Advanced Structuring of LBOs & Private Equity Transactions Masterclass A comprehensive examination of PE reviewing the 5 stages from PE, lender, advisors, management and investor s perspective This Course Can Be Presented In The Following Formats: Public Course Dates: 11-15 February 2019 24-28 June 2019 4-8 November 2019 Standard Price: 3,000 Membership Price: 2,400 Timings: 09:30 17:00 Location: London Face to Face In-House This course can be tailored and presented in-house at your location for 5 or more participants Live In-House Webinar This course can be tailored and presented exclusively via live webinar for your company for a group of participants. Participants are given a link and login and the trainer presents the course to a maximum of 20 participants. Participants can login and participants from different offices. Pre-Recorded In-House Webinar The trainer records the course exclusively for your company in one session or in bite-size video files. We provide access to our Learning Management System, the whole course and all supporting course materials for an agreed amount of time (6 or 12 months) for an agreed number of participants (20 1,000). Trusted By: The Banking and Corporate Finance Training Specialist
What Makes This Course Different The first trainer has deep experience of private equity having advised on the first MBO over 30 years ago The trainer has had exposure to private equity from a global perspective having presented programs,or advised on private equity, to clients in Europe, Africa, North America, Asia and Australasia The trainer s career also includes stints in commercial and investment banking, accountancy, Course tax Overview and law thus providing insight from a wide range of perspectives Through the trainer s wide experience he has developed a 360 degree perspective of private equity from the perspective of lawyer, advisor to PE firms, advisor to senior and junior debt providers and from a legal perspective Through the trainer s role as a Senior Consultant to Grant Thornton and as a Senior Advisor to KPMG Finland, he retains exposure to PE transactions The second trainer acts as a consultant to major investment management organisations and sell side research teams on valuation and modelling which provides insight into current market trends in LBO modelling The trainer has qualified as a Chartered Accountant and so is well qualified to understand both the accounting and financial aspects of the content The trainer s career includes stints in investment management building valuation models and processes which provides further insight from that angle The trainer has spent time working on various M&A transactions and building models to incorporate the financial effects of various types of transactions The course has been presented to numerous large accounting, investment management, PE firms and banks (globally) which reinforces the trainer s market knowledge Course Objectives Be introduced to the PE value creation model and PE fund structures Get an overview of the acquisition: adding value and reducing the risk at entry Have explained to them how to select the right investment with the 5 critical issues to sponsors Master how to negotiate the deal with the management team Gain an understanding of the key issues for sponsors and management Learn about the financing options for private equity houses Be appraised of the key issues for senior debt Be taught about how to negotiate the optimum debt package (including lender and borrower approaches) Have an overview on the different debt instruments mezzanine, unitranche, second lien, PIK loans and high yield notes Learn about the LBO Market and the effect of leveraged on the value of a business Get an overview of the LBO process, including how to determine the capital structure and assess the value creation. Have explained to them how to value the target by sourcing information, building a DCF valution and comparing and contrasting DCF and the LBO model structure Master the key elements of an LBO model including debt waterfalls Gain an understanding of the debt capacity for LBO financing Learn about the capital providers and their typical characteristics Analyse value creation in a transaction
Course Content Day 1 - Advanced Private Equity & Leveraged Buy-Outs Introduction to Private Equity: The PE value creation model; PE fund structures Introduction & background Overview of the PE market Venture capital PE / leveraged deals The three stages of the deal Entry, operations & exit The traditional PE value creation model the 3 key value drivers Techniques for enhancing returns Capital structure s impact on value Using soft exits recaps / refinancings Equity bridges Leveraging the fund Structuring issues & structuring parameters Structuring issues Taking security / collateral generally Security contrasted: UK vs Europe vs USA Financial assistance Ranking & priority of senior vs junior debt & pari passu loan/bond structures Tax issues - group tax relief & thin cap Squeeze-outs Spectrum of financing instruments in LBOs - overview Structuring parameters - creating an appropriate financial structure (overview) Percentage senior, junior and equity in debt capital structure EBITDA multiples Target returns for Private Equity & mezzanine funds Deriving the funding structure Funding uses Funding sources Structure and key terms and trends for Private Equity funds Review of typical (Luxco) fund structure Key terms & conditions Investment period (how long) Preferred return (rate, calculation) Carry (European vs US approach) How Private Equity fund structures optimise value Hot topics for LPs & GPs Generating and originating deal flow Why proprietary origination matters Deal sourcing strategies What makes a good originator What motivates intermediaries What motivates target s / sellers
