GROUP - 08 Abhishek | Aditya | Aklesh |

Shiv | Shardool | Sudeep

 CASE BACKGROUND
Acme Investment Trust is an $8 billion pension fund of a major manufacturing firm

The private equity group at Acme needed to decide whether or not to invest $40 million
into Hicks, Muse, Tate and Furst’s (HMTF) fifth fund

Tom Hicks started its own private equity investing in 1977 , HMTF was formed in 1991.
They employed “buy-and-build” strategy. The fund would acquire a well-run platform ,
and then add smaller acquisitions

Initially, funds focused on a handful of industries such as television, radio, outdoor,

advertising, manufacturing, food, and consumer branded products. They would either
take the company public or sold them

By 1999-00 the firm had invested approx. $1.2 billion in broadband communications &
technology service firms, these investments had been PIPE (Private Investments in Public
Equities) transactions
 THE OFFER
The group would discontinue
from investing in “new
HMTF group would only seek to
economy” firms, and instead
raise between $3 & $4 billion
invest in “consumer branded,
dollars, rather than the $4.5
manufacturing and media
billion target that had originally
sectors which had been part of
been set
traditional and very successful
strategy”
• The group’s portfolio of 13
high-technology
investments, known as HMTF
holdings, would be
guaranteed a rate of return
of at least 20%
• In the worst-case scenario,
where all investments were
liquidated, the fund’s 8
partners would provide
limited partners with their
original capital back plus an
amount equal to a return of
20% over the investment
holding period
 PURPOSE OF THIS NOVEL GUARANTEE STRUCTURE
• Acme Investment Trust is a pension fund, so rate of returns should be guaranteed or certain
Pension • They would choose low risk stable growth rather high risk technology companies

• Exhibit 1 shows that with changing investment strategy in different rounds, IRR has decreased by considerable amount
• HMTF 3 gross IRR was 17.5% compared to HMTF 2 29.6%. Six investments of HMTF 4 was not performing well
Dec. IRR

• The stock price performance of six investments of HMTF 4 was very poor. From Nov 1999 to Dec 2000 the stock price has
decreased substantially
Volatility • All the PIPE investments was very volatile with downward movement of stock prices, which directly affected the portfolio

• Competition was growing and intense in the buyout industry. The investment environment had become considerably
more difficult
Compete • Purchase prices had risen, bank debt for transactions was harder to access, and there were many other large competitors
as well as imitators
 FINANCIAL IMPLICATIONS

Fund raised Management Fees Variable amount Variable Amount

LP GP

2 billion

$25,63,23,321.48 $ 1,25,87,90,284.97 $13,01,52,992.03

3 billion

$38,44,84,982.22 $ 1,84,26,80,842.67 $18,74,11,330.10

5 billion

$64,08,08,303.71 $ 3,01,04,61,958.06 $30,19,28,006.23