)
Provide download on findings of advisors (consulting, accounting, legal, tax,environment, labor, insurance, govtrelations, etc.). For sensitive points thatmay be legally privileged, please run by outside or internal counsel in advance
DealProcess,Partnership/Consortia &
Other
Th
roughout
Throughout
Investment Committee to provide deal team with discreet structured follow-up
items
Deal teams to respond to each follow-up item from prior session during everyIC meetingFollow Up
Items
Throughout
8/10/2019 Private Equity Investment Committee
13/31
8/10/2019 Private Equity Investment Committee
14/31
14
Specific Opportunity:
Take Private of Willis (3rd
Largest Global Insurance Broker)
Objective:
Show impact of broader economy on the insurance industryandoutline a specific thesis on industry growth.
Conclusions:
a) The insurance sector follows the economy over the long-term, buthas industry-specific cycles.
b) Timing the insurance cycle is important to generating attractivereturns in the insurance brokerage space given the tying of the
growth of the broker space to commercial P&C premiums.c) Q: Why is it good to invest in the sector today?
A: Visibility on hardening cycle in the medium term, opportunity toenter market before valuations reset when insurance cycle
hardening is more visible.d) No visible positive or negative technological / industry shifts
expected to impact the industry.
Sample Macro / Industry Analysis 1: Willis (2010)
8/10/2019 Private Equity Investment Committee
15/31
15
Insurance broker organic growth is highly correlated with growth in commercial P&C premiums
Over the long term, P&C premiums grow But over shorter-term horizons,
in-line with the economy P&C premium growth is highly cyclical
Source: KKR Analysis, Company Filings, A.M. Best, SNL, Bureau of Economic Analysis
Hard Cycle
4%2%
4%3%
8%5%
5%
15%
18%
12%
(5%)
-
5%
10%
15%
20%
25%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD 6/10
Comm'l P&C NPW Growth
Broker Industry Organic Growth
Willis Organic Growth
-
50
100
150
200
250
300
350
400
450
500
'67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000P&C Net Premiums Earned (Left Axis)
Nominal GDP (Right Axis)
(10%)
(5%)
-
5%
10%
15%
20%
25%
'67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
3.2%
3.4%
3.6%
3.8%
4.0%
NPE Growth (Left Axis)
NPE / GDP (Right Axis)
Sample Macro / Industry Analysis: Willis (2010) (contd)
8/10/2019 Private Equity Investment Committee
16/31
16
Most Significant Value Creation Event in Recent History Was Willis' Initial Buyout
(10%)
(8%)
(6%)
(4%)
(2%)
0%
2%
4%
6%
8%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD 6/10
WillsOut/Underperformanc
(25%)
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
15%
20%
RevenueGrowt
Willis Out/Underperformance Willis Rev Growth Broker Ind Rev Growth
Sample Macro / Industry Analysis: Willis (2010) (contd)
- Significant desire by insurance carriers and corporates alike to create a third
option to Marsh & McLennan and Aon, who were the only large brokers of scale
- KKR partnered with insurance carriers in 1998 on the acquisitions
- This was a large driver of shift from underperformer to outperformer
Although Commission Rates Have Modestly Grown, Revenue is Driven by Volume Growth (P&C Premiums)with EBITDA Further Accelerated by Margin Expansion
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD 6/10
Vol Growth (P&C Prems) (0.9%) (1.8%) 0.3% 5.4% 9.5% 21.3% 12.8% 7.2% 2.5% 6.7% (0.9%) (3.6%) (6.9%) (3.6%)
Comm Rate Growth 5.9% 6.0% 6.5% 2.4% 0.3% (5.7%) (0.7%) (6.2%) (3.6%) (3.6%) 3.1% 5.0% 6.4% 3.8%
Broker Revenue Growth 5.0% 4.2% 6.8% 7.8% 9.8% 15.6% 12.2% 1.0% (1.2%) 3.1% 2.2% 1.4% (0.5%) 0.2%
Broker EBITDA Margin 16.4% 16.6% 16.9% 17.3% 18.1% 18.7% 19.5% 20.2% 21.0% 21.9% 23.0% 23.2% 23.7% 24.1%
Broker EBITDA Margin Change +0.2% +0.3% +0.4% +0.8% +0.6% +0.8% +0.7% +0.8% +0.9% +1.1% +0.2% +0.5% +0.4%Broker EBITDA Growth 5.2% 5.5% 8.7% 10.3% 14.9% 19.4% 17.0% 4.7% 2.7% 7.5% 7.4% 2.3% 1.7% 1.9%
0
50
100
150200
10
20
30
40Revenue EBITDA
8/10/2019 Private Equity Investment Committee
17/31
17
A Hardening Cycle May Be Getting Closer
Statutory cash flows have deteriorated, indicating And rates may be approaching the unprofitable levels
carriers may soon look to raise rates of the late 1990s
