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Private Equity > Lecture 1 > Flashcards

Lecture 1 Flashcards

1
Q

Potential Touchpoints during your career

A
  • employee/ partner of a Private Equity Fund
  • client - M&A Advisor or “Big 4” Advisor
  • competitor of a target in a buy-side process
  • potential buyer of your non-core asset
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2
Q

Mandatory Literature, S. 7 SW1

A
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3
Q

Private Equity Markets: In what stage which capital/ Market?

  1. Beginning
  2. Growth
  3. Maturity
  4. Saturation
A
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4
Q

Definition of Private Equity

A
  • investment fund and capital, that are used to acquire equity ownership in private companies (not publicly traded) or take public companies private.
  • focus on generating high returns through restructuring, operational improvements, or growth strategies
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5
Q

How does the risk-free interests rate look like since Jan 2020?

A
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6
Q

How is the current mood in Private Equity?
- Investments?
- Exits?
- Fund-Rasing?

A

in 2023
- Investments: -60% - 300B$
- Exits: -66% - 250B$
- Fund-Raising: 1% - 400B$

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7
Q

How high are the leveraged buyout yields?
How high are the Syndicated LBO issuance in $B in 2023?

A
  • US large corporate: 10.9%
  • European institutional: 8.9%
  • 2023: 50$B -> -56%
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8
Q

Private Equity: What different types of private equity do exist and what are the differences?

A
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9
Q

Private Debt: What different types do exist?

A

Leveraged Loans
* senior debt security
* high interest rates
* low credit ratings
* by firms with substantial debt or poor credit
* loans are to provide capital to finance an aquisition, as part of a refinancing or to provide working capital

Mezzanine Debt
* between equity and debt
* equity-like and debt-like features
* floor equity and ceiling of senior secured debt
* high risk; it often comes with potential equity participation
* appears as debt on inssuer’s BL
* hybrid

Distressed Debt
* troubled companies
* special expertise necessary
* may already defaulted on their debit
* may be on the brink of default
* may be seeking bankruptcy protection
* longer-term horizon needed
* ability to accept the lack of liquidity needed

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10
Q

How is the institutional Asset Allocation in 2023?

A
  • 10% PE
  • 8% Real Estate
  • 6.4% Infrastrucure
  • 2.7% Private credit
  • 3.3% Multi-asset strategies
  • 30% fixed income
  • 40% stocks
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11
Q

Venture Capital: definition

A
  • enterprises that are early stage in terms of growth
  • attempting to grow into large firms
  • foundation: start-up business and the entrepreneurs
  • venture capitalists are not passive investors
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12
Q

Venture Capital: Role of Venture capitalists

A
  • active role: either advisory or director on the board
  • monitor the progress of the company, implement incentive plans, establish financial goals
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13
Q

Venture Capital: What are some examples in Switzerland of enterprises?

A
  • GetYourGuide: booking platform for travel experiences - 76.5m CHF
  • Noema Pharma: clinical stage biotech company targets debilitating central nervous system disorders - 103m CHF
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14
Q

How is the cashflow of VC?

A
  • related to the operations
  • expected to be negative for several years
  • cash burn rate = speed with which cash is being depleted through time
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15
Q

Venture Capital: What about the banks?

A

unwilling to provide capital withouth collateral or without reasonably high probabilities of positive cash flows in the short run

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16
Q

Venture Capital: investment horizon

A

5 to 10 years

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17
Q

Venture Capital: What is the focus? and what are some examples?

A
  • focus on going public
  • Cisco Systems, Google, Microsoft
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18
Q

Venture Capital: What is the Strategy?

A
  • goal to build companies that can be sold or taken public with a high multiple of invested capital
  • these few big wins need to compensate for many failures
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19
Q

Venture Capital: What are investment structures?

