SMC - Final Round

How does 10 Dollars in depreciation impact the three financial statements?

1) Income Stmt: Operating income down 10 // 40% tax rate means net income would decrease 6 (10 - tax) 2) Cash Flow Stmt: Net Income down by 6, 10$ in depreciation is added back since non-cash. Overall CF Operations + 4. No Change in CFI / CFF therefore, net cash is +4 3) Balance Sheet: Assets = Liab + SE /// Assets: PPE decreases 10, but cash is up 4. / Liab & SE: Net Income is down 6 (Thus balance)

How many tires are sold in the US every year?

1) Make assumptions - a. US population - 300M B. households - assume 3 people per household (I.e. 100M houses) Cars per household = ~2 Thus 100M House x 2 = 200M cars

Market News I'm watching

1) Republican takeover (deregulation) + dropping rates = less hurdles for M&A - will take off in coming months. (Think LMM/MM/ Small Cap Public)2) Software/Tech: Artificial Intelligence and Data Analytic anything will trade at a premium and similiar to the .com bubble we will watch an AI race/revolution. Likely wont be smart enough to take the job of a financial analyst YET, but assume low level items will start to become Ai powered.3) Energy: As data centers come online to bulk up AI, power generation will be excessive. Google and Microsoft have acquired numerous nuclear reactors to power such.

Walk me through an Leverage Buy Out (LBO)

1. Calc implied Entry: Find Entry Multiple in comps and multiple by LTM EBITDA 2. Create Sources & Uses: Highlights purchase price + fees and where finances are coming from (sponsors + lenders) 3. Project FCF (determines potential growth/how much can service debts, etc.) 4. Determine Exit Assumptions: Time horizon & rerun comps for similar sized target companies.

How do you evaluate the quality of a companies ebitda for a credit deal?

1. Check add back adjustments 2. Revenue/Ebitda stability 3. Historical Trends 4. Industry Trends

KPI for Credit investments?

1. Coverage Ratio (Form: EBITDA / Interest) measures borrowers ability to cover debt payments from ops 2. Debt to EBITDA - indicates how many years of ebitda to pay down ALL debt. 3. Days Payable / Days Receivables 4. Margins (Ebitda / Net Income / etc.)

Why Private Credit / Equity

1. Debt is more patient form of capital - give entrepreneurs flexible fuel for growth ops while giving debt investors fixed return.

How do you link the three financial statements?

1. Income statement: Revenue - expenses = Net Income 2. Cash Flow Stmt: Starts @ Net Income +- Change in working capital 3.Balance Sheet: CFS updates cash on Assets, IS updates cash on retained earnings

How do private equity firms make money?

1. Management Fees 2. Performance Fees 3. Capital gains 4. Dividends

What are ideal investment criteria?

1. Non-cyclical 2. Stable Recurring cash flow 3. Favorable industry trends 4. Growing organization 5. Ebitda margins over 10% 6. Growing revenues

What is Mezzanine Debt?

1. Typically unsecured or subordinated debt 2. Highest Interest rate 3. Used in riskier growth, acquisition or buyout situations

What do you know about SMC?

4.5Bn AUM Target Companies: 15M - 50M EBITDA Target Co's: Private Credit (minor Equity) & Secondaries

What are some Key KPI's you would use

Anything relevant to the companies strategic objective - Revenue Growth, margin improvement, debt service coverage, Days payables Vs. Days receivables

Items on Balance Sheet

Assets = Liab + Equity Cash & Equivalents, Accounts recievable, inventory, PP&E, Accounts payable

How does 10 Million in dividends impact the financial Stmts?

BS - Assets: Cash decrease 10M // Liab & SE - Decreases 10M CFS: 10M outflow recorded on Financing activity // CFO/CFI no impact. Income statement - Dividends do not impact.

What are the three financial statements and what do they do?

Balance Sheet - Snapshot - Shows companies current financial position Income Statement - Period - Shows company's revenue - expenses to net income Cash Flow Statement: - Period - Tracks inflows/outflows of cash, categorized in operations, investing and financing activities to show cash management.

What is Unitranch?

Blends of Senior & Subordinated debt into a single offering - No multi tranch Typically for buyouts

what is a cap rate?

Cap Rate is Net Operating Income / Market Value.

Five C's of credit?

Capacity, Capital, Collateral, Conditions, Character

Items on Cash Flow Statement

Cash from Financing: Dividends, Stock repurchases, bond offerings Cash From Operations: Interest Payments, SG&A, Accounts Payable Cash from Investing: Change in PP&E, Capex

What is a Dividend Recapitalization? How does it impact the financial statements

Companies want to use the active term loan to take a dividend to pay themselves. Usually works in two steps - 1) (Drawdown impact) Cash is up X amount, debt increases same amount. 2) (Div paid) Cash is down X amount, equity is now down x amount

What happens if Portcos refinance early?

Deals typically include provisions for penalties/fees for early refinances. Usually this supports returns on premature exit

Why would you pass on a company?

Declining / Low Margins Customer concentration Competition Clear distress (I.e. over-levered currently) Cyclical revenues

Direct Lending Vs. LevFin

Direct lending focuses on ~lower half of the market // LevFin is focused on Larger companies

Equity Value (From enterprise value)

Enterprise Value - Total Debt

Enterprise Value (from equity value)

Equity Value + Net debt - cash

Tell me about a method you would use to determine the profitability of a loan

I would calculate the Net Present Value of the loan to determine if it would generate more value than cost of us.

Your on a desert Island what two statements do you need?

Income Statement & Balance Sheet - you can create a Cash flow statement from the two (remember you did!) BS: Provides a quick health snapshot at a given time IS: reports profitability Cfs: is Tracking sources and uses of cash

What is the Interest Coverage Ratio

Indicates how well a company can cover Interest. Formula: EBITDA / Interest

Explain working Capital

Measures a companies ability to cover its short term obligations and maintain day to day operations. Formula: Current Assets - Current Liabilities

What is multiple of Money // MOIC?

Multiple on Invested Capital (MOIC) essentially represents the returns earned per dollar of intiial investment contributed. Usually how much is your investment worth now in equity value // how much capital you have paid for said investment.

What is NOPAT? Why is it important?

NOPAT is Net operating profit after tax - important bc it shows company cash after taxes but pre-debt service.

Levered Free Cash Flow Formula

Net Income + Depreciation & Amort - Change in Working Cap - Capex + Net Debt

Free Cash Flow formula

Net Income + Non cash expense - Increase in working capil - Capex

Items on Income Statement

Revenue, Cost of Goods Sold, Depreciation, and Interest

Capital Structure?

Secured debt -> unsecured debt -> preferred equity -> common stock

Senior Debt Vs. Mezz?

Senior debt is usually top of the cap structure, whereas Mezz is usually unsecured and occasionally includes an equity kicker.

Calculate Equity Value (without Enterprise Value)

Shares outstanding X Share Price

a companies Tax fell from 34% to 25%, what would happen?

Since company is paying less to taxes, net income rises and servicing debt is that much easier.

How do you value a laundromat?

Using a market based multiple depending on size, location and profitability.

Is Private Credit a volume driven business?

Yes - PC funds benefit by putting more capital to work, enhancing the fund's yield. Whereas in PE the actual deal matters long term because they focus on selling and benefiting from the Capital Gain/Appreciation, not the yield.