• 109 09/26/2020

    Finding an attractive deal in private equity requires a tremendous amount of work. This video highlights the number of opportunities a private equity firm evaluates before closing a single transaction. 

    This video pulls from my personal experience, but the numbers are supported by industry data. When I posted this I found that it resonated with most of my friends that work in the industry, but I also received several text messages from friends claiming even larger numbers to find one attractive opportunity. One such text claimed that for the last year a private equity firm had on average "reviewed" 400 opportunities for every transaction closed; a "rough year" as they put it. How "reviewed" is defined changes from firm to firm, but signing a confidentiality agreement (CA) is a pretty easy step to measure. Private equity firms typically keep records of all CAs signed. I think it is common to see 100+ CAs signed for every 1 or 2 transactions closed, which puts the success rate at 2% in the most optimistic scenario. 

    As the video will highlight, there are benefits to the information gleaned working through the private equity funnel, and knowing that the work is beneficial to the process makes it easier to look for the needle in the haystack.

     

    private equity deal sourcing

 



  • 108 09/25/2020

    Securing a job in private equity requires an understanding of LBO models. This case study has instructions for entry-level positions and more advanced positions, but in this post we will focus on the instructions for an entry-level hire. 

     

     

    Per the video, candidates looking to test their LBO modeling skill set should build an annual LBO model with a 5-year projection that contains the following:

    1. A 50% cash flow sweep that pays down outstanding debt in order of priority.
    2. Debt covenant analysis. Be sure to reference the term sheets for covenants.
    3. A standard 80 / 20 distribution waterfall for equity proceeds.
    4. And finally, an exit analysis worksheet that shows returns both gross and net of fees.

    To download the files mentioned in the video please visit this page: LINK.

     

    LBO Financial Modeling Test

 



  • 107 06/22/2020

    In this post we will cover a simple debt recapitalization in a three-statement model. This is a continuation of the post titled “Adding a Loan to a Three Statement Model,” and relies on the same workbook, which can be downloaded here

    This post does not include the financing fee related to the new debt raise, but there are two worksheets in the workbook that explain the treatment of financing fees in a financial model. This post breaks down the process of updating a three-statement model for a debt recapitalization into two steps outlined below in bold text.
     
    Update the Debt Schedule for this New Debt Issuance.
    In this example we will be raising the exact same amount of capital as the business has outstanding at the time of the debt recapitalization. Changes are indicated by a small x on the left-hand side of the image. 
     

    Debt Schedule in a Three Statement Model

    Add the Balance Sheet Adjustments.

    Step two requires making an adjustment to the balance sheet in the transaction period (20X2). The Excel file may appear intimidating, but the process is simple. To adjust the balance sheet for the change in capital structure complete the steps that follow. Please refer to the image below the bulleted list.
    1. Link the historical values to the column marked by a rectangle with a red-dashed line. 
    2. Input the balance sheet adjustments visible under the columns titled “Debt” and “Oldco Debt.” The values under "Debt" (indicated with a light blue shaded header) link to the new debt schedule. The values under "Oldco Debt" link directly to the pre-closing balance sheet; the only difference is that the values are now negative. 
    3. Link the post-closing balance sheet back to the model.

    Balance Sheet Adjustments for Debt Recapitalization

    You will notice that the oldco debt balances have been zeroed out, and that only "New Long Term Debt" remains as a long term liability on the balance sheet in the projected period. The elimination of "Current Maturities of Long Term Debt" is expained under "Additional Commentary" below.
     
    In step 2 above the =SUM() function is used to calculate the post-closing balance sheet. The formula is visible in the image below. 
     

    Balance Sheet Adjustments Formula in Excel

     
    ADDITIONAL COMMENTARY:
     
    Current Maturities of Long-Term Debt: In this model, and in most LBO Models, the current portion of long term debt is not listed as a current liability. Instead the entire debt balance is listed under Long Term Liabilities. This makes the model easier to work with as the capital structure expands to include additional debt tranches. 
     
    Dividends: In this debt recapitalization we are using the new debt issuance to retire the old debt balance. This post will not include a dividend, but you can explore how a dividend payment would then be made by visiting this post.
     
 




 



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.