Yale School of Management. Private Equity: Leveraged Buyouts. Course Syllabus

Transcription

1 Course Name: Private Equity: Leveraged Buyouts Course Number: MGT 847 Session: Fall 1 Class Meeting Time: days and nesdays. 1pm 2:20pm Classroom: TBD Instructor: Joshua Cascade Joshua.Cascade@yale.edu TA: TBD Office Hours: By appointment Course Description: This course will focus on the investment decision process of leveraged buyout (LBO) firms. Students will gain an understanding of how private equity (PE) professionals evaluate investment opportunities and manage due diligence throughout the transaction process. Classes will be comprised of discussions of organizational frameworks and practices of PE firms, case studies based on LBO transactions, and group analysis of completed deals. Topical discussions: Each class session will include a presentation on the specific course topics listed in the Class Schedule below. Guest speakers from PE firms will occasionally join the class to share their investment decision process and participate in deal reviews. Case study review: Each case assignment reflects typical marketing information provided by a company for sale. Student deal teams will follow the investment process by submitting an outline of the early deal thesis, key business drivers, and due diligence strategy. There will be an in-class due diligence session reflecting typical Q&A with target management and a dataroom containing additional information. Deal teams will then prepare and present an investment memorandum supporting a recommendation, as they would for a PE investment committee (IC). LBO Review : Each week a student deal team will walk the class through a different LBO transaction. Each team will be connected to a PE professional and conduct a phone interview to gather information on a deal from the original investment thesis to the final outcome, including successes and failures in due diligence. 1

2 Course topics will cover the investment process prior to the completion of the transaction: A. Underwriting Investment Memorandum (IM) Thesis assessment, business strengths and opportunities Risk assessment and mitigating factors Due diligence scope and key questions Focused data gathering and analysis Operating forecast drivers and projected outcomes LBO models: capital structure, valuation, returns B. Value-creation planning Post-acquisition initiatives Management tools C. Structuring Debt financing Legal agreements This course will focus primarily on LBO firms who target established companies with the cash flow generation to support leverage, as opposed to PE firms focused on early stage investments or distressed turnarounds. The private equity industry has grown from approximately $500 billion in assets under management in 2000 to over $2.5 trillion in Growth by established firms and new entrants has outstripped transaction volume, resulting in substantial competition for deals. In this course, we will explore strategies PE firms use to enhance due diligence and post-acquisition improvement plans to gain an edge in this competitive market. Course Materials: Software: LBO model template to be provided. Readings Sources: - See detailed outline of class sessions and files uploaded on Canvas. - Reference guide: Gilligan & Wright, Private Equity Demystified: An Explanatory Guide. 2015, 3 rd edition. - Reference guide: Gompers, Kaplan, & Mukharlyamov, What Do Private Equity Firms Say They Do? Required Background Reference: Rosenbaum & Pearl, Investment Banking: Valuation, Leveraged Buyouts and Mergers & Acquisitions. Published by Wiley, 2013, 2nd edition. Case Study Assignments: Student deal teams will prepare investment materials based on transaction case studies which mirror a PE firm s process of evaluating investment opportunities. Distilling information from the target and industry sources into a concise assessment of business drivers and probable outcomes is fundamental. There are no right or wrong answers to the case study assignments; strength and clarity of argument and the quality of support is paramount. 2

3 Assignments: two for each case study 1. Early Thesis and Preliminary LBO Model Each deal team will review a typical first round information package provided by a seller and prepare the following: o A one to two page outline of: (a) the potential strengths, risks, and key business drivers, and (b) a due diligence strategy, including key questions and scope of work. o An early draft LBO model based on preliminary operating projections and including a simple output summary as would be presented to an IC. The output summary template will be provided, and the analysis should include return sensitivities based on a range of exit assumptions (multiples and year five EBITDA). 2. Investment Memorandum - See Investment Memorandum Deliverables below. Investment Memorandum Deliverables The IM submitted for each case study should include: (1) situation overview and recommendation (one page), (2) company overview (one to two pages), (3) investment strengths and opportunities, (4) risks and mitigating factors, (5) assessment of key performance drivers, (6) projected drivers and resulting financial outlook cases, and (7) summary of LBO models, including capital structure, returns, and sensitivities. Form of case submissions: The IM should be no more than twenty pages in PowerPoint and organized to emphasize major conclusions and support, as opposed to rehashing information from the seller. Use of charts, tables, and bullet outlines is encouraged. Market and valuation: Each case study assignment will include valuation guidance regarding the expected market multiple to be achieved in a competitive sale process. Team recommendations to proceed (or not) should be based on the guidance; an IM supporting a lower price is a proposal to not proceed. Teams should seek a competitive edge by sourcing independent information and performing data driven analysis to support an acceptable range of investment returns at the market clearing price. Performance drivers and projections: Each IM should include an analysis and forecast of the key drivers of business performance. This should include an assessment of: (a) external drivers, such as market demand and channel trends, and (b) internal drivers, including company specific factors, such as competitive stickiness / switching and customer concentrations. Include a description of the logic behind key assumptions and summarize supporting detail. In developing projections, avoid overweighting the haloeffect of recent past performance, recognizing potential volatility or inflection points in internal and external drivers. LBO model scenarios: Please present two scenarios: an expected base case and a reasonable downside case. Assume the IC is extremely focused on downside protection if performance does not go as planned. To create a downside case, do not 3

