Evan Vitale

Accounting Professional

Evan Vitale – Lincolnshire Management Feels the Heat

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T.J. Maloney and the private equity firm he controls, Lincolnshire Management, are under scrutiny once again. The last time one may have heard about Lincolnshire was in 2011 when they ran into some trouble after gaining $99 million in a lawsuit. Trouble is not something you expect when you have a courthouse win of that size and to add to the surprise of the predicament, it arrived from an unexpected source to boot. Lincolnshire’s investors themselves filed a suit against the private equity firm arguing that they were not given their fair share of the legal gains. That case seems to have been more bark than bite, however, as the case remains pending to this day.

The S.E.C. took action against Lincolnshire Managment

The S.E.C. took action against Lincolnshire Managment

This time around, the Securities and Exchange Commission is the one bringing the suit and they have managed to do more than just bark. In fact, Lincolnshire has agreed to pay 2.3 million dollars to settle with the SEC. The charges stated that Lincolnshire had improperly allocated expenses between two funds that it controlled. Both of these funds were acting as owners in what, in the eyes of the SEC, was the same company. Lincolnshire, for one reason or another, decided that it would exchange resources between these two companies as if they were the same. For example, one company, Peripheral Computer Support paid the entire payroll and 401(k) administrative expenses for employees of both companies.

Now, this would not be an issue if both companies decided to do this to their mutual benefit. The issue arises when one company clearly suffers while the other profits from such a relationship. As the co-chief of the asset management unit in the enforcement division of the SEC Julie Riewe said, “Lincolnshire’s decision to integrate two portfolio companies owned by separate private equity funds resulted in the misallocation of expenses between the two companies. Advisers that commingle assets across funds must do so in a manner that satisfies their fiduciary duties to each fund and prevents one fund from benefiting to the detriment of the other.”

Because the SEC could prove that Computer Technology Solutions – the name of the other company – was benefiting and Peripheral Computer Support was suffering, or perhaps because Lincolnshire did not want the SEC to look any deeper, Lincolnshire agreed to pay the damages and settle the dispute. Hopefully, Lincolnshire doesn’t have any more run-ins with the law for a few years, their reputation could use a break.

Evan Vitale – Russia Sanctions Prove Difficult to Manage

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Russia continues to bear down on the Ukrainian forces in support of the Ukrainian separatist forces. In the face of this, America and the EU have put in place certain economic sanctions to encourage Russia to stop. These sanctions include such rules like: no US concern shall be allowed to do business with a concern that is controlled (over 50%) by a sanctioned Russian concern. Other sanctions are targeted at the Russian controlled shale-oil projects in the Arctic. Clearly, these sanctions affect a large variety of businesses and, due to the complex nature of the global economy, not all of those concerns will be Russian.

Putin is in charge of not just the fate of Russia and the Ukraine but of a lot of American firms as well.

Putin is in charge of not just the fate of Russia and the Ukraine but of a lot of American firms as well.

Many private equity firms have issued orders to special teams to look into their investments and decide which could be affected by these changing sanctions. This is something that all firms have to face and those who are the best informed are also the most prepared should the sanctions continue past the end of this month (if Russia complies with the 12 point peace plan and removes all Russian material and forces from Ukraine by September 30 the sanctions will be lifted). And, should the sanctions continue, they will only get stronger. Experts suspect that sanctions could grow to deny all but short-term investments in Russian concerns by American firms. Russia is the eighth largest economy in the world today so, this will have an effect on the whole world.

To make matters even more difficult to handle, Russian law permits companies to have as many as six different aliases. Private equity firms trying to identify which of their concerns will be affected must wade through this murky water which is a far from simple task. Hopefully, Russia will comply with the sanctions soon so that the effects of these sanctions will not be so long lasting or detrimental to private equity firms and the global economy alike.

Evan Vitale – “Fundless Sponsor” Deals Becoming a Trend

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Fundless sponsors are brokering big deals in the world of private equity

Fundless sponsors are brokering big deals in the world of private equity

Private equity is a difficult business. In order to get started, one has to raise capital but, in order to raise capital, one must showcase a track record of success. In the past this was done very slowly, with the private equity executive hopeful brokering small deals in an effort to build credibility in the industry before moving up to larger and larger deals. That is a tough, long road for anyone to walk. It is made even more difficult in today’s market where the competition is as fierce as it has ever been and, therefore, prices are through the roof. The new entrant to the world of private equity is beaten out by bigger firms before he can even get out of the starting gate. So what is he or she to do?

An interesting direction some entrants into the market are taking when they find a deal but are unable to raise capital themselves is to broker the deal out to a larger firms, acting as a “fundless sponsor” for the deal. These deals have become more and more prevalent in the world of private equity over the past five years. In fact, according to Michael B. Shaw, a partner in the Chicago office of law firm Much Shelist PC, the number of “fundless sponsor” deal has doubled since 2009.

