Capital Ideas - Advisers | Macquarie

1 Macquarie private equity Investment If you have any questions or require more information we recommend you talk to your financial adviser or Ask Macquarie An introduction to Call 1800 808 508 private equity investment Macquarie Investment Management Limited PO Box 192. Australia Square NSW 1215. Capital Ideas Adviser stamp BKL0069 04/04. Contents A Capital idea 01 A Capital idea. What is private equity ? What is private equity ? Simply put, private 04 A winning game. How private equity works. equity investors provide Capital for businesses 11 Why private equity ? Why now? Why here? that are not listed on a stock exchange. 15 It's personal. private equity and you. 18 Scar tissue. The risks. 19 Buy in, buy out, by whom? The importance of management. Individuals, royalty, aristocrats, And more than just Capital syndicates and merchant banks have private equity investors generally 23 Your way in.

2 How to invest in private equity . been providing a form of private equity provide their Capital in exchange for a 24 Points of difference. for centuries. Professional private sizeable stake in the business. They equity investing dates back to 1946, also invest their expertise in 25 Forward thinking. Why Macquarie ? to the launch of American Research management, finance, marketing, Case studies and Development Corporation, a strategic direction and networks. By US$4 million fund that pooled exercising some control through board 02 Cisco individual and institutional money to seats and management agreements, 04 Brown and Dureau invest in private companies. private equity investors can protect 08 Austal Ships and grow their investment. This The most important alignment of interests and the ability to 10 Neverfail Springwater features of private equity add value to the business often means that private equity investors can 14 Cellnet investing are: generate higher returns than those 17 Wridgways available from traditional hands-off'.

3 It's about Capital equity investing. 22 Miller's Retail private equity investing means putting Capital into a business to expand, develop new products or fund changes to ownership and The information provided in this booklet is current at March 2003 and provided for general purposes only. It is published management. private equity investors by Macquarie Investment Management Limited (MIML) ABN 66 002 867 003, Level 11, 20 Bond Street, Sydney. do more than buy the rights to share MIML ABN 66 002 867 003 is not an authorised deposit-taking institution for the purposes of the Banking in a company's return they provide Act (Cth) 1959, and MIML's obligations do not represent deposits or other liabilities of Macquarie Bank Limited working Capital . As respected investor ABN 46 008 583 542.

4 Macquarie Bank Limited does not guarantee or otherwise provide assurance in respect of the Warren Buffett puts it: Buy a obligations of MIML. business, don't rent stocks.. MPET, MPET II and MDPEF are offered by MIML ABN 66 002 867 003. In deciding whether to acquire or continue to hold an investment, and before acting on this advice, you should consider the Product Disclosure Statement (PDS). and assess, with (or without) your financial adviser, whether this product fits your objectives, financial situation or needs. Applications can only be made on the application form contained in the current PDS. Any financial product advice provided by us is free of charge. We (MIML) may receive remuneration for distributing financial products issued by other Macquarie Bank group companies.

5 1. New Ideas Better structures private equity financing can be a It's long term and potentially crucial factor in aligning a company's lucrative Many world famous technology As a company grows, its management management and ownership structure companies including Compaq, Sun private equity investment is typically and ownership structures often need with the needs of the business. The and Apple were funded by venture long term ranging from 3-12 years. to change. A start-up company may change of control can occur through: Capital companies in their early years. Because the investment manager is be driven by the vision and energy of Biotech star Genentech and courier a leveraged buy-out (LBO) where investing substantial Capital at high its founders in its early years but giant FedEx are also famous recipients private equity investors use debt to risk over a long period they expect to needs more professional management of venture Capital (sometimes called take control of a business be rewarded with higher returns.)

6 As it matures. Similarly, a company early stage Capital in Australia). that once benefited from easy access a management buy-out (MBO). to Capital as part of a large where private equity investors help conglomerate may be more successful fund existing management to buy if the owners understand the day-to- the business day issues affecting the business. a management buy-in (MBI) when private equity investors finance a new management team to buy into the business. Successfully executed, the restructure benefits both the business and the investors a better performing company means a better return. New Ideas pass through three periods Growing Cisco It can't be done. Sometimes private equity is crucial in Sequoia Capital . At the time they had It probably can be done, but it's not turning a start-up into a giant.

7 In 1984 quarterly sales of around US$ million. Sanford University computer scientists, At the end of 2002 the company booked worth doing. Sandy Lerner and Len Bosak founded net quarterly sales of US$ billion. Cisco Systems and financed their new I knew it was a good idea all along. venture using their credit cards. In 1987. Cisco received venture Capital funding from - Arthur C Clarke 2 3. A winning game private equity funds run by professional private equity managers collect and combine Capital from Fund of funds private equity managers take advantage of the choices that are available by individuals, companies, banks, super investing in a portfolio of private How private equity works. To understand funds and fund managers. They seek equity funds. A fund of funds how private equity works you need to look at out attractive companies to invest in approach gives investors access to a and structure a deal that exchanges much broader range of underlying who is involved.

8 The Capital they've sourced for a companies and allows for stake in the company. As many diversification of managers and private equity firms are staffed by manager styles. Typically a fund of former bankers, lawyers, funds manager will invest in around The investors Investor technologists or line managers their ten funds and give investors access Angel investors (such as Australia's business expertise can be invaluable. to around 100 companies. Kerry Packer) invest directly in By providing Capital and business A good fund of funds manager will Company 1. Company 2. Company 3. Company 4. Company 5. Company 6. companies that need Capital . They expertise, private equity managers have an expert knowledge of the need substantial assets (measured in aim to aid the rapid growth of a style and capabilities of the private millions) and must have expertise in company so that they can exit with a equity managers they choose.

9 Ideally finding investment opportunities and substantial profit. they will select quality managers and structuring financial deals. Typically blend them in ways that maximise they also bring useful business skills diversification and improve the Investor to the table. risk/return characteristics of the overall portfolio. private equity Fund Investor 1 Investor 2 Investor 3 Investor 4. Branching out Company 1. Company 2. Company 3. Company 4. Company 5. Company 6. private equity Fund of funds private equity can improve a business by Under its new structure the company turning managers into owners. dramatically improved operational efficiency. When the fund manager realised their Brown and Dureau is a century-old private equity private equity private equity investment in 2001 they had generated a Victorian pine sawmilling company that was Fund A Fund B Fund C.

10 91% pa internal rate of return for their part of the Amcor group. private equity investors (one of which was With private equity funding from an the Macquarie Alternative Investment Trust). Company 1. Company 2. Company 3. Company 4. Company 5. Company 1. Company 2. Company 3. Company 4. Company 5. Company 1. Company 2. Company 3. Company 4. Company 5. underlying manager of the Macquarie Alternative Investment Trust the management team bought out the business in 1998. With the help of the private equity manager, Brown and Dureau were able to pay off debt faster than anticipated, invest in upgrades to the sawmill and increase capacity, productivity and profits. The Macquarie Alternative Investment Trust (MAIT) is a wholesale managed fund offered by Macquarie Investment Management Limited (MIML) ABN 66 002 867 003.