But It Is Not Yet Imminent
It took three years of unfavorable reserve developments prior Underwriting profitability still appears to be
to the last hard cycle, and we have had none to-date much better than in the late 1990s
Source: KKR Analysis, SNL, The Council of Insurance Agents and Brokers
18%
22%25%
19%20%
13%
8% 7% 7%
12%12%
6%3%
5%4%
-
10
20
30
40
50
60
70
80
90
100
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Y TD6/10
P&C Statutory Op. CF (bn)
Total P&C % of Surplus
Comm'l P&C % of Surplus
(20)
(15)
(10)
(5)
-
5
10
15
20
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Cum. Dev't To-Date
2-Year Dev't
1-Year Dev't 110% 114%
97%93% 95%
96%92%
95%
103%100%
114%115%
110%109%
80%
85%
90%
95%
100%
105%
110%
115%
120%
125%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Reported Combined Ratio
Combined Ratio ex. PY Reserve Dev't
Sample Macro / Industry Analysis: Willis (2010) (contd)
8/10/2019 Private Equity Investment Committee
18/31
18
The Next Hard Cycle May Not Be As Amplified As The Last Without A Large Catastrophe
Industry capitalization levels remain robust The '00-'03 cycle was magnified by the tech bust and 9/11
Based On This Analysis, We Have Formed Three Cases For P&C Cycle Assumptions
Conservative Case: Pricing does not harden, but flattens over three years; volumes grow at 2%
Base Hardening Case: '11-'13 same as Conservative Case; '14, '15 and '16 grow at 10%, 10% and 7%, respectively
Aggressive Hardening Case: '11-'12 same as Conservative Case; '13-'16 replicate growth in '01-'03 (10% / 21% / 13% / 7%)
Projected P&C Industry Net Premiums Written:
Source: KKR Analysis, SNL, Bureau of Economic Analysis
109%
100%
87%85%
89%
103%
126%129%
115%
106%
98%
83%87%87%
75%
100%
125%
150%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2.5%
3.0%
3.5%
4.0%
NPW / Surplus (Left Axis)P&C Industry Surplus / GDP (Right Axis)
24%
9%
2%
(5%)(7%)
(1%)
(13%)
19%
15%
9%12%
7%12%
3%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD
6/10
Change in Stat Surplus
Tech Bust /
Sept. 11thKatrina /
Rita / Wilma
(10%)
(5%)
-
5%
10%
15%
20%
25%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Aggressive Hardening Case
Base Hardening Case
Conservative Case
Sample Macro / Industry Analysis: Willis (2010) (contd)
8/10/2019 Private Equity Investment Committee
19/31
19
Appendix 2: Sample Preliminary CompetitivePositioning Analysis
8/10/2019 Private Equity Investment Committee
20/31
20
Specific Opportunity:
Take Private of Supervalu
Objective:
Outline key competitors, positioning and relative trends.
Conclusions:a) Share trends for grocery channel and Supervalu troubling and
unlikely to moderate.
b) Importance of banner / market level operating performance andregional market share.
c) Meaningful investments in price likely needed across most
banners.
Preliminary Competitive Analysis: Supervalu (2011)
8/10/2019 Private Equity Investment Committee
21/31
8/10/2019 Private Equity Investment Committee
22/31
8/10/2019 Private Equity Investment Committee
23/31
8/10/2019 Private Equity Investment Committee
24/31
24
ID Sales Trend (Annual) ID Sales Trend (Last 4 Appx. Calendar Qtrs)
EBITDA Margin EBITDA Growth (CY 2007 LTM CAGR)
Preliminary Competitive Analysis: Supervalu (2011) (contd)
Financial Benchmarking Analysis
5.6%5.3%
5.0%
2.1%3.3% 3.4%
0.8%
(2.5%)
0.4% 0.5%
(1.2%)
(5.1%)(6.0%)
(4.0%)
(2.0%)
2.0%
4.0%
6.0%
8.0%
2006 2007 2008 2009
Kroger Safeway Supervalu
1.2%
2.4%2.7%
2.4%
(4.1%)
(3.1%)
(2.5%)(2.0%)
(6.5%)(6.8%)
(7.2%)
(6.4%)
(4.9%)
(8.0%)
(6.0%)
(4.0%)
(2.0%)
2.0%
4.0%
Q409 Q1 10 Q2 10 Q3 10 Q4 10
Kroger Safeway Supervalu
(5.9%)
(11.3%)
(0.1%)
(12.0%)
(10.0%)
(8.0%)
(6.0%)
(4.0%)
(2.0%)
Kroger
Safeway
Supervalu
5.6%
5.4%
5.2%
5.0%
4.7%
6.7%
6.9%7.0%
6.5%
6.1%6.0%
6.3%
5.5%5.4%
5.1%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
2006 2007 2008 2009 LTM
Kroger Safeway Supervalu
8/10/2019 Private Equity Investment Committee
25/31
25
Appendix 3: Sample Management Analysis
8/10/2019 Private Equity Investment Committee
26/31
26
Organizational Chart and Management Overview
The quality of the management team was an important part of our investment thesis on Company X
Based on our assessment to-date, the Companys senior leadership talent is of high qualityand is capable of operating a much larger company