4 simply run discount percentages to the base case; deal teams should simulate a premortem scenario with a logical set of drivers. Emphasis on risk assessment: The IM should include an assessment of risk factors that could significantly impact the business and the projected investment return. This should include defensible reasons why the risk is unlikely to occur, can be actively managed, and/or would have a limited impact. Deal Teams Students will be divided into groups of three or four depending on class size. The deal teams will be assigned by the instructor and will be reassigned mid-way through the course. Information Sources The limited information provided in each case study reflects the marketing materials typically provided in sell-side auctions. Sellers include the target s strengths, aggressive projections, and limited industry information and do not include a section on risk factors. The challenge for the deal team is to focus on what matters most and be resourceful in synthesizing independent information sources to improve the quality of the investment decision. Submissions and In-Class Process Each deal team should submit their IM the day before class and prepare to present their recommendation on the deal in class. One representative of each deal team will have ten minutes to walk the group through the salient points. To mirror a real-world IC process, after a brief synopsis by each deal team, the class will ask questions and challenge the two deal teams. Any member of a selected deal team can answer questions and defend the team s findings. Method of Evaluation: Class participation (including LBO Review ): 20% LBO Exercise: 10% Two Case study assignments: Early Thesis and Preliminary LBO Model 20% Investment Memorandum 50% Preliminary Case Studies: Aerospace Parts (industrial products) Private Label Pet Food (consumer packaged goods) 4

5 Class Schedule: Class Topics Assignments Due 1 Private Equity Industry Overview o Course overview, expectations and goals o Rosenbaum & Pearl, Leveraged Aug 29 o Market trends: supply, demand, valuation, IRR target Buyouts, Chapter 4, pages 185 o Public versus private markets 202 o Value creation: merits of active, private ownership o Gilligan & Wright, pages and LBO Model Part 1: Model Mechanics and Deal Structure Fri o Backdrop: how the LBO model is used o Rosenbaum & Pearl, LBO Aug 31 o Debt structuring and prioritizing loss prevention Analysis, Chapter 5, o Inputs and sources of value creation o Review LBO model in excel o Excel model demonstration 3 Sep 5 4 Sep 10 5 Sep 12 6 Sep 17 7 Sep 19 LBO Model Part 2: Pricing the Deal o How PE firms price deals o Drivers of price inefficiency among PE firms o Competition and valuing potential initiatives and recapitalizations o Assignment overview Due Diligence and Making the Investment Decision o Marketing materials developed by sellers o Diligence prioritization o Tools to outsmart your biases o Identifying and forecasting key drivers o Early deal screening: desktop diligence and thesis development Operating Model: Tool to Frame Diligence o Segmentation of the business and model design o Data focus: material, necessary and useful information o Historical business trend analysis o Examples: identifying and forecasting key drivers The Auction Process and Transaction Advisors o Outline of a typical auction process o Competitive auctions: from proprietary to cutthroat o External advisors and deliverables o Positioning to win at final bid Managing Management-Governance and Execution Tools o Setting clear expectations upfront o Typical execution challenges o Objective KPIs: fighting defensive behavior o Same as prior class o EY study, How do Private Equity Investors Create Value? pages o LBO Exercise o Kahneman, Lovallo & Sibony, Before You Make That Big Decision o Marks, The Truth About Investing o Cullinan, Le Roux & digen, When to Walk Away from A Deal o Case: Aerospace Parts, #1 Early Thesis and Preliminary LBO Model o Rogers, Holland & Haas, Value Acceleration: Lessons from Private Equity Masters o Foster & Wright, Top Reasons PE-backed CEOs Fail 5

6 Class Topics Assignments Due 8 Creating Value I: Cost Initiatives o Types of cost saving initiatives o Case: Aerospace Parts, Sep 24 o Prioritization: magnitude vs. cost vs. disruption #2 Investment Memorandum o Outside resources 9 Sep Oct 1 11 Oct 3 12 Oct 8 13 Oct 13 Creating Value II: Growth Initiatives o Evolving PE success with growth initiatives o Common challenges with management o ROI philosophy - importance of internal investment o Trend in add-on acquisitions: benefits and risks Executive Evaluation and Hiring o Diverse PE views on management change o Framework for evaluating CEOs o Interviewing and referencing Capital Structure and Negotiating Financing o Comparison of debt alternatives and key terms o Differences between small lender groups and widely syndicated debt securities o Example debt financing term sheets o Negotiating perspective of buyer and lender Negotiating Purchase Agreements o Purchase agreements: key terms, perspective of buyer and seller PE Managers: Fund Structures and Organizational Strategies o Fundraising process and dynamics o Key terms: with LPs (external) and principals (internal) o Effective organizational models o BCG, Private Equity: Engaging for Growth o Case: Private Label Pet Food, #1 Early Thesis and Preliminary LBO Model o Rosenbaum and Pearl, Chapter 4, pages o Gompers, Ivashina & Van Goul, Note on LBO Capital Structure o Latham & Watkins, Key Provisions of Acquisition Agreements o Case: Private Label Pet Food, #2 Investment Memorandum o Institutional Limited Partners Association, Private Equity Principals 6