PE: Second Midterm Flashcards
(46 cards)
What are the four phases of the managerial process?
(1) Fundraising
(2) Investment
(3) Managing and Monitoring
(4) Exiting
Why is collecting funds so difficult for managers?
(1) Long maturity of initiative
(2) No one wants to take the first move
What are the typical steps in a fundraising activity?
(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
What is the typical content of the information memorandum?
- 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
Who are the players involved in the investing phase?
(1) The management company
(2) The technical committee
(3) External advisory company
What are the different stages of the Decision-Making phase of the Investing phase?
(1) Origination/Deal flow
(2) Screening
(3) Due diligence and valuation
(4) Rating assignment
(5) Decision to invest
What are the “Three pillars” of the Deal Making Phase?
(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.
What are the typical actions that PEI’s utilize to create value in a target company?
(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
What are the typical covenants that a PEI utilize to protect the value created in the target company?
(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
Why is exiting so difficult for the PE firm?
(1) Liquidity
(2) Pricing
What kinds of exiting strategies does the PE firm have available?
(1) Trade sale
(2) Buy back
(3) IPO
(4) Sale to another PEI
(5) Write-off
What are the suggestions for an entrepreneur that has to work with a PEI?
(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.
How is it possible to successfully work together towards an IPO?
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.
What is particular about valuation in the PE setting?
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.
How do we unloved and relever the industry Beta?
Bu = B/(1+(1-t)(D/E)) to unlever and B = Bu*(1+(1-t)(D/E)) to relever
What are the main characteristics of companies in the PE setting in terms of valuation?
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.
Which approach do we use to value firms in the PE setting?
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.
What characterizes companies in the VC setting?
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.
Which approach do we use to value firms in the VC setting?
We use the venture capital method.
What is particular about the venture capital method?
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.
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?
Number of new shares = (Existing shares x % PE shares)/(1-% PE shares)
How are the conditions for starting your own company these days?
- Huge amount of liquidity
- Interest rates are low. Attraction to alternative asset classes.
- Dramatic need for growth to enhance the GDP.
What are the rules that a well-organized startupper needs to adhere to?
(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
How are the conditions in the Italian M&A market? And what is the role of PE in this market?
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.
