Insights

This post is Part 2 of an introduction to private equity. In this video we will explore how leverage can both create and destroy value. To highlight the benefits and dangers of excessive leverage two examples are included below in both video and text format. The first was a wild win for investors in the early 80s, and the second a modern-day private equity horror story.

Most concisely, private equity is the business of acquiring assets with a combination of debt and equity. It is sufficiently simple in theory to be frequently compared to the process of taking out a mortgage to buy a home, but intentionally obfuscated in practice to communicate a mastery of complex financial science. When encountered, the latter should be thought of largely as a marketing effort. Vocabulary aside, the process is simple. Incredibly detailed and at times chaotic, but not the product of financial wizardry.

In this post we will cover the M&A auction process from the buyside perspective by detailing a “standard” process for a private equity group. In any process the objective should be to win by the smallest margin possible. Every participant knows this in theory, but the gamesmanship and strategy involved in an M&A auction can make it difficult in practice (as the first video below will demonstrate). But before we dive into the strategy, let’s first outline the process.

In this post we are including a personal budget template and a “watch-me-build-it” tutorial video that explains how the template works. Please see the video below for more detail.

Seasonality can have a drastic impact on the amount of working capital required to run a business, which is why it is frequently cited as one of the primary revenue-related challenges in negotiating the working capital adjustment in a private equity transaction (aka “the working capital peg”). To help give this concept some teeth, in this post we will use visuals to explore how seasonality impacts the liquidity required to maintain a business.