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PE and VC > PE: Second Midterm > Flashcards

PE: Second Midterm Flashcards

1
Q

What are the four phases of the managerial process?

A

(1) Fundraising
(2) Investment
(3) Managing and Monitoring
(4) Exiting

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2
Q

Why is collecting funds so difficult for managers?

A

(1) Long maturity of initiative

(2) No one wants to take the first move

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3
Q

What are the typical steps in a fundraising activity?

A

(1) Launching of the business idea: testing the waters, producing the information memorandum and obtaining approval from the relevant supervisor (Europe).
(2) Selling job: making investors sign the letter of commitment
(3) Raising debt
(4) Closing

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4
Q

What is the typical content of the information memorandum?

A
  • Choice of vehicle
  • Size of vehicle and minimum closing amount
  • Size of individual participations
  • Size of leverage (if non-european)
  • Corporate governance rules
  • Target to invest (countries, sectors, life cycle stages)
  • Track record of management
  • Remuneration structure
  • Costs
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5
Q

Who are the players involved in the investing phase?

A

(1) The management company
(2) The technical committee
(3) External advisory company

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6
Q

What are the different stages of the Decision-Making phase of the Investing phase?

A

(1) Origination/Deal flow
(2) Screening
(3) Due diligence and valuation
(4) Rating assignment
(5) Decision to invest

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7
Q

What are the “Three pillars” of the Deal Making Phase?

A

(1) Targeting: vehicle used to invest and % of shares.
(2) Liability profile: syndication strategy and debt issuance.
(3) Engagement: categories of shares, paying policy and governance rules.

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8
Q

What are the typical actions that PEI’s utilize to create value in a target company?

A

(1) Supporting the management of the company through a hands-on approach
(2) Support activities:
- Board services
- Recruiting management
- Performance evaluations and reviews
- Relationship management (contact network)
- Mentoring

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9
Q

What are the typical covenants that a PEI utilize to protect the value created in the target company?

A

(1) Lock-up
(2) Permitted transfer
(3) Staging technique
(4) Stock option plans
(5) Callable and putable security
(6) Tag along rights
(7) Drag along rights
(8) Right of first refusal
(9) Exit ratchet

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10
Q

Why is exiting so difficult for the PE firm?

A

(1) Liquidity

(2) Pricing

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11
Q

What kinds of exiting strategies does the PE firm have available?

A

(1) Trade sale
(2) Buy back
(3) IPO
(4) Sale to another PEI
(5) Write-off

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12
Q

What are the suggestions for an entrepreneur that has to work with a PEI?

A

(1) The entrepreneur has to understand that he obtains a partner - not just pure financing: should be ready to share his decisions with the PEI and be open about the problems.
(2) Should choose the one that fits his/her needs.
(3) Should know who will be the persons that will assist him in the company’s day-to-day activities.

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13
Q

How is it possible to successfully work together towards an IPO?

A

Pre-IPO deal: the choice to pursue an IPO should be imbedded in the terms and conditions in the investment contract between the parties –> work towards the goal of being listed.

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14
Q

What is particular about valuation in the PE setting?

A

The equity value needs to be calculated at time 0 (the time of the investment) and at time n (the time of the exit). Both are important drivers of the IRR.

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15
Q

How do we unloved and relever the industry Beta?

A

Bu = B/(1+(1-t)(D/E)) to unlever and B = Bu*(1+(1-t)(D/E)) to relever

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16
Q

What are the main characteristics of companies in the PE setting in terms of valuation?

A

Companies receiving expansion and replacement financing are characterized by a solid business plan + the fact that it is possible to make reasonable assumptions about the future as the company has been running for some years.

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17
Q

Which approach do we use to value firms in the PE setting?

A

We combine a DCF valuation at time 0 with a multiple valuation at time n. This will provide the basis for whether a satisfactory return could be achieved. Since the inputs are uncertain, we complement this by a sensitivity analysis.

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18
Q

What characterizes companies in the VC setting?

A

Young companies do not have a solid business plan in place and no or a limited amount of data on historical performance. Hence, it is very difficult to make sensible projections about the future.

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19
Q

Which approach do we use to value firms in the VC setting?

A

We use the venture capital method.

20
Q

What is particular about the venture capital method?

A

The IRR is not an output of the valuation, but one of the inputs. It is a central component to calculate the amount of shares that needs to be issued in order for the PEI to achieve his target return.

21
Q

How do we calculate the amount of new shares that needs to be issued when we have the % shares that the PEI needs to hold?

A

Number of new shares = (Existing shares x % PE shares)/(1-% PE shares)

22
Q

How are the conditions for starting your own company these days?

A
  • Huge amount of liquidity
  • Interest rates are low. Attraction to alternative asset classes.
  • Dramatic need for growth to enhance the GDP.
23
Q

What are the rules that a well-organized startupper needs to adhere to?

