This case study solution discusses whether Platinum Capital Partners new buyout funds would be a profitable investment for the Angel Foundation.
Steven N. Kaplan; Taka Terachi
University of Chicago Graduate School of Business
Case questions answered:
Is Platinum Capital Partners worth investing in?
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Case answers for Platinum Capital Partners
Introduction to the Platinum Capital Partners Case Study:
The Angel Foundation is currently looking for possible funds to invest in and is considering the Platinum Capital Partners, a new buyout fund in the $250m range. Platinum is relatively new to the fund-structure with this being their first buyout fund and their second fund in total. Their strategy is to focus on smaller companies as they have proved to be lucrative buyout candidates. The question is therefore if Platinum is worth investing in, or if it is just another JAMMBOG. Our analysis concludes that Platinum belongs in the third pile.
Platinum Capital Partners has previously raised capital on a deal-by-deal basis, finding attractive targets before raising the capital required. This has been disadvantageous when bidding for companies, as it takes time to raise the capital necessary. Having a fund would clearly make Platinum more flexible, but it will also give them different incentives.
With a fund, new governance problems might occur. For instance, Platinum might not be able to find good deals for all $250m making it difficult for them to cope with all the money at hand. As the total historical investments amount to $87m over a time span of approximately 15 years, Platinum might end up with more bad investments when trying to spend 250m.
The hurdle rate might also further incentivize Platinum Capital Partners to take more risk as they will not see any profits for themselves until an IRR of 8% is achieved. Platinum further states that no more than 20% of the fund should be invested in each company. This opens up the possibility for some investments being way higher than any previous deals made by Platinum and it can lead to a more risky and undiversified allocation of their portfolio.
Furthermore, the LBO-market has developed over the years, and the value drives have changed. Fund managers estimated that, on average, about 40 % of the investment return during the 1980s derived from the application of leverage, while post-acquisition operating improvements accounted for just 34 %.
During the 1990s, they estimated these contribution rates had roughly reversed, with 23 % of returns deriving from the application of leverage and 43 % from operating improvements. It is fair to assume that this development will continue, as the financial market becomes even more efficient. This implies that LBO-funds need to identify companies where operating improvements can be done in order to gain an excess return.
Platinum Capital Partners’ track record has been exceptional besides a few bad investments. In the timelines 1986-1990, 1991-1995 and 1996-2000 they have had gross IRR of 32%, 132%, 231%, and multiples of 6.6, 5, and 1.9 respectively.
If you compare Platinum’s historical performance with averages for the buyout industry, we see that Platinum has…