How the right type of specialisation can boost returns Three ways to use networks Identifying exit signals from various sources Why & how social media matters Case Study: Calculating the entry and exit value, the funding sources, the basic approach to deriving the equity split between PE and management on entry and exit and introduction to estimating the correct capital structure The Acquisition: adding value & reducing risk at entry The Acquisition - offer structure Offer structure cash free, debt free with normalised working capital/net asset value etc Risk matrix - analysis of the five key value drivers / areas for due diligence Cash & trapped cash Debt what s included? Working capital (key to the deal?) Capex EBITDA (the good news & bad) Establishing the run rate Value matrix techniques for mitigating the risks and identifying value SPA structuring - Locked box vs Completion accounts Pros & cons of each How it can affect value Risk in Locked box Day 2 - Advanced Private Equity & Leveraged Buy-Outs Case Study: Identifying problematic items in reconciling equity value to enterprise value and the correct approach to calculating the correct level of working capital Adding value during the operational stage Selecting the right investment - the 5 critical issues to sponsors Portfolio fit The business model Management - what PEs approach Approach to generating value/returns Exits hard vs. soft How to avoid the value trap Case Study: Calculate the exit value and discuss how structuring the PE equity can affect the returns of management Adding value: operating partner models The new value-creation model 4 key areas Operational improvements 6 aspects
7 Methods PE can add value via teaming up with executives The operating partner model (3 approaches) The operating partner model in practice typical role Liquidity events Hard exits vs soft exits Exit strategies using dual or triple track to enhance value IPOs The key ingredients for IPO What about the management problem areas Sale of equity partial vs complete sale Problem areas trade vs secondary PE deals Soft exits a useful way of enhancing returns Refinancings & recaps Other ways of extracting value Management and other fees Case Study: Discuss the pros and cons of a dual/triple track exit strategy and the key issues to both the PE and management Negotiating the deal with management team: Key issues for Sponsors Structuring the equity Structure - loans, preference shares Typical returns Structuring the payment waterfall Issues for management Differences in primary and secondary deals Equity ratchets Rationale, structure Pros and cons of positive vs. negative, stepped vs. linear Key issues for Management Multifaceted role and duties of management Issues vis-à-vis role as director, employee, shareholder, warrantor Key documents & terms Shareholders agreement vs articles/ statues (pros & cons) Critical issues in the investment agreement Good vs. bad leaver Management warranties Equity valuation issues pre exit (why fair value is dangerous) Transfer issues drag, tag-along rights Critical issues in the service agreement Restraints Termination Financing options for PEs Introduction & overview of the funding spectrum
The spectrum of financing options for borrowers Review of typical debt structures in the market for all deals sizes Senior only Senior/ junior structures Pari loan bond structures Loans vs Bonds whats the difference (maintenance vs incurrence covenants) Senior loans: key facilities & issues Typical terms The main facilities RCFs why they matter & typical pitfalls Capex facilities Margin ratchets Mezzanine key terms Is there still a market for mezzanine Pros and cons Use an application Rationale of warranted vs. warrant-less Typical terms Unitranche / direct lending financing Review of the various market structures Typical terms Pros and cons Use and application where they work and where they don't Second lien loans Typical terms Pros and cons Use and application PIK loans (making a comeback) Typical terms Why has the PIK market spring to life Pros and cons for sponsors Use and application Day 3 - Advanced Private Equity & Leveraged Buy-Outs High Yield Notes Spectrum of instruments Pros & cons of high yield and why they appeal to borrowers Use and application Loans vs bonds compared Loans maintenance covenants vs Bonds Incurrence covenants Case Study: Reviewing a capital structure and how different instruments can be used to optimise the capital structure, provide more head room and handle capex
Negotiating the optimum debt package - Lender s vs Borrowers Negotiating the debt package - The lender s approach The Lender s approach to credit decision measuring debt capacity security over assets exit routes Different types of lenders: Banks vs Alternative lenders Whats the difference How and where it matters Overview of loan documentation and impact on deal Loan as a radar system Typical structure Key parties (obligors, borrowers and guarantors) Case Study: Review a detailed term sheet for a senior loan, identify the key commercial aspects and how and where it should be amended to make it borrower / lender friendly Negotiating the debt package - The borrower s approach The four deal scenarios and the role of due diligence The key financial ratios / covenants Cash flow cover Leverage Interest cover Capex Selecting the appropriate covenant for the deal; borrowers v lenders Do covenants really matter - if so how, when & where Step 1: How to identify the borrower s objective Step 2: Identifying the key requirements for the borrower Step 3: Deciding on which type of debt & lender is most appropriate Loans v bonds When and where to use junior debt Step 4: Strategies for negotiating with lenders Step 5: Getting what you paid for Inter-creditor issues review of key issues Case Study: Calculate the exit value and discuss how structuring the PE equity can affect the returns of management Days 4 & 5 - Advanced LBO Modelling Leverage Overview Background to the LBO market Introductory theory - The effect of leverage on firm value Valuing the target Sourcing information Historic and forecast data Analysing equity research
Key attributes of broker analysis Pluses and minuses of equity research Building a DCF valuation using equity research Modelling the stand alone valuation DCF valuation Use of multiples in valuation (EV/EBIT, EV/EBITDA) Case Study I: Participants model the stand alone valuation of the target using historic data and equity research LBO Modelling Overview Key elements of an LBO model Comparing and contrasting DCF and LBO models Sources and uses of funds Key drivers in an LBO model From stand alone valuation to LBO analysis Case Study II: Participants use the stand alone valuation of the target to complete an LBO model Assessing debt capacity for LBO financing Financial interdependencies Financing growth Sustainable debt Target debt capacity assumed in a WACC calculation, debt capacity and interest cover Debt capacity in LBOs Debt capacity multiples in practice and credit analysis Case Study III: Modelling the debt capacity of the target using multiple and credit analysis Capital providers and their typical characteristics Institutional and management equity Traditional/new lenders Senior tranche profiles A, B, C, RCF Subordinated tranche profiles Second lien Mezzanine (with/without warrants) PIK High yield bonds More complex issues warrants and options Typical LBO transaction sensitivity analysis, management, base and payout cases Case Study IV: Modelling a more complex capital structure with various scenarios calculating exit value and IRR for each of the capital providers Assessing value creation in LBO transactions APV analysis and dividend recaps Key components of an APV valuation Unlevered value
