PE
Define "pre-money" valuation
Value of a company's stock before it goes public and receives investments.
What are the core principles of capital and finance
(6 parts of financial system: 1 Money/capital - to pay for purchases and store wealth 2 financial instruments - to transfer resources from savers to investors and to transfer risk to those best equipped to bear it 3 financial markets - to buy and sell financial instruments 4 financial institutions - to provide access to financial markets, collect info & provide services 5 regulatory agencies - to provide oversight for financial system 6 central banks - to monitor financial institutions and stabilize economy) 5 core principles of capital and finance 1 time has value 2 risk requires compensation 3 information is the basis for decisions 4 markets determine prices and allocate resources 5 stability improves welfare
Explain the mechanics in assigning value for the acquisition of a company for a private equity fund
1 funding 2 agreements LPs & GPs 3 finding assets investments 4 investing/assigning value 5 deal structuring 6 managing the investment 7 exit liquidity
Discuss details related to each aspect of a private equity transaction (for example, funding, deal structuring, exit etc)
1 funding - fund formation/choosing. Sources of funding and choosing LPs: -angel investors, endowments and foundations, family offices, pension funds, corporations, sovereign wealth fund, intermediaries 2 agreements LPs & GPs - fund characteristics, management of the fund, activities of the fund, types of investment, alignment of interest and fees (management fees, carried interest, capital calls) 3 finding assets investments - deal sourcing. Attracting vs finding a deal, looking for specialization vs diversification, networks and syndicates, deal evaluation (due diligence, critical parameters) 4 investing/assigning value - comparable benchmarks, NPV & adjusted, Venture Capital IRR, options valuation 5 deal structuring - debt v equity, hybrid equity (redeemable preferred, convertible preferred stock, participating convertible preferred stock, multiple liquidations preferences), issues to consider (vesting, covenants, anti-dilution provisions), special focus on venture and mezzanine debt 6 managing the investment - board composition, management vehicles for performance success (budget, key performance indicators, milestones, management performance review, independent accounting audits, strategic review), salient aspect of managing the investment (communications, trust, track record and experience) 7 exit liquidity - IPO or Sell-off/acquisition, partial exits via dividends, private-to-public sale, private-to-private sale, repurchases/selling back stock
Describe key principles in the due diligence process
1. Fact based: Be knowledge- oriented 2. Inquisitive: Avoid check-list and compliance-mentality adopt investor's mentality 3. Identify risks- risks provide opportunities 4. Multidisciplinary: explore interrelations 5. Careful to avoid surprises: Surprises now vs surprises later
What is the difference between a private equity transaction and private equity fund?
A private Equity fund is an collective investment scheme managed by a private equity firm and are used to purchase/invest in private or public companies. They often have limited partnerships that exist between 10-13 years. After this time the fund can be closed and a new fund can be created.
What is the "shadow" banking system
A shadow banking system is the group of financial intermediaries facilitating the creation of credit across the global financial system but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions. Examples of intermediaries not subject to regulation include hedge funds, unlisted derivatives. Shadow Banking institutions and instruments have been able to employ higher market, credit and liquidity risks and do not have capital requirements compensate for for those risks
Define capital calls. What is committed capital? What is deployed capital
Act of collecting funds from limited partners whenever the need arises. 5. What we mean that we have the first and second close of a fund? o Contractual agreement between an investor and a venture capital fund that obligates the investor to contribute money to the fund. The investor may pay all of the committed capital at one time, or make contributions over a period of time. o The amount of money that is released to be given to potentially invest.
Define private equity. What are the limitations of PE?
An Alternative investment where Any purchases of asset(s) to be deployed with cash flow, Limitations: No liquidity, lack of public information for objective performance assessment.
What is a closed-end fund? A blind pool?
