Wall StreetMy BackgroundWhy Work in the World of Wall Street?Components of Wall StreetSell-Side / Buy-SideSlide 6Slide 7Slide 8Slide 9Private Equity FundLeverage Buyout: ExampleLeverage Buyout: Ultimate GoalPower of LeveragePrivate Equity Firm StructureSlide 15Insurance DiligenceRisk ManagementThe Private Equity SummaryMy Job: the Good and the BadOverview of Investment Banking JobsInvestment Banking AnalystDebt and Equity Capital Markets AnalystEquity Research AnalystSales and Trading AnalystHow Do You Get There?Wall Street Irina Zilbergleyt2My BackgroundGraduated with a Finance Major December 2002Merrill Lynch Investment Banking Analyst (Chicago)Allied Capital Private Equity Associate Oct 2004 - Present (Chicago and New York)3Why Work in the World of Wall Street?Challenge / Responsibility Be in a position to provide advice and guidance to people whom, if you worked in a corporate setting, you would probably have no exposure to Compensation: 2006 Investment Banking Average First Year Compensation$60K salary + $70K bonus = $130KOpportunities after Investment BankingPrivate Equity / Venture CapitalHedge FundsCorporate FinanceBusiness SchoolNetworkingDirect Promotion to Associate4Components of Wall StreetSell-side FirmsAgents or Middle ManSell investment banking services: Acquisition Advisory Capital Markets (IPOs) Trading Services Stock ResearchMorgan Stanley, Goldman Sachs, Merrill LynchExample : Merrill Lynch advised P&G on their acquisition of Gillette in 2005.4Buy-side FirmsPrincipalsThose who buy the services that the sell-side is offering: money managers including Mutual Funds  Private Equity Firms Hedge FundsFidelity, Putnam, KKR, Carlyle Group, Blackstone, Citadel Example : Fidelity asking Merrill Lynch to sell their Microsoft Stock.5CORPS:Abbott, GESell-Side / Buy-Side INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADINGRESEARCHINVESTMENT BANKINGCAPITAL MARKETSSALES & TRADINGRESEARCHstrategic advisoryunderwrite and placesecuritiesSell-Side6INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADINGRESEARCHINVESTMENT BANKINGCAPITAL MARKETSSALES & TRADINGRESEARCHMUTUAL FUNDS(Buy-Side)MUTUAL FUNDS(Buy-Side)CORPS:Abbott, GEstrategic advisoryunderwrite and placesecuritiessell equity and debt securities, provide research invest directlySell-Side7INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADINGRESEARCHINVESTMENT BANKINGCAPITAL MARKETSSALES & TRADINGRESEARCHINDIVIDUAL INVESTORSINDIVIDUAL INVESTORSsell equity and debt securities, provide research, financial planningstrategic advisoryunderwrite and placesecuritiessell equity and debtsecurities, provide researchinvest directlyMUTUAL FUNDS(Buy-Side)MUTUAL FUNDS(Buy-Side)CORPS:Abbott, GESell-Side8INVESTMENT BANKINGCAPITAL MARKETSSALES & TRADINGRESEARCHINVESTMENT BANKINGCAPITAL MARKETSSALES & TRADINGRESEARCHCORPS:Abbott, GEinstitutionsstrategic advisoryunderwrite and placesecuritiesinvest indirectly by buying mutual funds, insurance policies, etc.sell equity and debt securities, provide researchinvest directlyinvest directlyMUTUAL FUNDS(Buy-Side)MUTUAL FUNDS(Buy-Side)INDIVIDUAL INVESTORSINDIVIDUAL INVESTORSsell equity and debt securities, provide research, financial planningSell-Side9IndividualInvestors:High Net Worth IndividualsInstitutionalInvestors:•Insurance Companies •Pension Funds•College Endowments CashEquivalentsDebtSecuritiesStocks Private EquityHedge FundsRealEstateMoney FlowMutual FundsPublicly Traded InvestmentsPrivately Traded InvestmentsBuy-sideFirms:InvestmentTypes:PrivateAssets Other:Metal, Oil10Private Equity FundPrivate Equity Fund: is an investment company that provides equity capital in exchange for an ownership position in a private company (not traded on a public stock market post transaction).Venture Capital: invest in start-ups and early stage deals (Technology)Leverage Buyout Funds: invest in buyouts, usually of mature companies (Allied Capital)Leverage Buyout (LBO): is the process of acquiring a company using a significant amount of debt, which helps increase the acquirer’s equity return.11Leverage Buyout: ExampleHouse Leverage Buyout (LBO)Pre Deal Research: Hire a Broker or look at listings, attend open houses. Hire investment bankers who help find potential opportunities or do your own search. Visit companies, meet management.Deal Related Work/ Investigation (Due Diligence):Hire inspector, attorney, title company Perform Financial, Legal, Accounting, and Insurance Due Diligence (Usually hire outside parties) Payment: 1) Down payment20% 25-40%2) Borrow From Bank Mortgage Payment Interest PaymentHold Period: Varies 3-7 years12Leverage Buyout: Ultimate GoalBuy low, sell high!An equity investor expects that the Company will grow in value.How does Private Equity Firm create value?Cost cutting (outsource to Asia)Selecting operating executives and boards of directors Industry consolidation or acquisition strategies13Power of LeverageWhy borrow capital (debt) to fund buyout transaction?Transaction Structure: Cash Purchase LBO Purchase Price Today: $100 million $100 million Equity $s Invested: $100 million $30 million (30%) Selling Price (1 year later): $125 million $125 million Profit: $25 million $25 million Simple Return Calc: $25 (profit) / $100 (invested amount) = 25% $25 (profit) / $30 (invested amount) = 83%14Private Equity Firm StructureGeneral PartnersManaging Directors (MD’s)PrincipalsVice PresidentsSr. AssociatesAssociatesBack Office (Accounting, Treasury, etc.)Operating PartnersFormer CEOs, COO’s, CFO’s, and management consultantsRecent MBA’s often with related experienceUndergrads with 2-3 years experience as: •Investment Bankers •Management Consultants •Big Four AccountantsGeneral partners (GPs) The private equity firm employees that manage the firm’s investing activities•Receive a 2% management fee and 20% of profit  Limited partners (LPs) The pension funds, college endowments, etc. that provide capital to the private equity firms but do not actively manage the investments•Receive their initial investment and 80% of profit15DevelopmentMeineke hired investment bankers to help them sell the CompanyInvestment Bankers put together a book describing the business (Offering Memorandum) and submitted it to Allied and other interested partiesAllied performed financial analysis to determine the value of the Company and submitted it to Meineke through Investment BankersAllied met