A

(1) Commitment, hard work and passion
(2) Promotion of a glamorous idea
(3) Right team
(4) Numbers, numbers, numbers
(5) Share the risk with the VC investor
(6) Be able to make other people commit

24
Q

How are the conditions in the Italian M&A market? And what is the role of PE in this market?

A

Conditions:
(1) Booming market dominated by foreign investors
(2) Lack of M&A activity between domestic strategic players
PE’s role:
(1) Support domestic M&A
(2) IPO market is very weak: provide exit opportunity for investors and capital to companies in need for it.

25
Q

What are the key issues that a company needs support with in the M&A process?

A

Buy-side: due diligence and post-acquisition integration.

Sell-side: finding the right window for a sale.

26
Q

What is the relationship between PE and exits through IPOs?

A

In an ideal equity chain, the PE investor enters the shareholder base of a company right before a company goes public. Here, it is crucial in spreading an equity culture within the company.

27
Q

Why are SMEs usually so reluctant to go public and what is Borsa Italiana doing for SMEs?

A

Why? Family owned businesses.
What are they doing? creating markets that are tailor-made for smaller companies and the launch of the ELITE business program.

28
Q

What is the ELITE business program?

A

It is a program that encourages companies to open up their capital and trains and coaches companies and their management on correct solutions to obtain liquidity, composed of three stages:

(1) Training of the management
(2) Pushed towards change (business areas, governance…)
(3) Stock exchange open up their network of potential investors

29
Q

What is the relationship between PE and restructuring today?

A

More relevant than ever: higher systematic risk. Without support, companies overwhelmed by change could go bankrupt.

30
Q

What is the key issue for a PE investor that has to manage restructuring and turnarounds?

A

To be able to point out those few companies which stand a chance of surviving the crisis from those that have been hit by structural and irreversible changes.

31
Q

What are the key trends in the market for restructurings and turnaround situations?

A

Banks have changed their approach to distressed debt: from liquidation value and legal procedures in bankruptcy to seeing the value of helping the companies recover from distressed situations. Banks do not have a lot of experience in this field –> partnerships with PE firms.

32
Q

What are the core services of Invest Europe?

A

(1) Industry promotion
(2) Political advocacy
(3) Industry data
(4) Industry networking
(5) Self-regulation

33
Q

What is the trend in the equity amount raised and committed?

A
  • Record year in 2013 and the numbers for the years after that are high compared to historic ones.
  • Money raised for buyouts are always the biggest contributor to total funds raised.
34
Q

Where is the fundraising capital coming from?

A

Only 59 % is coming from inside Europe. Hence, PE attracts equity capital from all over the world. The injection of equity capital is an important contributor to the European economy.

35
Q

Who are the investors providing capital to PE?

A
  • Not a retail business: dominated by few large investors with large ticket sizes.
  • Pension funds are the largest investors in PE funds (24 %).
  • Sovereign wealth funds play an increasingly larger role (14 %).
36
Q

What role does PE firms play in Europe?

A

We measure the importance of PE in the economy as a percentage of BNP. This percentage is low in the European market if compared to the US market. Hence, Europe is an underserved market for PE investments.

37
Q

How are PE investments being financed?

A

The average equity contribution increased in the aftermath of the financial crisis and are still very high. I.e. PE firms have become more conservative and lowered their debt ratios.

38
Q

What are the three most popular exit strategies?

A

(1) Trade sale (29 %)
(2) Sale to another PE firm (26 %)
(3) Public offering

39
Q

What is “Invest Europe” doing in Brussels?

A

Works closely with political institutions to influence the policy for the industry, making sure none of the directives directly or indirectly that influence the PE industry have a negative effect on the business.

40
Q

What are the reasons for the low importance of PE in Italy?

A

(1) Financial: late development of pension funds and preference of bank debt.
(2) Entrepreneurs like to have full control over their company.

41
Q

How does H.I.G get to know about the relevant opportunities in the origination phase?

A

Either through proactive searches or their network of contacts (M&A advisors, investment bankers, managers, lawyers and accountants). This contact network is continuously refreshed about who H.I.G are and what they are interested in.

42
Q

How is H.I.G’s screening procedure?

A

(1) First check of minimum requirements (company size, deal size and restrictions on country and sectors).
(2) Business and financial analysis:
(2. 1) Business and market analysis
(2. 2) Identification of avenues for value creation (!)
(2. 3) Financial analysis (focus on return)
(3) Deal context analysis

43
Q

What are the steps in the deal structuring and execution phase of H.I.G? (Deal-making phase)

A

Pricing (signing the LOI), financing, due diligence and ultimately structuring and SPA.

44
Q

How does H.I.G create value from its transactions?

A

(1) Financial leverage
(2) Multiple expansion
(3) EBITDA growth (!)

45
Q

How does H.I.G create value from EBITDA growth?

A

(1) Internationalization
(2) External growth (add-on acquisitions)
(3) Operational improvements

46
Q

Who does what to create value?

A

PEI: Guide (hands-on), incentivize and support.

Management team: execute and propose and share and communicate.

PE and VC (3 decks)

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