Lecture 3 Flashcards
Deal origination five sources
- Proactive origination strategy
- Requests from other funds to syndicate
- Consultancies/ Investment banks
- Online deal sourcing platforms
- Referrals by portfolio companies
Options to generate a PE investment opportunity
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)
Which PE investment opportunity do we exclude? (Because it not really is a real PE deal)
Private Investment in Public Equity (PIPE)
From which seller do the most deals come from and which have the highest deal values?
Both from private sellers
From which seller do only a few deals originate from but have a large deal value?
Public to private
From which seller do many deals originate from but of little deal value?
Add-on/Mergers
What percentage of companies discussed finally end up as actual deals for the PE firm?
<1% of firms
Which committees are there in the deal funnel?
- Investment committee
- Final committee
Deal screening criteria
- Fit to investment strategy (target industry, country etc.)
- Management
- Transaction size
- Market growth and size
- Competition
- Ownership structure
What make a buyout opportunity less attractive?
- highly cyclical
- rapid technological change
- poor labour relations
- significant R&D investment
- volatile working capital
- high business risk
3 types of transactions in PE
- proprietary deals
- auctions
- special situations (e.g. liquidation event –> transfer to creditors or recapitalization by investing fund)
What are proprietary deals?
- direct negotiation between seller and buyer
- untypical in larger deals
- preferred by investors due to lower costs and transactions prices
What are auction deals?
- typically led by an investment bank that oversees and conducts the auction
- most common transaction type
- conducted over multiple rounds
What is an investment thesis?
The investment thesis is the foundation of a deal. It should answer the questions of why and how this investment will generate a return.
What determines the dimensions of due diligence?
The investment thesis. The due diligence depends on what the PE firm wants to do with the portfolio company.
What is pre-due diligence?
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.
5 steps in pre-due diligence
- Identifying real results
- Assessing opportunities (growth and profit)
- Assessing risk (market, operational, legal)
- Reviewing 3-year to 5-year plans
- Assessing management’s capability to achieve the business plan.
-> Decision on whether to make bid or not
6 types of formal DD
- Commercial
- Operational
- Financial
- Legal
- Tax
- IT
What is commercial DD about?
- 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
What is operational DD about?
- Assessment of operations quality, including an assessment of likely improvement potentials
- focus on costs
- done by PE firm or specialized consultancies
What is financial DD?
- Verification of quality of current and the appropriateness of planned future earnings and ensuring long-term liquidity.
- focus is accounting
- done by accounting firms
What is legal DD?
- collection, understanding, and assessment of all legal risks associated with the deal process
- focus on contracts
- done by corporate law firms
What is tax DD?
- Identification and quantification of tax risks and opportunities arising from the deal and structuring advice.
- focus on legal structure
- done by accounting firms
What is IT DD?
- Assessment of appropriateness of IT infrastructure, potential risks, and forward-looking cost-benefit analysis.
- focus on IT
- by IT consultancy or accounting firm
What are the typical areas covered in commercial DD?
- firm view
- market view
- competitors & customers
- top-line model
In which DD can Porter’s 5 forces be used?
Commercial DD
Porters 5 forces?
- Threat of new entrants
- Competition
- Substitution
- Customers
- Suppliers
Areas covered in operational DD?
- growth (salesforce effectiveness, pricing optimization)
- cost
- cash (NWC & CAPEX optimization)
Do smaller or larger; younger or older PE firms pass a greater fraction of deals through to the next stage?
Usually, larger and older PE firms pass a greater fraction of their deals through to the next stage.
Are larger deals usually proprietary?
No, usually, large deals are sold in auction processes.
Where do most deals originate from?
Self generation and by investment banks