  • convertible preferred equity
  • convertible notes
  • debentures
  • warrants
A

convertible preferred stock
- offers the investor the option to convert their preferred shares into a predetermined number of common share
- higher priority than common stock, offer fixed income and greater security in liquidiation, but with limited upside and little to no voting power
- option to convert their shares to common stock when exiting via an IPO

Convertible notes and debenture
- allow conversion of debt into equity upon the occurrence of an event, such as a merger, an acquisition, or an IPO
- convertible notes: short-term debt
- debentures: long-term debt

warrants
- right but not the obligation to buy a company’s stock at a specific price within a certain frame

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20
Q

Venture Capital: What is the SECA Model Documentation?

A

two CV model documentation:
1. start-up investment in CH by business angels and similar start-up investors in the range of CHF 0.5 - 5 Mio. -> Model Documentation light
2. seizable venture capital by institutional/international investors in the range of CHF 5 - 20 Mio. -> Model Documentation large

  • term sheet
  • investment agreement
  • shareholders agreement

Goal: make it more efficient and become the standard for Venture investment in CH

21
Q

Venture capital: what is 20-bagger

A

a company that appreciates in value 20fold compared to the cost of the CV investment

22
Q

Venture capital: What are the different stages?

A
23
Q

Venture Capital: Stage Angel investing

A
  • earliest stage of venture capital
  • often F&F = friends and family
  • Third F = fools
  • wealthy individuals (often successfull businesspeople who can offer their skills)
  • no formal business plan
  • no management team
  • no product
  • no market analysis
  • just an idea
  • TCHF 50 - 500
24
Q

Venture Capital: Stage seed capital

A
  • first stage where institutional investors commit their capital into a venture
  • established the viability of the product is prior
  • business plan is completed and presented to outside investors
  • member of management team assembled
  • performance of market analysis
  • financing is provided to complete the product development and begin initial marketing of the prototype to potential customerss
  • TCHF 1’000 TCHF 5’000
  • not profitable
  • Investment based on due diligence of the management teams, their own market analysis and the viability
25
Q

Venture Capital: first-stage, start-up stage or early-stage

A
  • viable product that has been beta tested
  • price or fee is already being charged for the product
  • revenues are being generated
  • now the product is demonstrating its commercial viability
  • TCHF 2’000 or more
  • going concern
  • at least one venture capitalist is sitting on the board of directors
  • business and marketing plans are redefined
  • manufacturing has begun
  • initial sales have been established
  • goal: market penetration
  • distribution channels should be identified
  • reaching break-even is the financial goal
26
Q

Venture Capital: Second- or late-stage / Expansion

A
  • first profitable quarter
  • near the point of breaking even
  • demonstration of commercial viability
  • working capital is short, future is bright
  • sales and receivables are growing
  • receivables have not yet been translated into a solid and stable cashflow
  • need additional working capital, because it has been focusing on product development and product sales
27
Q

Venture capital: Mezzanine venture capital or pre-IPO financing

A
  • last funding stage before a start-up company goes public or is sold to a strategic buyer
  • mezzanine to keep the company from running out of cash until the IPO
  • proven winner with an established track record
  • ## convertible debt
28
Q

Venture Capital: Vauluation of venture capital

Why is it challenging?

A
  • estimation of future cashflows are highly uncertain
  • lack of appropriate comparison
  • alternative: enterprise value: total value of the company which adds the equity value of the firm to its outstanding debt and substracts the cash on the firm’s balance sheet
29
Q

Venture Capital: How can the value of the venture can be calculated?

General formula

A
30
Q

Venture Capital: How can the value of the venture can be calculated?

  • 4 million investment
  • 7.5 EBITDA Multiple
  • 60% IRR
  • EBITDA of 20 million
  • 6 years to reach the point of being bought or going public
A
31
Q

What are the two keys to successfull VC investing?

A
  1. Find undervalued opportunities by identifying promising projects where you can gather enough information about their potential success before investing a lot of money.
  2. Let go of unprofitable projects when they show no signs of success. Avoid focusing on past investments (sunk costs) and instead, make decisions based on clear, updated information about their chances of success.
32
Q

How do you valuate growth equity?

