Thursday, March 1, 2012 Nicholas Center Blog
Crash Course in Private Equity with Bill Krugler by John Hames

Last week's Current Topics class welcomed Bill Krugler, a Nicholas Center board member and co-founder of Mason Wells, a private equity firm based in Milwaukee, WI. Founded in 1982 as a subsidiary of Marshall & Ilsley Corporation, Mason Wells became an independent private equity firm in 1998. The firm is currently investing equity from Mason Wells Buyout Fund III, a $525 million fund raised to make control-oriented buyout investments of middle market companies primarily located in the Midwestern United States.

Mr. Krugler began his presentation with an overview of Mason Wells, covering the firm's history and current investment strategy. The fund seeks to make $15-40 million equity investments in specialty packaging and paper companies, engineered product and service firms, and outsourced business service providers. This investment size roughly translates to businesses with $25-250 million in sales.

Next, the discussion changed gears to address the mechanics of private equity, including how firms are structured, different categories of funds, and the history of fundraising.  Private equity funds generally invest capital that has been raised from institutional investors (e.g. pension funds, insurance companies, hedge funds, etc.).  In finance terms, private equity is considered an alternative asset class to stocks and bonds.  

Several categories of private equity firms exist in terms of their investment stage focus.  On one end of the spectrum, some funds only invest in younger companies by providing growth equity, while others invest in mature businesses by making controlling investments.  Private equity investments can accomplish any of the following:

  • Provide liquidity to founders/owners 
  • Provide additional liquidity to support a changing business environment
  • Enable a larger company to divest a non-strategic subsidiary
  • Enable a public company to be taken private

While discussing the history of fundraising, we zeroed in on the large amount of capital that was raised prior to the economic slowdown in 2009.  As of 2011, $450 billion in "dry powder" (committed capital that remains unspent) existed.  Capital commitment periods typically last five years, and many of the funds included in the $450 billion total raised their funds during 2007 and 2008.  As such, many commitments will be expiring during 2012 and 2013, which will be interesting to monitor.  Several private equity firms could disappear based on poor performance and unused capital history (assuming they are not able to raise new funds).

Mr. Krugler shared some very insightful slides and graphs with us.  Among them, one depicted total number of companies on the y-axis and profitability (EBIT margin) on the x-axis.  The graph overlaid a bell-shaped curve on four sections, which were (from left to right): turnaround, underperforming, outperforming, star.  The chart did a good job illustrating the high concentration of investment focuses (on underperforming and over performing assets) across the private equity industry.

In conclusion, Mr. Krugler summarized a typical deal structure for private equity firms.  Generally, more than half the purchase price consists of debt (senior plus mezzanine/subordinated).  The balance is financed with equity from one or multiple private equity firms.

Thank you again to Mr. Krugler.  The discussion was very interesting and the presentation was highly interactive, with students asking many questions.