Understanding private equity.

70 W. Chippewa Street, Suite 500, Buffalo, NY 14202 716.566.2900 www.summerstreetcapital.com

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What is private equity? EXAMPLES OF PRIVATELY HELD COMPANIES:

A private equity investor is an individual or entity that invests

capital into a private company (i.e. firms not traded on a public
exchange) in exchange for equity interest in that business. In the
US, there are approximately 18,000 publicly traded companies,
and more than 300,000 privately held companies.

WHO MIGHT SEEK A PRIVATE EQUITY INVESTOR AS A SOURCE OF CAPITAL?

 Companies looking to fund a capital need that is beyond

traditional bank financing
 Owners considering a partial or complete sale of their business
 Managers looking to buy a business
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Private equity strategies. EXAMPLES OF PRIVATE EQUITY FIRMS:

MOST PRIVATE EQUITY INVESTORS WILL LIMIT THEIR INVESTMENTS TO ONE OR

TWO OF THE FOLLOWING STRATEGIES:

 Angel investing  Growth capital

 Venture capital  Distressed investments
 Leveraged buyouts (LBO)  Mezzanine capital
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Sources of capital for PE funds.

THERE ARE TWO TYPES OF PRIVATE EQUITY FIRMS:

 Firms with a dedicated fund, with the majority of the capital sourced from institutional investors (i.e. pension
funds, banks, endowments, etc.) and accredited investors (i.e. high net worth individual investors)
 Firms that raise capital from investors on a per-deal basis (pledge funds)

INVESTMENT DURATION AND RETURNS.

 Typical investment period is 3−10 years, after which capital is distributed to investors
 Rates of return are higher than public market returns, typically 15−30%, depending on the strategy

HISTORICAL
S&P 500 RETURNS

■ S&P 500 Returns ■ Average Source: Standard & Poor’s LCD

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Private equity fund structure.

PRIVATE EQUITY FIRM LIMITED PARTNERS (Investors)

(Public pension funds, corporate pension funds, insurance companies, high net worth
Management Company General Partner individuals, family offices, endowments, banks, foundations, funds-of-funds, etc.)

Fund Ownership

Fund Investment Management

PRIVATE EQUITY FUND
(Limited Partnership)

Fund’s Ownership of Portfolio Investments

Etc.

INVESTMENT 1 INVESTMENT 2 INVESTMENT 3

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Private equity investment strategies.

Venture and Growth and Buyout and

Pre-Seed Seed
Early Stage Expansion Recapitalization

 Pre-revenue/start-up  $500K-5MM in revenue  Profitable, with TTM  Revenue greater than

revenue of $3MM+ $10MM
 Building management  Management team
team near complete  Mature management  Mature management
team team
 Early stage product  Commercial
development acceptance  Year-over-year  Growth strategy −
revenue growth organic or acquisition
 Significant market  Significant market
opportunity opportunity  Defensible market  Defensible market
position position

Seed and Angel Venture Capital

Private Equity (Growth and LBO)

Mezzanine Funding

Distressed Investments
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Partnering process.

DISCOVERY
PROCESS
PRELIMINARY
MEETINGS
 Business plan and REVIEW OFFERS
strategy
 Information requests FUNDING
 Historical and pro forma
finance projections  Questions list  Company due diligence PARTNER
 Market opportunity and  Company visits − Management  Review financial goals
defensible position
 Debt capacity − Facility and expectations
 Resumes of senior assessment  Develop plan for all
− Operations  Review partnership roles
management team parties to realize value
 Data room preparations − Customer and expectations from investment
 Potential resources and − Environmental
 Supporting documents  Negotiate documents  Build and grow
capital need
 Industry due diligence partnership
 Board representation
 Financial due diligence and compensation
agreements
 Legal due diligence
 Finalize capital structure
(Sr., Mezz, PE)

1 - ? weeks 2 - 4 weeks 4 - 12 weeks 3 - 10 years

Total process from meeting to funding will typically take 6 months.

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Understanding leveraged buyouts.

Leveraged buyouts (LBOs) include any acquisition by a private equity group that involves a mix of equity and
leveraged finance (i.e. senior debt, mezzanine debt, etc.) to fund the capital required for the transaction. In the
past, the debt portion of an LBO comprised 50-90% of the purchase price, but in today’s market, debt levels are
typically less than 50%.

