private equity guest lecture

Question 1

how do PE funds generate value for investors?

Answer 1

80% from ebitda growth split into improved efficiency and organic revenue growth, multiple expansion (tends to be negative as the business is more mature and has lower growth perspective when it’s sold) and debt reduction.

Question 2

how do you achieve good multiple growth?

Answer 2

mainly by buying/selling at different market conditions and by improving the general quality of the business.

Question 3

why is net debt reduction such a low share of value generation?

Answer 3

because cash is usually reinvested in the business to foster growth and only a small share of capital is used to repay debt.

Question 4

what are screening criteria?

Answer 4

-majority share
-size of the investment
-sector and market attractiveness
-track record and forward looking performance
-value expectations (although this is now less relevant)

Question 5

what are preparatory steps before making an offer?

Answer 5

-due diligence (commercial, financial, legal in order of importance)
-business plan & LBO
-valuation
-Financing (borrowing the LBO capital, usually at most 50-60% of the transaction)
-legal/tax structuring