Closed-end fund- organized as a publicly traded investment company by the SEC, pooled investment fund with a manager overseeing the portfolio, raises prescribed amount of capital only once through an IPO by issuing fixed number of shares Blind pool- direct participation program or limited partnership that lacks a stated investment goal for the funds that are raised from investors (one potential use is to provide funding for the acquisition of private companies to take them public outside of the traditional regulations and registration process)
What are covenants and why they are important in private equity transactions
Covenants are contractual promises that require the parties in an SPA to take or refrain from specific actions before or after transaction closing, and are typically made by the seller in favor of the buyer. They are important: Covenants are the key monitoring mechanism following a loan's disbursement and are divided into financial and non-financial covenants. Financial covenants define certain thresholds of operating performance within which the target company must perform; the failure of doing so results in a breach of contract.
What is private credit? How you structure a fund for provide private credit
Credit that is extended to companies or projects on a bilaterally negotiated basis, not publicly traded, can be loans, bonds, notes, or private securitization issues. 2 strategies "Capital preservation" - like traditional sponsor-focused mezzanine and senior debt funds, seek to deliver predictable returns while protecting against losses (few losses and fewer unexpected gains) "Return maximization" - distressed corporate credit funds and funds that focus on capital appreciation, these funds offer prospect of larger gains
What is a GP Catch-up and what is "Clawback" in private equity
GP catch up- 20 of 2/20? Distribution of capital until the GP has received carried interest equal to 20% of the distributions made to the fund LPs
What is dry powder? Why many investors are looking at the amount of dry powder?
Dry powder is a term that refers to the amount of cash reserves or liquid assets available for use. These cash reserves or short-term marketable securities are usually kept on hand to cover future obligations that may or may not be foresee. These firms want adequate cash on hand to either invest in a new opportunity or provide additional funding to portfolio companies to fuel growth.
Explain the components of value creation in a PE transaction
EBITDA Change, operating cash flow, EBITDA multiple, change in net debt- shows cash generation during a holding period, invested capital -Change in each shows whether the firm has made substantial gains during a certain time period of investment
Many times valuations are based on multiples of EBIT (or EBITDA), for example, 3XEBIT. What the number 3 signifies? Explain the origin of multiple comparable valuations
EV/EBIT EV- Enterprise Value: The companies overall total value EBIT- By ignoring taxes and interest expense, EBIT focuses solely on a company's ability to generate earnings from operations The 3 signifies a multiple and determines how much more the company is actually worth compared to its overall EBIT
What is Enterprise Value? What is the difference between enterprise value and equity value of a company?
Enterprise value is a measure of a company's total value and includes market capitalization, Long and short-term debt and any cash on the balance sheet. It gives you the potential takeover price if the company were to be bought. Equity value calculates - Enterprise Value and subtracts out the debt of the company
the term co-investing is used in PE.
Equity co-investment is a minority investment in a company made by investors alongside a private equity fund manager or venture capital firm. Equity co-investment enables investors to participate in potentially highly profitable investments without paying the usual fees charged by a private equity fund
What we mean that we have the first and second close of a fund?
First closing- bring together investment commitments for the beginning of the fund. Collect a certain amount, then start investing that money after the first close. Second closing- next stage of fundraising. GP not waiting until completion of the funding to invest- has more visibilty to the assets in the fund when they participate in a later close. Final Closing- no more funding
What is the difference between Venture capital and growth equity
Growth-focused PE firms typically invest in transactions valued between €10-100 million in exchange for either a minority or majority stake in the target company. growth equity PE firms help create value through accelerated operational improvements and revenue growth,, Unlike in larger leveraged buyouts, debt is not used extensively. Growth equity, is usually deployed in firms that are more mature in their lifecycle, not early-stage firms. Venture Capital - is early stage investing in a company, VC look to make 5-10 times return on their investment. VC's make an investment in a company pre-IPO, and often early in the company's lifecycle. With many companies never even making it past this stage it represents a serious risk for the investor and thus they're often incentivized to take this risk by obtaining a significant portion of the company for a relatively small price. They can then leverage this large stake in the company to guide it towards their intended end (profit) or buy out other investors such that they represent a controlling interest in the company. ·
Discuss exit paths for a private equity investment
IPO or sell-off/acquisition, partial exits via dividends, private-to-public/private-to-private sale, repurchases/selling back stock
Explain indemnification provisions in the Sales and Purchase agreement for a PE fund
Indemnification provisions set out monetary remedies that protect a party to an SPA from losses associated with identified risks of a business. These provisions provide both the buyer and seller with certainty as to their legal rights and responsibilities in the instance of a specific breach
What is the rationale and motivations behind the explosive growth of private equity in the last 30 years or so?