THE AMOUNT OF DEBT USED TO FINANCE A TRANSACTION VARIES ACCORDING TO:

 Market conditions
 Financial condition and history of the acquisition target
 Willingness of lenders to extend credit – both to the company being acquired and to the sponsoring private
equity firm

Debt (interest and principal payments) will ultimately be repaid with the cash flows of the acquisition target. Due
to the debt service burden placed on a company as a result of an LBO, such transactions are not always
appropriate for cyclical companies with uneven cash flows.

BENEFITS OF A LEVERAGED FINANCING STRUCTURE:

 The private equity group only needs to provide a portion of the capital for the acquisition
 As long as the capital returned upon exit exceeds the invested equity plus the cost of the debt, the return for all
investors can be significantly enhanced
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Compelling LBO targets.

Many factors will determine how attractive a company is to a private equity group considering an LBO, and will
also impact the willingness of banks and investors to provide financing.
 Quality of the management team
 Cash flow consistency
 Defensible market position
 Operational leverage for growth
 Feasibility of a solid exit strategy
 Stability during economic downturns
 Presence of larger, well-capitalized competitors
 History of successful LBOs in the industry
 Ability to generate returns greater than 25% (assuming an exit in 3–10 years)
 A purchase price in line with comparable companies and transactions
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Generating LBO results.

For the right company, an LBO can generate solid results with limited growth. This simple ”financial engineering”
strategy enticed many firms into leveraged buyouts in the 1990s.
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Generating value through growth.

Summer Street’s strategy is to generate value through real growth, not financial engineering.
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Generating value through growth.

VALUE CREATION DRIVERS

ORGANIC STRATEGIC OPERATIONAL ALIGNMENT OF

GROWTH ACQUISITIONS IMPROVEMENTS SHAREHOLDER INTERESTS

 Develop new  Product/service  Improve IT systems  Equity held by senior

products/services overlap executives
 Enhance/augment
 Leverage new  Geographic management team  Profit sharing pool for
distribution channels expansion management
 Implement lean
 Expand geographic  Product/service manufacturing  Incentive-based
presence extension bonus programs
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Generating enhanced LBO results.

Adding real growth to the equation increases returns dramatically for all shareholders. Greater earnings and
improved operations make the company an attractive acquisition for a larger universe of prospective buyers.
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Equity return comparison.

NO GROWTH VALUE CREATION

SCENARIO SCENARIO
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Historical LBO activity.

In the years following the 2007 economic crisis, deal quantity has rebounded given the abundant access to both
debt and equity capital. LBO volume hit a peak pre-crisis due to a mega deal trend.

Source: Houlihan Lockey, M&A Market Overview Q2 2015, Thomson Reuters Buyouts Magazine, July 2015 issue; Preqin, July 2015
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Equity contributions in LBOs.

As the buy-out market continues to mature, private equity funds have to invest more equity in each
transaction to remain competitive. This pressure on returns means more funds are adopting Summer Street’s
strategy – generating real growth to drive great results.

Source: Houlihan Lockey, M&A Market Overview Q2 2015, Standard & Poor’s Q2 2015 Leveraged Buyout Review
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About Summer Street Capital.

Summer Street Capital Partners, LLC is a Buffalo, NY based HOW TO CONTACT US

private equity firm with committed capital focused on investing If you’d like more information
in lower middle market companies. The firm invests alongside about Summer Street, please
talented managers, bringing capital and resources to enable contact:
extraordinary growth. Summer Street’s investors include leading
pension funds, insurance companies, and banking institutions.

 Founded: 1999
 Funds under management: over $450 million*
(currently investing in our third fund)
 Investment type: Equity for growth and buyout transactions
 Investment preference:
INVESTMENT AMOUNT: minimum of $10 million Randy Bianchi
REVENUES: $20 –150 million (10% + EBITDA) Partner - Business Development

GEOGRAPHY: US and Canada 70 W. Chippewa Street, Suite 500,

Buffalo, New York 14202
OWNERSHIP: Control or minority positions
P 716.566.2900 C 716.863.9971
E rbianchi@summerstreetcapital.com

* as of 12/31/2015 www.summerstreetcapital.com

© 2010 Summer Street Capital Partners