• 119 03/04/2021

    Per Michael Porter there are two ways to compete, by charging lower prices or by developing differentiated products and offerings. In this context product differentiation is the only way to avoid a race to the bottom.

    What are Diffentiated Products? Product differentiation is a company’s ability to effectively communicate to its target customer why its product is superior. Please see the video that follows for more detail. We have also included a list of examples just beneath the video player.

    Examples of Differentiated Products:

    1. Chipotle: Became known for healthy fast food by marketing high quality ingredients.
    2. Dollar Shave Club: Separated itself from the competition with a direct-to-consumer model and hilarious advertising. It was the first subscription-based service in its space, which was otherwise dominated by giants.
    3. Porsche: Established itself as a premium sports car that could also be an everyday car. The company is associated with performance and quality, but the reliability separates it from high-end competition that requires considerable maintenance.

    Per the video, product differentiation does not have to be sleek or sexy. Ideas that come immediately to mind are well established brands, but an article in The Economist argued that this could be applied to even the most mundane or commoditized products:

    Philip Kotler gives the example of the brick industry, which is about as close to being a commodity business as is possible. Yet one company in the industry was able to differentiate itself by altering its method of delivering bricks. Instead of dumping them on the ground (and breaking several), it stacked them together on pallets and used a small crane to lift them off their truck. So successful was the firm with this method that before long it became standard industry practice. The firm then, of course, had to look for new ways of differentiating itself. 

    When differences in product or service are difficult to communicate, subtle differences in how the firm presents itself to clients can help influence the selection process. But the most important thing to be aware of is that once a clear distinction has been established, the company can potentially benefit for years from this same distinction. 

  • 118 02/17/2021

    In an LBO model the sources and uses table is a convenient way to track the sources and uses of cash required to close a transaction. Building a sources and uses table can appear to be a process that is without a proper sequence, but there is definitely an order that can be followed. To understand it, let’s first explore concise definitions of the two terms. Think of sources and uses as follows:

    Sources: The sources of cash required to consummate the transaction. 
    Uses: The cash used satisfy all claimants of the target company so that ownership can be transferred (enterprise value or purchase price) and to pay all of the fees associated with the transaction. Total uses will be equal to enterprise value plus all fees.
    Under Uses we need to further define claimants and fees, because in both instances there will be two types. 
    Claimants will need to be divided between shareholders (target company equity holders / "Seller Proceeds" in the table below) and creditors (target company debt holders / "OldCo Debt" in the table below). Enterprise Value - OldCo Debt = Seller Proceeds. Another way to think about Seller Proceeds is that this is the sum required to purchase the target company's equity.
    Fees will be divided between transaction expenses and financing fees. 
    With these definitions in mind, we can establish a sequence. The image below pulls data from the LBO Case Study to complete the sources and uses table. The steps are outlined below the image and a video at the bottom of this post walks through the process in detail.

    Sources and Uses
    SEQUENCE (All of the "video links" included in the outline are timestamps for the YouTube video available below.)
    1. Establish Purchase Price (EBITDA x EBITDA Multiple) [Video Link]
    2. Sources and Uses: Estimate Debt Available to Finance the Acquisition and Financing Fees (Note: Use Term Sheets if Available.) [Video Link]
    3. Uses: Identify Debt Balances of the Target Company to be Paid Off (Satisfy Debt Holders) [Video Link]
    4. Uses: Estimate Transaction Expenses [Video Link]
    5. Uses: Calculate Total Capital Required to Close (Sum of Purchase Price and Fees) 
    6. Uses: Calculate Seller Proceeds (Cash Required to Purchase Target Company Equity) [Video Link]
    7. Sources: Set Total Sources Equal to Total Uses 
    8. Sources: Calculate Equity Required to Close (Total Sources – Debt Available) [Video Link]
    In the video available below I build a Sources and Uses table for the LBO Case Study as part of a live “Watch-Me-Build-It-Series.” As a visual for this sequence I have included timestamps below the video to make it easy to reference.



    1. LBO Pro Forma Balance Sheet Adjustments (Template Available)
    2. LBO Case Study (Case Study and Template Available)

    Note: All of the information included in the sources and uses table pulls from the LBO Case Study linked above. 


  • 117 01/27/2021

    This video is Part 4 of an introduction to private equity. In this video you will learn more about the individuals involved in the process of sourcing, structuring and closing transactions. The video provides an introduction to the independent sponsor (aka fundless sponsor), and explains certain advantages dealmakers have over their competition. The conclusion covers a brief comparison of the independent sponsor structure and the private equity fund structure.


    After a short introduction, the video provides a little background on the independent sponsor (going back to 1984). Superficially, an independent sponsor is an individual that acquires companies and raises funds on a deal-by-deal basis without raising a committed pool of capital. Click on the image below to skip to this detail (all images are linked to the relevant part of the video).

    Independent Sponsor in Private Equity


    In this video three unique dealmakers are introduced. This video starts with Bradley Jacobs, who is well known for having completed 500 acquisitions. Per his one-page website:

    Over the course of his career, Jacobs has led teams that integrated approximately 500 acquisitions and opened over 250 greenfield locations, raised over $25 billion of debt and equity capital, including two IPOs, and created icons of business excellence across several industries.

    Bradley Jacobs Private Equity

    Next the video covers a less conventional private equity participant, Hollywood actor Ryan Reynolds. Reynolds has an advantage few can match in his social media megaphone. For example, when he invested in Aviation Gin, sales reportedly doubled from $20 million to $40 million, and Jeffries estimated that the company sold 96,000 cases in 2019. Then in 2020 Diageo agreed to acquire Davos Brands LLC, a portfolio of brands including Aviation Gin, for $610 million.

    Ryan Reynolds Investment in Aviation Gin

    As one last example, Vista Equity Partners, which was founded by billionaire investor Robert Smith, has been included as well. Vista is known for turning software companies into profit machines. Per an article in the WSJ:

    Vista Equity Partners Private Equity Fund

    This video concludes with a brief comparison of the independent sponsor structure to the private equity fund structure. The reason an introduction to the independent sponsor is helpful to understanding private equity is that the independent sponsor model allows us to focus on a single initial transaction. In the videos that follow both of these structures will be dismantled and explained one component at a time, and by the conclusion of this course you should have a greater understanding of how these two private equity participants operate.

    Private Equity Fund and Independent Sponsor Structure

    Introduction to Private Equity Series:


    private equity training



Models are:
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above



*Answers a, b, c, d, e, f and g are all correct.