Value of the tax shield Direct and indirect cost of leverage APV valuation and DCF valuation APV valuation in a steady state Calculating AP in a steady growth environment Incorporating APV analysis in an LBO transaction analysis Sustaining returns via a dividend recap Case Study V: Where has value been created, modelling APV analysis and dividend recap for an LBO transaction Background of the Trainer The trainer is a consultant, public speaker and author. He provides training programmes globally to a blue-chip client base on private equity, debt finance, loan documentation and restructuring. He is a senior consultant with Debt Xplained, with Grant Thornton UK (Debt Advisory) and is also a Senior Advisor to KPMG Finland. He has spoken at conferences in the UK, Europe, Australasia & South Africa. He provides training to a wide range of clients on a bespoke in-house basis & publicly through Redcliffe Training Associates. Additionally, he is the Programme Director for the infrastructure/project finance module for the MBA programme at the Cass Business School in London. Course Summary The programme will review the impact of the draft ECB guidance on leveraged transactions. This programme provides participants with a comprehensive view of private equity, particularly the various types of buy-outs (e.g. LBOs, MBOS). The programme takes participants through all the major stages of the deal; from entry, through the operational phase to exit (liquidity events). In doing this the course provides insight into how the PE firm can add value to the process at each of the three major stages. To do this it approaches PE from the respective perspective of all the main protagonists; Private equity professionals, lenders and other providers of debt financing; the various professional advisers (lawyers, accountants in due diligence or audit), corporate finance advisors and management teams looking to enter or exit the market. It will also appeal to investors who may wish to invest directly (co-invest) or indirectly (via funds) in different parts of the debt or equity capital structure, such as pension funds, insurance companies, private family offices and corporates who are trying to understand the radically different business model of their PE competitors Whilst simple in theory private equity, the highly competitive nature of the PE market means that adding value can no longer be achieved by leverage and reliance on rising markets. The course covers the three key stages of PE value creation. Stage 1; the acquisition, where it is vital to structure the transaction in the optimal fashion in terms of both the Offer to minimize risk. Disastrous mistakes can be made ab initio by failing to
understand the main risk areas of the equity bridge (i.e. the value traps from enterprise value to equity value) or in the completion method (e.g. locked box rather than completion accounts). Developing the optimal capital structure is a critical as it is essential to use both the correct level of debt for and the most appropriate type of debt that will allow the company to achieve its business plan (e.g. organic growth or buy and build). The second stage requires the PE firm to add value during the operational phase and here there is much the PE firm can do in terms focusing on operation improvements. These do not occur in a vacuum and require the best management team. Top quartile PE firms have large in-house teams to assist them in the process but smaller firms can achieve the same results through different operating partner models. In the current seller friendly environment, deal origination is another key point of differentiation between top quartile teams and the course reviews various ways of approaching this issue The third and final stage relates to liquidity events however PEs have the luxury in the current market of opting for soft as well as hard exits to generate value for LPs. The programme adopts a pan-european approach to the topic but the presenter has experience of PE in other jurisdictions including, USA, Asia Pacific and Africa. Reference will be made to current trends and data in the markets across Europe. Participants will be provided with numerous case studies to reinforce the various aspects and will also be provided with an LBO model which will be used to structure a transaction. Post the course participants will receive a number of other PE related models (e.g. how to calculate warrants and ratchets) as well as current review of debt trends in the debt market. The fourth and fifth day of the course covers the key elements of modelling in an LBO analysis. Participants will value the target business using historic data and available equity research. The valuation process will incorporate absolute and relative valuation techniques. Once the target business has been valued, participants will be introduced to LBO analysis and construct an LBO model. The LBO modelling analysis will be developed by assessing the debt capacity of the business to determine the range of capital structures available for the transaction and how credit analysis is used in the LBO modelling process. The participants will then cover more complex LBO instruments such as warrants and PIKs, how they can be incorporated into an LBO structure and how to calculate returns to each of the equity and debt providers. Participants will model a more complex capital structure and calculate exit values and the IRRs generated by each investor. Using the integrated model participants will then analyse various scenarios (management case, base case, payout case) to derive the optimum financing structure taking into account the financial constraints of each investor. The participants will then undertake an adjusted present value ( APV ) analysis to determine where value has been created in the LBO transaction using an APV model and finally look at a recovery analysis for a failed LBO transaction. Case Study: The participants will use a variety of case studies and exercises during the two days, based on publically quoted and generic companies.