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PE & strategy > Private Equity > Flashcards

Private Equity Flashcards

1
Q

PE: Investment Thesis: key components

A

Geography
Target sectors
Profiles of target companies
Investment play
Ticket and stake
Exit

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2
Q

Illustration of PE investment life cycle

A

Deal sourcing & screening
Evalutation –> execution
- Outside-in Strategic DD
- Full DD
- Negotiation& structuring

Post-acquisition
- 100-day plan
- Managing & Monitoring
- Exit

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3
Q

PE: Key tasks in Deal sourcing & screening and role fo investment team

A

Key tasks: Lead generation
and identification of deal opportunities
Initial screening
team:
Local footprint and
presence
Pipeline of proprietary deals
Local network of entrepreneurs and CEOs

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4
Q

PE: Key tasks in evalutation to execution

A

Outside-in analysis:
* Market attractiveness
* Company attractiveness
* Financial attractiveness
Initial risk assessment & transaction review
Preliminary approval

Full due diligence
leveraging external advisors on:
* Strategic
* Financial
* Legal
* Technical &
marketing
- Structuring and drafting
of shareholder agreement and SPA
- Negotiation and finalization of term sheet
-Final approval to authorize funds drawdowns

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5
Q

PE: Investment team role in evalutation to execution

A

Strong in-house capabilities through team members’ experience
* Strategy consulting background and extensive experience
* Financial audit background and extensive experience
* PE transactional experience
* Investment Banking transactional experience across the region
- Lean investment process
- Cost-savvy approach

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6
Q

PE: Key tasks in Post-acquisition

A

Development of 100-day value creation plan for
target company

Execution of 100-
day plan
On-going performance review
Strategic direction
and support on key
initiatives

Exit
opportunity/ channel
identification
Divestment execution

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7
Q

PE: Investment team role in Post-acquisition

A

Extensive PE portfolio management experience
* Secondment to portfolio companies
* Active support in bank debt-raising and relationship management

Strong expertise in consulting and business support
* Strategy and operational consulting experience within the team

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8
Q

PE: investment process steps

A

Deal Log
Pre-assessment
Investment approval
Due Dilligence
Negotiation
Closing

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9
Q

Investment teams’ contribution to the
performance of portfolio companies

A

Organization:
- Review processes and define new ones
* Recruit top managers
* Define delegation matrix

Operations:
- * Develop cash management tools
* Review working capital cycle and derive improvement levers
* Review production process and identify bottlenecks

Strategy:
- Develop a 100-day plan
* Define a 5-year strategy
* Identify key strategic
initiatives to focus on
* Set-up of strategy monitoring tools and operational setup

Capital Structure:
- Build-up consensus on
optimal capital structure
* Agree on equity injection needs
* Develop banking / investment memoranda and manage debt
raising process with banks

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10
Q

PE: Value creation levers with Financial
restructuring

A

Put as much debt as you can in the company at entry
* Make your exit once the debt is at its lowest
* Through the cash generated by the firm
* Through selling assets
* Through sale-and-lease-back of company’s assets to generate cash

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11
Q

PE: Value creation levers with Operational
improvement

A
  • Influence the strategy of the company (acquisitions, new projects, capacity increase, etc.)
  • Improve operations of the company (e.g. Working Capital process)
    => Generate extra revenue at same or lower costs => Increase value of the company
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12
Q

PE: Value creation levers with Multiple game

A

Principle: Sell at a higher multiple than you buy
* Tough play with a lot of uncertainty
* Develop the company, diversify its activities and put it in a configuration where growth
perspectives perceived by the market are higher at exit than at entry

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13
Q

Technical focus: key financial metrics: EBITDA:

A

Represents the cash generated by a company from its operations to fund debt & interest
payments, investment and dividend
▪ Thus key in the context of a PE investment, especially under LBO
▪ To be adjusted of extraordinary items to reflect sustainable cash generation of the
company

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14
Q

Technical focus: key financial metrics: Free Cash Flow & Enterprise value

A

FCF = EBITDA – CAPEX – Change in WC – Interest –Tax
▪ Represents the money available to repay debt, distribute dividend or fill a cash cushion

EV:
EV = Equity Value (Market Cap) + Debt - Cash

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15
Q

Technical focus: key financial metrics: Multiple of cash & IRR

A

The multiple of cost an investment returns
▪ MoC = Cash Outflow / Cash Inflow

IRR:
Metric used to compare PE returns to other placement opportunities
▪ IRR = [ (Cash Outflow / Cash Inflow) ^ (1/n)] - 1

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16
Q

PE: Technical focus: main valuation techniques
Comparable transaction
multiples & Comparable
traded multiples

A

Choose the right multiple
▪ Choose the right comps and assess their appropriateness
▪ Choose the right « financials »’ year
▪ Be comfortable on the target financials

What multiples
do you have in
mind?

