Case: Martin Smith: January 2002

Topics: Investment, Private equity, Leveraged buyout Pages: 8 (783 words) Published: September 30, 2012
Private Equity: Leveraged
Intro Case:
Martin Smith

Martin Smith—Case Objectives
• Examine components of PE compensation and
their relative weight
– Case Exhibit 4 (difference between Salary and Total is
Carried Interest)

• Evaluate difference between IRR and
Multiple on Investment (two return metrics)
– Case Exhibit 6

• Begin to explore differences among funds as an
employee and investor
– trade-offs include compensation, track record, strategy, focus, reputation, risk, sustainability, etc.

Martin Smith
• Multiple offers: Nice dilemma!
– Excellent background for PE

Economics background
Banking experience
Financial operating experience

Martin Smith, cont’d
• Effective job search strategy:
– Target groups that match background
• Avoiding VC, where engineering and longer term
operating experience is more highly valued

– Focus on more credible groups
• As opposed to first-time funds—Avery search fund

– Extensive research
• Lots of (too much?) due diligence

Martin’s Dilemma
• Differences between firms/funds:
– Brand name/reputation
– Background of partners
– Deal flow strategy
– Industry focus/investment strategy
– Investment track record
– Organizational structure (number of partners,
offices, etc.)
– Capital under management: today and growth of
funds in the future

Martin’s Dilemma
Differences between firms/funds, cont’d
• Track record:
– Multiple of money invested
– Realized vs. Unrealized
– Vs. Benchmark
– Within Vintage
– Consistency
– Longevity

Martin’s Dilemma, cont’d
• Differences in compensation
– Current base salary
– Bonus potential
– Opportunity to share in carried interest
• now and in the future

– Division of carried interest and management fee
among partners (and others)
– Opportunity for co-investment
• firm loans to co-invest?

Martin’s Dilemma, cont’d
• Building personal reputation in “brand name”
firm early in career may be useful
– Creates pull away from search fund

• Is it easier to move from one firm to another
later (e.g., is it easier to move from a search
fund to Newport, or vice-versa)?

Newport Partners
• Highest current compensation
• Potential for carried interest
• $1.2 B managed by only 12 people—more
responsibility, less dilution of economics
• Has the “brand” suffered?
– “Bad” diversions into tech/telecom and international – “back-to-basics” may resonate with investors, match skills of firm

• Implications of track record:
– Future returns? Ability to raise more funds?

• Succession issue? Culture after many departures?
No history of promoting from within?
• Can you start here, and “trade down”?

Knowledge Capital Partners
• Lower starting comp than Newport, better than Search
• Won’t discuss carry
– Implications for interest in developing “real partners” down the road?

• $1 B managed by 38 people
– Still a small firm, but Martin getting to be one of a crowd? – Better opportunity to find a mentor?

• Specialized strategy: spin-offs
– Conflicts with (“stealing” from) consulting clients? – Sustainability of strategy?

• Ability to manage growth: fund growth = 5 X
– Implications for strategy and personnel

• Firm could spit with consulting firm
– Implications for strategy, deal flow, recruiting?

Search Fund—Steve Avery
• Lowest starting comp
• 2 people split ALL the carried interest, but
– Will there be any?

• What if entrepreneurs don’t fund the deal?
– Capital not as committed as institutional funds

Credibility with sellers of companies?
Ability to raise debt financing to close acquisition?
Culture: better get along with Avery
Outcome more highly dependent on skills of Avery and
Martin; no mentors
• Outcome quite binary—win/lose
• LONG run success could be HUGE—senior partners the
next Henry Kravis and George Roberts?

Ideal background for Private Equity?

Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Martin Smith Essay
  • Martin Smith Essay
  • smith Essay
  • Williams, 2002 Case Study Essay
  • Essay about Martin Manufacturing Case
  • Essay on January
  • Essay on January
  • Case 6 Jeffrey Smith Essay

Become a StudyMode Member

Sign Up - It's Free