That is not to say just anyone can broker these deals and act as a “fundless sponsor.” In many of these cases, the deals are being brokered by private equity executives who have decided to leave their company and strike out on their own. They usually have the benefit of knowing many people in the private equity world and have an area of expertise that would rival anyone in the industry who is currently working for a private equity firm. Because of these connections and level of industry-specific knowledge, these emancipated executives are able to act as a middleman between a business and a private equity firm. They get noted as the “fundless sponsor” of the deal and can reap great financial reward, besides the track record they build for when they look to raise capital for future deals.

Will this mode of interaction between businesses and private equity firms persist into the future or is it just a fad? In the mind of some professionals, these “fundless sponsor” brokered deals will continue to grow because it is becoming increasingly difficult for firms to find deals on their own. If they allow these freelancers to bring the deals to them, firms can actually save money, in some cases. So, perhaps these “fundless sponsors” are here to stay.

 

Evan Vitale – Private equity performance not dictated by how fast capital called — study

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Private equity funds that called a greater percentage of capital than other funds in the same vintage year did not outperform their peers, a new study by private equity fund-of-funds firm Pantheon shows.

Contrary to popular belief, calling capital quickly compared to other funds raised in the same year, “doesn’t say anything about final outcome,” said Nik Morandi, partner and head of research and portfolio strategy at Pantheon. Mr. Morandi is the author of the Pantheon study, titled “Private Equity Cash Flows and Performance Patterns.”

Calling capital quickly did not result in a higher probability that the fund would produce top-quartile returns over the life of the fund. The result was the same when performance was measured by internal rate of return and by total value to paid-in return.

However, there is a relationship between distributions and returns, the study found. Private equity funds that distributed more than funds in the same vintage year during the typical five-year commitment period were more likely to produce top-quartile returns over the long term. For this analysis, performance was measured in multiples since the results would be skewed when measured by IRR because funds with distributions will have better IRR, Mr. Morandi said.

Private equity funds whose distributions were within the top 25% of funds in the same vintage year in terms of distributions outperformed their peer groups.
What’s more, the deeper a fund’s J-curve — indicating a fund’s negative cash position, the lower probability the fund would generate a top-quartile return.

Pantheon’s study was based on data for 322 U.S. buyout funds raised between 1992 and 2007, using fund performance data through the second quarter of 2013.

Evan Vitale – Private Equity Firms are Linking Up With the Insurance Industry

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Over the past few years, private equity firms are moving further and further away from home runs; instead, they’re deciding to play small ball with some singles and doubles. During the late 1990s and into the early 2000s, this would have been nearly unheard of. Private equity firms were known for their high-risk, high-reward strategies. These firms would take on massive amounts of debt to acquire companies and then change the structure by eliminating unprofitable operations while also putting more efficient management strategies in place. This allowed private equity firms to knock it out of the park when it came to the initial public offering (IPO).

Since 2011, firms such as the Ares Private Equity Group, Blackstone Group and Apollo Global Management have moved into a more secure sector – insurance. By purchasing these insurance companies, there is much less risk involved.

Private equity firms are purchasing more and more insurance companies due to interest rates and the baby boomers.

Private equity firms are purchasing more and more insurance companies due to interest rates and the baby boomers.

There is some speculation, however, as to why these companies are investing in fixed annuities in this sector – ones that have a lower rate of return. However, the payoff seems to be evident; by establishing themselves in the life and annuity insurance sector, these private equity firms are adding billions in assets. This allows firms to put their investment expertise to use, allowing fairly predictable and steady returns.

One reason why these private equity firms are jumping into insurance now is because of the realization by insurers that interest rates are remaining low, squeezing their profit margins. Thus, these insurance companies need to inject more capital into their businesses. This need for capital is where private equity firms come into play.

While interest rates are currently low, they are expecting these rates to take off in the near future. Because of new capital coming in the door, better return on investment will be achieved through the rising interest rates. Combined with the fact that the baby boomer generation is due to retire soon, insurers could see much greater investment returns than usual.

A problem that private equity firms are running into, however, is the fact that insurance is highly regulated. States must approve changing ownership within the insurance industry – giving these firms another hoop to jump through.

Evan Vitale – Blackstone Group to Buy Majority Stake in Service King

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Blackstone Group has agreed to buy a majority stake in Service King Collision Repair Centers from the Carlyle Group with a view to fund the company’s future growth, according to sources familiar with the matter. The Wall Street Journal reported Tuesday the deal values Service King at about $650 million, citing a person familiar with the matter.

Carlyle will recognize a return of nearly four times its initial investment from the sale and will retain a significant minority stake in Service King, whose management will increase its own minority stake as part of the deal, sources said.

Washington, D.C.-based Carlyle acquired a majority stake in Service King in August 2012, with plans to expand the company nationally. At the time, the Richardson, Texas-based company operated 49 collision repair shops in or near Texas’s major cities. The company, which traces its roots to 1976 when its founder Eddie Lennox took out a $10,000 loan and repaired vehicles from his own garage, now operates 177 centers across 20 states.