17
Q

PE: Technical focus: main valuation techniques: DCF

A

Be comfortable on your WACC
▪ Be comfortable on your terminal value
▪ Be comfortable on the underlying Business plan (consider scenarios)

What checks on
your terminal
Value ? On your
business plan?

18
Q

PE: LBO

A

Allows to target larger companies
Debt and equity to fund the SPV. Special private company (shell company)
liability stay the same. + 100% shares of company
Dividends pay for the debt
Create a merger SPV and target -co
Leverage effect

19
Q

impact of leverage: what is MOC, markup to investors & IRR, debt to payback
Investor’s Equity: 10
▪ Debt: 0
▪ Uses
▪ Acquisition: 10
Sale after 1 year: 20

A

Markup to investor: 10
MoC: 2
IRR: 100%
debt to payback: 0

20
Q

impact of leverage: what is MOC, markup to investors & IRR, debt to payback
Investor’s Equity: 5
▪ Debt: 5
▪ Uses
▪ Acquisition: 10
▪ Sale after 1 year : 20

A

Debt to payback: 5
Markup to investor: 15
MoC: 3
IRR: 200%

21
Q

impact of leverage: what is MOC, markup to investors & IRR
Investor’s Equity: 2.5
▪ Debt: 7.5
▪ Uses
▪ Acquisition: 10
▪ Sale after 1 year: 20

A

Debt to payback: 7.5
▪ Markup to investor: 12.5
▪ MoC: 5
▪ IRR: 400%

22
Q

PE: Holding company

A
  • Hold company
    o Is an empty shell
     No employees
    o Only have an board
23
Q

IRR & Hurdle rate, carried interest

A

IRR
oInterest received on investment over time
oTo get high IRR
Invest late and receive amount back early
oThe rate promised to investors
oTarget 15%-20%
Hurdle rate
oMinimum rate of IRR promised
oUsually 7-8%

Carried interest tp the GP (Fund manager)
oAlign interest of GP to fund employees LPs
oHurdle rate  100% to LP
oRest rate above the hurdle
80% to LP
20 % to mgt team
o Creates stickiness in the team

24
Q

PE: ticket size

A

Fund size based on ticket size
o Average ticket size x 10-15 firms

25
Q

PE: Quasi equity

A

oConvertible debt
oMore risker, use it when the other options have been used

26
Q

PE: Assessing whether a business is attractive or not through EBITA etc

A

Operating income

COGS
All the costs are associated with your production/service, directly
Negative gross margin = problem with product
oSG&A
Sales, general & adminstration
Positive gross margin but negative EBITA = Operational & corporate structure problem
oD&A
Positive EBIT, but negative EBITDA
Problem: investment have been too large, overinvested
oInterest
Positive EBIT, negative after interest
Problem: financial structure

27
Q

PE: Business plan is key how to challenge it

A

DCF
oHas to be well challenged (every forecast and your DCF)
Intrinsic to the firm (two metrics)
*WACC & Return on Capital (ROCE)
oThe difference between WAC and ROCE is the value creation
oBiased: Risk of overinflating
Use a cashflow near balance between WACC and ROCE
oYear 5 determines the terminal value. Terminal < 60% of total value
Projecting perpetuity, growth rate is key

28
Q

PE: GP & LP structure

A
  • GP & LP structure
    o GP = active investor
    o LP = passive investor
29
Q

PE: EBITDA & cashflow importance

A

o Pay off debt or dividends (early cash in = better IRR)

30
Q

PE: How can a deal have a high IRR but low MoC vice versa

A

The holding period (short = higher IRR)

31
Q

PE: must do’s in Due Dilligence

A

Finance, operational, legal, tax

32
Q

Align interest of PE And MANGEMENT OF PORTFOLIO COMPANIES

A

MANAGEMENT package

33
Q

PE: what is skin in the game?

A

Investing personal funds

By utilizing their own funds, these insiders send a clear signal of confidence and responsibility, fostering a dynamic where their interests are intricately tied to the well-being and prosperity of the company they guide.

34
Q

PE: 2%-20% rule in PE, hurdle rate?

A

o 2% management fee
o plus 20% of returns generated above a certain threshold known as the hurdle rate.
o Hurdle rate IRR level that triggers carried interests for the investment team

PE & strategy (2 decks)

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