Podcast
Questions and Answers
What is the primary purpose of a teaser in the private equity deal process?
What is the primary purpose of a teaser in the private equity deal process?
Which of the following details is typically NOT included in a teaser?
Which of the following details is typically NOT included in a teaser?
When considering whether to move forward after reviewing a teaser, which factor is NOT relevant?
When considering whether to move forward after reviewing a teaser, which factor is NOT relevant?
Why is a company frequently anonymized in a teaser?
Why is a company frequently anonymized in a teaser?
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What should you assess to determine if a teaser is worth pursuing further?
What should you assess to determine if a teaser is worth pursuing further?
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In the context of a teaser, what does the term 'investment highlights' typically refer to?
In the context of a teaser, what does the term 'investment highlights' typically refer to?
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What is a common aspect examined to decide on proceeding after reviewing a teaser?
What is a common aspect examined to decide on proceeding after reviewing a teaser?
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Which of the following questions is NOT relevant when considering whether to move ahead with a teaser?
Which of the following questions is NOT relevant when considering whether to move ahead with a teaser?
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What is the growth profile of the market in which JoeCo operates?
What is the growth profile of the market in which JoeCo operates?
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What aspect of JoeCo's product offering presents a potential risk?
What aspect of JoeCo's product offering presents a potential risk?
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What is one key characteristic of JoeCo's management team?
What is one key characteristic of JoeCo's management team?
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What should be further understood to evaluate JoeCo's financials?
What should be further understood to evaluate JoeCo's financials?
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What method of selling does JoeCo utilize for their products?
What method of selling does JoeCo utilize for their products?
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What specific concern is raised regarding JoeCo's business model?
What specific concern is raised regarding JoeCo's business model?
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Which of the following describes JoeCo's barrier to entry in the market?
Which of the following describes JoeCo's barrier to entry in the market?
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What is a significant question to consider before asking for an NDA with JoeCo?
What is a significant question to consider before asking for an NDA with JoeCo?
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What is the primary purpose of NDAs?
What is the primary purpose of NDAs?
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What typically happens to documents after a buyer disengages?
What typically happens to documents after a buyer disengages?
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How many initial teasers does a sell-side bank usually send out?
How many initial teasers does a sell-side bank usually send out?
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What is generally the final number of interested bidders who submit formal LOIs?
What is generally the final number of interested bidders who submit formal LOIs?
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From a legal perspective, how should a firm handle confidential competitive information?
From a legal perspective, how should a firm handle confidential competitive information?
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Why are breaches of NDAs infrequently litigated?
Why are breaches of NDAs infrequently litigated?
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What does the sales process typically do as it progresses?
What does the sales process typically do as it progresses?
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During the initial stages of a sale, how many IOIs does a banker usually receive?
During the initial stages of a sale, how many IOIs does a banker usually receive?
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What is the primary responsibility of associates in the pre-IOI IC memo process?
What is the primary responsibility of associates in the pre-IOI IC memo process?
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Which of the following is emphasized as important for associates to learn quickly when creating a pre-IOI IC memo?
Which of the following is emphasized as important for associates to learn quickly when creating a pre-IOI IC memo?
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What do lenders find more useful when assessing a deal?
What do lenders find more useful when assessing a deal?
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What is one key action the VP must take during the preliminary financing indication phase?
What is one key action the VP must take during the preliminary financing indication phase?
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In preparing for calls with lenders, which type of document is crucial for discussing preliminary financing?
In preparing for calls with lenders, which type of document is crucial for discussing preliminary financing?
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What type of mini-models should associates focus on learning to build quickly?
What type of mini-models should associates focus on learning to build quickly?
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Which aspect should you focus on when determining the information to share with lenders?
Which aspect should you focus on when determining the information to share with lenders?
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What is the role of the Principal in the initial financing source indication process?
What is the role of the Principal in the initial financing source indication process?
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What is the primary feature of unitranche debt?
What is the primary feature of unitranche debt?
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What does a Highly Confident Letter indicate?
What does a Highly Confident Letter indicate?
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Which best describes staple financing?
Which best describes staple financing?
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What is an important consideration for a seller beyond the purchase price?