Blackstone’s investment in the company comes as another private-equity-backed collision repair chain is on the auction block. Palladium Equity Partners LLC has hired an investment bank to sell ABRA Auto Body & Glass, which could fetch $500 million or more, sources familiar with the matter said last month.

The move underscores Blackstone’s pursuit of smaller, high-growth deals as steep market valuations make traditional buyout deals more expensive. As of the end of the second quarter, the firm had $17.7 billion available to spend on private-equity investments.

Evan Vitale – $4 Billion Real Estate Fund Launch

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High risk private equity funds may be coming back into style after a tough few years. Since the financial crisis, firms have run into trouble raising the capital needed for new real-estate funds. However, private equity giants TPG Capital, KKR, and Carlyle Group have demonstrated interest in and taken steps toward launching real-estate focused funds. Carlyle Group is preparing for a multi-billion dollar real-estate fund with plans to raise up to $4 billion. The fund would qualify as the largest property fund since the financial crisis and the burst of the real-estate bubble.

Carlyle is hoping to benefit from a surge in positive publicity from its recent sales of trophy assets at high profits. The firm and its partners reached an agreement late last month to sell the 27-story Manhattan office building at 650 Madison Ave. for $1.3 billion, or about $500 million more than the firm spent buying and fixing up the property.

Carlyle invests in a wide range of asset types, including corporate private equity, debt and energy. Real estate makes up only $13 billion of its total portfolio. Carlyle tends to buy single buildings, less often acquiring large property portfolios as some of its peers such as Blackstone Group or Starwood Capital Group. Source

Carlyle has had seven real-estate focused funds since 1997, the largest of which topped out at $3 billion. The private equity giant, with $176 billion in assets under management, will hope to capitalize on a renewed confidence in the real estate market and the rising prices of homes.

Evan Vitale – Private Equity Investment Model

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It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation (ARDC) and J.H. Whitney & Company.

Private equity companies manage funds, which typically invest in unlisted companies. There are several stages in the private equity investment process starting from collecting capital for the fund and ending with returning committed capital and realized returns to fund investors.

Establishing a fund

Private equity fund managers raise capital from institutional investors to establish private equity funds. Typically, investors include both private and state pension funds, funds of funds, life insurance companies, foundations and other institutions. Often the fund manager also commits capital to the newly established fund. Private equity funds are typically organized as limited partnerships with a life cycle of approximately ten years. Capital is called from investors when the investments are made into portfolio companies. The fund manager acts as an advisor to the fund and is responsible for the decision making process, such as making investment and exit proposals and developing the investment targets during the ownership period.

Mapping potential investments

The private equity fund manager maps potential investment targets for the fund. Typically, the targets need to fulfill certain criteria in terms of size, industry and life cycle phase in accordance with the fund’s strategy. Additionally, the fund manager evaluates the attractiveness of each target based on its value creation and exit potential. Investment targets are usually sourced either through proprietary networks or by participating in auction processes. Efficient deal sourcing therefore calls for strong business networks across the fund’s target geography.

Making an investment

After a fund manager identifies an investment target, a more detailed analysis of the business is performed. This due diligence analysis usually involves going through the company’s financial and legal documents, as well as evaluating its commercial attractiveness. Negotiations with banks to arrange financing are also initiated at this stage. Provided that bank financing is available and due diligence findings support the investment, final negotiations regarding the transaction are initiated.

Developing the target company

Once the investment is made, the private equity fund manager starts developing the company based on a detailed value creation plan. In addition to financial capital, the manager supports the target company by providing sector knowledge, operational experience and access to a wider business/industry network. This usually involves taking a seat on the target company’s board.

Exit

Private equity investors are temporary owners. Therefore, a portfolio company is usually held between 4 to 6 years, during which the value creation plan is being implemented in cooperation with the management team. There are several alternatives available for the private equity fund to exit the investment. Most commonly exits take place through:

  • Trade sale to an industrial buyer
  • Secondary sale to another private equity fund
  • Listing through initial public offering (IPO)
  • Sale to the management group

Once the exit is finalized, the initial capital and proceeds from the investment are returned to the fund investors.

Evan Vitale – Private Equity in Short

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Private equity enables the growth and development of unlisted businesses. Private equity consists of funds making equity investments in non-listed companies. Private equity investors are active owners. Besides capital, the investors provide the companies with strategic and managerial support. Value creation in private equity is primarily based on achieving increased growth and operational efficiency.

Private equity investments are usually categorized based on life cycle phase of the
target company:

  • Seed/early stage investments: Financing for development and commercialization of a business concept.
  • Venture Capital: Minority/majority investments in early stage or expansion ventures.
  • Growth Capital: Typically minority investments in companies with major growth potential.
  • Buyout: Acquisition of a controlling interest in a company together with the operative management or an outside management group.
  • Special situations: Investments in distressed companies or companies operating in an industry with major changes