Investors have a lot of money stored up and are looking for opportunities to invest since the 2008 crash, and want to create returns for their LPs and themselves
What is mezzanine finance
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default. Generally after venture capital companies and other senior lenders are paid. Mezzanine financing tends to be completed with little due diligence on the part of the lender and little or no collateral on the part of the borrower. It is treated as equity on a company's balance sheet. Mezzanine financing may result in lenders gaining equity in a business or warrants for purchasing equity at a later date. This may significantly increase an investor's rate of return (ROR)., Mezzanine financing providers receive contractually obligated interest payments monthly, quarterly or annually.
Explain the key parts of the due diligence process
PRELIMINARY DD- The structured DD process typically begins with a review of the target by the PE firm's professionals. Following the execution of a confidentiality or non-disclosure agreement (NDA), the target firm will share a Confidential Information Memorandum (CIM) providing a broad overview of the opportunity. This is followed by a management presentation, which marks the first formal meeting between management and the PE firm NDA- NDA is executed between the PE firm and a target company so that nonpublic information can be securely exchanged; these agreements cover all information shared during the DD, negotiation and closing process CIM- CIM is the first formal document shared by a target and provides an up-to-date overview of its business and the investment opportunity. The CIM, often prepared with the help of a sell-side advisor, includes a detailed description of the business and its industry, historical and projected financials, forward-looking strategy and opportunities, The management presentation tends to represent the first face-to-face meeting between a PE firm and the company's management in an intermediated DD process. This presentation expands on the information provided in the CIM, highlights and illustrates key elements of the target's operations, updates relevant business developments and provides a forum for investors to ask questions.
What do we mean by intermediated flows
Paid intermediaries such as IB;s or Boutique M&A;s that source deals for large equity buyout funds. Their compensation comes from a success fee that is a result from completing the transaction. Intermediated deals are predominantly introduced by advisors engaged by the target company (or sell-side advisors) and advisors engaged directly by the PE firm (or buy-side advisors), and—more rarely—by "fund-less" promoters who finance transactions on a deal-by-deal basis in exchange for an equity stake or fee
Explain fund vehicles (What is a primary fund, Feeder fund Alternative investment Vehicle parallel fund)
Primary Fund- investment is an investment in a venture, buyout, credit, or other private markets fund at the time it is being raised. Feeder Fund- Investors deposit money into a feeder fund, which takes that money and invests in a master fund. Parallel Fund- investment vehicles generally formed to invest and divest in the same investments at the same time as the main fund. The parallel fund generally invests directly in each investment alongside and in parallel with the Delaware fund, in fixed proportions determined by their respective capital commitments. Additionally, funds formed to invest in specific countries or regions may have separate funds for local and international investors.
What is the difference between private capital markets and public capital markets?
Private Capital markets are markets where private funds are raised and private equity interests are exchanged. Public capital markets are markets where public funds are raised and sold/bought and are available to the public. The two markets differ in terms of Risk/return, liquidity and management involvement. In a public market the value of company is determined by the market owners have limited liability, the company has a infinite life and profit maximization is the goal. In private Capital Markets value is established at a single point in time owners have total liability, securities are usually illiquid and personal wealth is the goal.
What are representations and warranties? Where these statements are used?
Representations and warranties ("reps and warranties") are statements of fact and promises that underpin specific elements of the transaction set out in the SPA. A representation is a statement of fact that was influential in inducing a buyer or seller to enter into the SPA; a warranty is a promise that a statement of fact is true. SPA- Sales and Purchase Agreement Where these statements are used?- In M&A transactions, representations and warranties are given by both parties to disclose material information.