As a result, it will be critical for us to ensure that each of the key members of the managementteam remains highly motivated and is provided with sufficient responsibility and upsideopportunity
CEO successor potential Strongno issuesIn question Under strengthto leaveResigned New
Searches in Progress
Position Timing to Fill
Open Position 1 ASAP
Open Position 2 Not Urgent; When Larger Company
Person 3Chief Financial Officer
Person 2Chief Operating Officer
Person 1Chief Executive Officer
Person4
Unit A
Person5
Unit B
Person6
Unit C
Person7
Unit D
Person8
Unit E
Person9
Unit F
Management Analysis: Company X
8/10/2019 Private Equity Investment Committee
27/31
27
Executive Position Roll % /$ Early Assessment Concerns/Action
Person 1 CEO [ ]% / $[ ]mm Strong, sales-oriented CEO. Hascommand and respect of his people
Need to mentor on softeningleadership style
Person 2 COO [ ]% / $[ ]mm Highly talented, execution focused COO.Overqualified for role
Need to monitor to ensurebeing provided with enoughresponsibility
Person 3 CFO [ ]% / $[ ]mm Capable and detail oriented. Good atblocking and tackling
Need to push to be morestrategic
Person 4 Unit A [ ]% / $[ ]mm Long tenure at Company. Capablesteward of Unit A franchise but not a
high-powered leader
Responsibility scopedeclining as other leaders
step up. Not sufficientlyaggressive/commercial todrive Unit A
Person 5 Unit B [ ]% / $[ ]mm Extremely valuable to the franchise.Directly responsible for growth of Unit B
Need to ensure shecontinues to be motivated
Person 6 Unit C [ ]% / $[ ]mm Capable leader of Unit C segment andhas been able to grow the businessmeaningfully
Need to ensure he continuesto be motivated
Person 7 Unit D [ ]% / $[ ]mm Highly talented young leader of Unit D.Important to the growth of the segment
Need to ensure he continuesto be motivated
Person 8 Unit E [ ]% / $[ ]mm Overqualified for the core Unit E job.Good at thinking of operational andstrategic implications of technology toCompany X
Need to keep motivated ashe is critical to the Company
Person 9 Unit F [ ]% / $[ ]mm Very capable salesperson want to seemore significant desire to achieve more
Need to monitor ability toexecute on new wins and ifright person going forward
Senior Management Assessment
Management Analysis: Company X (contd)
8/10/2019 Private Equity Investment Committee
28/31
28
Appendix 4: Rationale for Investment /Sources of Return
8/10/2019 Private Equity Investment Committee
29/31
29
Value Driver EBITDA Key Assumptions Risk Level
At Acquisition $200
Industry Growth +$32mm 3% estimated industry growth, 2% from general macroeconomicgrowth and 1% from secular growth
MacroSecular
Market Share Gain +$11mm 1% addnl growth via share gain vs historical outperformance of 3%
Op Leverage +$31mm Flow-through rate of revenue growth based on variable cost analysis
Cost Takeout +$30mm Already identified cost initiatives; supplemented by Capstone review
Subtotal $304mm Implies 9% EBITDA CAGR
Cash Flow /Deleveraging
$716mmcash flow
Based on historical capex levels and assumed working capitaloptimization initiatives
Rationale for Investment
Rationale for Investment / Sources of Return
We believe that Company X represents an attractive investment opportunity given the returnprofile of the investment relative to the risks
We have a high confidence level on most of the drivers of value (both controllable anduncontrollable)
The upside opportunity is meaningful while our conservative case (which we have highconfidence we can exceed) still generates an attractive return profile
Finally, in a severe downside scenario, our capital investment is still preserved
Acquisition Information Capitalization Information Net Return Profile
Acquisition TEV (w/ Fees) $1,700 Debt Funding $1,200 3-Year 5-Year
EBITDA Multiple (Current) 8.5x Leverage 6.0x Base Case 25.6% 22.9%
EBITDA Multiple (Forward) 7.8x Interest Coverage 2.1x Upside Case 36.3% 32.2%
EBITDA - Capex (Current) 9.2x Equity Requirement $500 Conservative Case 18.9% 16.7%
EBITDA - Capex (Forward) 8.4x % Equity 29.4% Downside Case (2.4%) 1.2%
8/10/2019 Private Equity Investment Committee
30/31
8/10/2019 Private Equity Investment Committee
31/31
Top Related