What is an important consideration for a seller beyond the purchase price?
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Why might covenants be considered less relevant for sellers?
Why might covenants be considered less relevant for sellers?
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What is a key advantage of non-bank lenders in relation to unitranche debt?
What is a key advantage of non-bank lenders in relation to unitranche debt?
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In the context of Highly Confident Letters, what does 'post-diligence' imply?
In the context of Highly Confident Letters, what does 'post-diligence' imply?
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Which of the following statements best explains the role of a sell-side investment bank in staple financing?
Which of the following statements best explains the role of a sell-side investment bank in staple financing?
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What does high concentration in one business division typically indicate in private equity investments?
What does high concentration in one business division typically indicate in private equity investments?
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What is a potential exception to the concentration rule in private equity?
What is a potential exception to the concentration rule in private equity?
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Why is cyclicality considered troubling for companies with high levels of debt?
Why is cyclicality considered troubling for companies with high levels of debt?
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What is the main purpose of a Confidential Information Memorandum (CIM) in a private equity deal?
What is the main purpose of a Confidential Information Memorandum (CIM) in a private equity deal?
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What role do associates typically play during the CIM review process?
What role do associates typically play during the CIM review process?
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How does cyclicality affect private equity investors' preferences?
How does cyclicality affect private equity investors' preferences?
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In an LBO scenario, what could happen if a key component of a company's revenue stream is compromised?
In an LBO scenario, what could happen if a key component of a company's revenue stream is compromised?
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What consequence might arise from a high concentration of risk in private equity?
What consequence might arise from a high concentration of risk in private equity?
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Study Notes
The Private Equity Deal Process
- Private equity is an alternative investment class.
- It's composed of funds and investors that directly invest in private companies or engage in buyouts of public companies ("take-privates").
- The focus of this course is on private equity funds with mid-to late-stage mandates.
- PE professionals need to manage multiple workstreams.
- The key part of the course will be on the acquisition and financing processes.
- Business and financial due diligence are covered in a separate module.
PE Deal Process Introduction
- The course focuses on the acquisition and financing of companies.
- PE deals typically start when a company's shareholders decide to sell.
- Management typically reaches out to an investment banker to market the company.
- Investment bankers assemble data.
- They construct marketing materials highlighting the company's strengths then present materials to potential buyers, including PE firms.
- This is the beginning of the “sell-side" process.
Auction vs. Negotiated Sale
- The two common deal processes in private equity are auction or negotiated sale.
- PE firms prefer negotiated sales because they often result in a lower price.
- In an auction, multiple buyers are invited to bid, potentially leading to higher prices.
- Negotiated sales often involve one buyer in conversation, allowing for lower negotiated prices.
Typical PE Firm Investment
- Portfolio companies are acquired using the equity raised in the fund along with debt.
- Going from start to finish involves specific investment steps - an important part of the course.
The Primary Workstreams
- To execute buy-side investment, PE professionals must manage these multiple workstreams.
- This course focuses on the acquisition and financing processes.
- Business and financial due diligence is treated in a separate module.
Deal Process: Zoomed-in View
- This depicts the detailed steps of a deal process.
Analyst/Associate Vs. Vice President Roles
- Titles and responsibilities vary by firm, but this describes the general roles.
- Analysts/Associates handle model construction, initial due diligence and documents.
- Vice Presidents review models, and handle higher-level documentation tasks.
JoeCo Case Introduction
- JoeCo is used as the case company throughout the course to illustrate the PE deal process; this is not a real company.
- Real-life examples are shared, along with annotations to clarify the course material.
JoeCo Company & Situation Overview
- Company Name: JoeCo, Inc.
- JoeCo is a private coffee company founded in 2010 and headquartered in Woburn, MA.
- JoeCo is experiencing increased growth.
- The course will detail the entire deal process.
The Key Players
- Important actors in the transactional process—the parties involved.
- This table lists the company, individual or entity performing specific roles in the process.
Where We're Headed
- This timeline outlines the major events, processes, and phases of a private equity deal throughout the course.
Private Equity Deal Process: Interchangeable Terms
- PE professionals use various terms interchangeably.