Describe and differentiate among debt instruments in structuring private equity transactions
Senior debt - revolving credit facility, 1st & 2nd lien term loan Junior debt - mezzanine loans, high yield bonds Bridge loans - about to purchase company and need money on side for capital structure, just need some money to bridge time span of deficit, very short 3-6 months, by banks or other intermediaries
What are the post-closing price adjustments and remedies?
The final purchase price determined by the closing mechanism is delivered at closing. However, in some instances, the conclusive purchase price is subject to change and proceeds may change hands after the closing date. Two of these instances include a contingent payment making up part of the purchase price or a breach of contract
What are the typical components of an LP/GP agreement?
The general Partner is in a limited parnership with LPs and is responsible for all decsions regarding the partnership. GP has fiduciary responsibility to act in the best intrest of the limited partners and is liable for his/her actions. LP's as investors have limited liability and have priority over GP when it comes to liquidation of the partnership. They have no control over day to day management of the fund. LP's have no approval rights regarding investments this power lies with GP's.
Why they are important in the PE market place-
They provide buyers access to PE investments at varying stages of maturity, and additional means of gaining exposure to specific managers and strategies.
What is 2/20 in private equity
This phrase refers to how hedge fund managers charge a flat 2% of total asset value as a management fee and an additional 20% of any profits earned.
Describe different "types" of alternative/Private equity funds
Venture Capital Fund Garage stage Early stage Mid-stage Late-s $1k-$50M Mezzanine Fund Very late stage Growth capital $5M-$100M Buyout Fund Merger Acquisitions LBOs $70M-$Bs Distress Fund Workouts Special situations $50M-$Bs
What are secondaries? Why they are important in the PE market place
What are secondaries?- refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds.
Explain agency costs and their significance in private equity
any fees associated with managing the needs of conflicting parties, in the process of evaluating and resolving disputes.These costs mainly refer to economic incentives such as performance bonuses, stock options and other carrots which would stimulate agents to execute their duties properly. The agent's purpose is to help a company thrive, thereby aligning the interests of all stakeholders.
What is carried interest? What is waterfall distributions? How we calculate waterfall distributions?
carried interest- is a share of any profits that the general partners of PE receives as waterfall distributions- describes the method by which capital is distributed to a fund's investors as underlying investments are sold. Priority is typically defined by a waterfall consisting of four steps: the first two steps allocate distributions to fund LPs, the third allocates proceeds to the GP, and the fourth allocates distributions to both fund LPs and the GP.
What is deal structuring in private equity
deal structuring - debt v equity, hybrid equity (redeemable preferred, convertible preferred stock, participating convertible preferred stock, multiple liquidations preferences), issues to consider (vesting, covenants, anti-dilution provisions), special focus on venture and mezzanine debt
What is the difference between fund of funds Private equity and a public private equity fund
fund of funds vehicle is an efficient way to achieve needed diversification, leveraging the necessary expertise to build, manage and monitor the private equity portfolio Public private equity fund - a publicly traded private equity company uses the funds that they may receive through stock purchases to help aid in their PE funding
What is hurdle rate
hurdle rate is the minimum rate of return on a project or investment required by a manager or investor. The hurdle rate denotes appropriate compensation for the level of risk present; riskier projects generally have higher hurdle rates than those that are less risky
What is the difference between invested and committed capital
nvested Capital is amount of money paid-in capital that has actually been invested in the fund's portfolio companies. Commited Capital - contractual agreement between an investor and a venture capital fund that obligates the investor to contribute money to the fund. The investor may pay all of the committed capital at one time, or make contributions over a period of time.
role of a sponsor in a private equity transaction?
sponsor invests in PE companies, create demand for publicly traded securities, underwrite mutual fund shares for public offerings, issues exchange traded funds. Needs the assets of the target company as collateral to borrow the funds necessary to acquire the company