Lecture 3

Question 1

Deal origination five sources

Answer 1

• Proactive origination strategy
• Requests from other funds to syndicate
• Consultancies/ Investment banks
• Online deal sourcing platforms
• Referrals by portfolio companies

Question 2

Options to generate a PE investment opportunity

Answer 2

Private - Non-financial seller (Mittelstandsunternehmen)
Private - Financial seller (sale of a firm already held by a financial investor)
Public - Public-to-Private (delisting of public company)
Privatization (selling of prior government-owned assets to private investors)

Question 3

Which PE investment opportunity do we exclude? (Because it not really is a real PE deal)

Answer 3

Private Investment in Public Equity (PIPE)

Question 4

From which seller do the most deals come from and which have the highest deal values?

Answer 4

Both from private sellers

Question 5

From which seller do only a few deals originate from but have a large deal value?

Answer 5

Public to private

Question 6

From which seller do many deals originate from but of little deal value?

Answer 6

Add-on/Mergers

Question 7

What percentage of companies discussed finally end up as actual deals for the PE firm?

Answer 7

<1% of firms

Question 8

Which committees are there in the deal funnel?

Answer 8

1. Investment committee
2. Final committee

Question 9

Deal screening criteria

Answer 9

• Fit to investment strategy (target industry, country etc.)
• Management
• Transaction size
• Market growth and size
• Competition
• Ownership structure

Question 10

What make a buyout opportunity less attractive?

Answer 10

• highly cyclical
• rapid technological change
• poor labour relations
• significant R&D investment
• volatile working capital
• high business risk

Question 11

3 types of transactions in PE

Answer 11

• proprietary deals
• auctions
• special situations (e.g. liquidation event –> transfer to creditors or recapitalization by investing fund)

Question 12

What are proprietary deals?

Answer 12

• direct negotiation between seller and buyer
• untypical in larger deals
• preferred by investors due to lower costs and transactions prices

Question 13

What are auction deals?

Answer 13

• typically led by an investment bank that oversees and conducts the auction
• most common transaction type
• conducted over multiple rounds

Question 14

What is an investment thesis?

Answer 14

The investment thesis is the foundation of a deal. It should answer the questions of why and how this investment will generate a return.

Question 15

What determines the dimensions of due diligence?

Answer 15

The investment thesis. The due diligence depends on what the PE firm wants to do with the portfolio company.

Question 16

What is pre-due diligence?

Answer 16

The aim is to assess the most important financials of the target company: identify opportunities, risks, and “red flags”. At this stage, the PE firm is usually still on the long list and only has partial access to the data room.

Question 17

5 steps in pre-due diligence

Answer 17

1. Identifying real results
2. Assessing opportunities (growth and profit)
3. Assessing risk (market, operational, legal)
4. Reviewing 3-year to 5-year plans
5. Assessing management’s capability to achieve the business plan.
   -> Decision on whether to make bid or not

Question 18

6 types of formal DD

Answer 18

• Commercial
• Operational
• Financial
• Legal
• Tax
• IT

Question 19

What is commercial DD about?

Answer 19

• Forward-looking outlook regarding the likely development of the company, the market it is active in, and the competitive environment.
• Focus on revenue
• Done by PE firm or management consultancies

Question 20

What is operational DD about?

Answer 20

• Assessment of operations quality, including an assessment of likely improvement potentials
• focus on costs
• done by PE firm or specialized consultancies

Question 21

What is financial DD?

Answer 21

• Verification of quality of current and the appropriateness of planned future earnings and ensuring long-term liquidity.
• focus is accounting
• done by accounting firms

Question 22

What is legal DD?

Answer 22

• collection, understanding, and assessment of all legal risks associated with the deal process
• focus on contracts
• done by corporate law firms

Question 23

What is tax DD?

Answer 23

• Identification and quantification of tax risks and opportunities arising from the deal and structuring advice.
• focus on legal structure
• done by accounting firms

Question 24

What is IT DD?

Answer 24

• Assessment of appropriateness of IT infrastructure, potential risks, and forward-looking cost-benefit analysis.
• focus on IT
• by IT consultancy or accounting firm

Question 25

What are the typical areas covered in commercial DD?

Answer 25

• firm view
• market view
• competitors & customers
• top-line model

Question 26

In which DD can Porter’s 5 forces be used?

Answer 26

Commercial DD

Question 27

Porters 5 forces?

Answer 27

• Threat of new entrants
• Competition
• Substitution
• Customers
• Suppliers

Question 28

Areas covered in operational DD?

Answer 28

• growth (salesforce effectiveness, pricing optimization)
• cost
• cash (NWC & CAPEX optimization)

Question 29

Do smaller or larger; younger or older PE firms pass a greater fraction of deals through to the next stage?

Answer 29

Usually, larger and older PE firms pass a greater fraction of their deals through to the next stage.

Question 30

Are larger deals usually proprietary?

Answer 30

No, usually, large deals are sold in auction processes.

Question 31

Where do most deals originate from?

Answer 31

Self generation and by investment banks