General Formula

A
33
Q

How do you valuate growth equity and value of venture?

  • annual revenues of TCHF 80’000
  • in 6 years IPO is anticipated
  • enterprise-value-to-revenue multiples of 2.25
  • 25% stake in the company
  • IRR 45%
A
34
Q

What is a Leveraged Buyout (LBO) - 3 aspects

A
  1. LBO buys out control of the assets or the firms
  2. uses substantial leverage
  3. resulting leveraged firm is not immediately publicly traded
35
Q

What is P2P?

A

Public-to-private: when a public company is bought entirely and delisted from the stock exchange

36
Q

LBO: What is the typically target company?

A
  • established enterprises with tangible assets
  • beyond the cash-burning stage
37
Q

What is the goal of LBO?

A
  • increase the value of a corporation by unlocking hidden value, maximizing the borrowing capacity of a company’s balance sheet, taking advantage of the tax benefits of using debt financing, and/or exploiting existing but underfunded opportunities
38
Q

What types of private equity buyouts do exist? (LBO)

A
  • MBI: management buy-in is led by an outside management team. control of the new company is taken over by the new management team, and the old management team leaves
  • MBO: management buyout occurs when the current management acquires the company
  • buy-in management buyout is a hybrid between an MBI and an MBO in which the new management team is combination of new managers and incumbent managers
  • SBO: in a secondary buyout, one private equity firm typically sells a private company to another private equity firm. in effect, a secondary buyout is typically an ownership change among private equity firms. secondary buyouts provide a secondary-market-like opportunity for private equity firms to exit a buyout
39
Q

LBO: What are the value drivers? (4)

A
  1. Operational value enhancements leading to higher growth and/or improved margins
  2. higher relative valuation “multiple expansion”
  3. Operating cash flows during the holding period leading to lower debt and/or dividends (deleveraging)
  4. Amount and conditions of debt financing “leverage”
40
Q

LBO value drivers: what could be an operational value enhancement?

A
  • Sales growth
  • margin growh
41
Q

LBO value drivers: how does multiple expansion work and what are the reasons for multiple expansions?

A
  1. generally higher valuations
  2. buy and build - build a larger group
  3. arbitrage between private and public markets
42
Q

LBO value drivers: deleveraging

A
  • reducing the debt
43
Q

LBO value drivers: debt financing conditions

A
44
Q

What are 5 general categories of LBOs to Create Value?

A
  1. Efficiency Buyouts
  2. Entrepreneurship Stimulators
  3. The Overstuffed Corporation
  4. Buy-and-build Strategy
  5. Turnaround Strategy
45
Q

What is the appeal of leveraged buyouts to targets? (4)

A
  1. the use of leverage where interest payments are tax deductible
  2. in case of P2P: less scrutiny from public quity investors and regulators
  3. In case of spin-off: freedom from a distracted corporate parent (seperating part of its operations)
  4. The potential of company management to become substantial equity holder and thereby benefit directly from building the business
46
Q

What is the definition of Dual Track and Triple Track?

A

Dual Track
- simultaneous preparation of both of a possible Initial Public Offering (IPO-Track) as well as possible private sale (M&A-Track)

Triple Track
- simulaneous preparatioin of both of a possible Initial Public Offering (IPO-Track), a possible private sale (M&A-Track) as well as a possible refinancing (Refinancing-Track)

47
Q

How does the M&A Process loock like? of triple track

A
48
Q

What are the Pros and Cons of a Triple Track Process?

A

Pros:
- arbitrage between the public and the private markets
- arbitrage between the debt and the equity markets
- typically mutually better negotiation position vis a vis potential private as well as the public market investors, debt market investors respectively
- higher transaction certainty

Cons:
- more management attention and time needed / more demands for the organisation overall
- typically takes more time
- higher leak risk
- higher costs
- more compex

Private Equity (5 decks)

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