- This section outlines these terms to clarify expectations for the course.
- Critical clauses in a typical NDA include the term, confidentiality, non-solicit, one-way vs. mutual, standstill clauses.
NDA: Confidential Information Exceptions
- Publicly available information prior to the NDA is not considered confidential.
Decreasing Division Risk
- The signing of the NDA is an entity-level action.
- The relevant party includes only the specific investment fund and portfolio.
CIM: Purpose, Process, and Role
- CIMs provide extensive information about a target company.
CIM: Review Exercise
- This is a list of typical review questions used in a CIM - the review process used here.
First Pass Review
- The associate assesses if the company meets the fund's criteria and its financial profile.
Other Key Considerations
- Some relevant factors to consider in evaluating investments include the use of leverage (free cash flow conversion, historical profitability).
- Capital-intensive businesses are usually unattractive in LBO candidates - such as those with high CapEx requirements
- Cyclicality and seasonality in cash flow negatively impacts return
ACEP Scenario
- Illustrative scenario to explain issues with the evaluation of a potential deal.
Concentration Rule Exception
- Exceptions to the concentration rule apply when there are irrevocable contracts (e.g. long-term agreements) in place.
- The contractual obligation makes the concentration more tolerable.
Cyclicality Risk
- Cyclicality refers to material swings in business performance.
- This is often a concern for companies with high debt and is counteractive to private equity's desire for stable returns.
IOI Phase
- The goal is reviewing the CIM and creating initial thoughts on the company based on the findings.
- Standardized firm-specific templates are generally used.
Goal of the Sell-side
- The goal is to promote a business to buyers and highlight its characteristics.
- "In-depth" information may not be provided at this stage.
First Pass Review
- Associate focuses on if the company meets the fund investment criteria.
- Also, looks critically at the financial profile of the company.
Pre-IOI IC Memo: Purpose, Process, and Role
- The purpose of this memo is to present findings and preliminary investment thesis.
- Deal team members, and sometimes the whole firm, review the memo and provide feedback to continue the process forward.
- It typically includes business overview, review, legal and accounting data findings, financial summaries, and a mini-model to support the potential bid.
Pre-IOI IC Memo: Summary
- The pre-IOI IC Memo is typically 5 - 25+ pages in length and provides an overall view—both business and investment—of the target company.
Pre-IOI IC Memo: Content Deep Dive
- Provides an overview of the pre-IOI IC memo's contents.
- Provides a breakdown of what can be found in the company overview, findings from diligence, QOF, summaries, and the mini-model for a clearer understanding—especially for the associate.
- The mini-model and summary returns are critical for the memo.
In-house Consultants
- Some firms have internal operations teams that provide consulting services to portfolio companies.
- Consultants often become involved after acquisition is complete to help with transitioning the business - such as after regulatory approvals.
- Generally, two types of firms—the focused firm and the "numbers game" firm—engage consultants during the IOI stage.
Mini-Model
- The purpose of the Mini-Model is to use realistic assumptions and projections to evaluate a potential investment.
NDA Cost
- The cost of executing an NDA is typically low and handled by in-house resources.
Sending Teasers
- The number of teasers to send depends on the decision-making process between the seller and the advisor.
- In order for the probability of a good deal, there is no downside to reaching out to multiple potential buyers.
Teaser: Pro-Tips
- Associates are expected to be able to analyze the teaser quickly.
- Building a checklist to review each teaser helps standardize the process.
- Creating an output template is beneficial for organizing your findings and presenting them to the team.
Teaser: Summary
- A teaser is 1-2 pages long.
- A summary of the business, market, and relevant business characteristics.
Teaser: Content Deep Dive
- Covers the nature of documents found in a teaser, and the reasons why these details are important for a potential investor.
Teaser Review Exercise: Key Questions
- A list of important questions for reviewing a teaser.
Teaser Review Exercise: Company Profile
- This details crucial aspects of the company.
Teaser Review Exercise: Concerns
- The companies perceived weaknesses or risks.
Teaser Review Exercise: Other Thoughts
- This is the summary of the additional analysis of the company's characteristics and issues that might impact a decision.
Teaser Review Exercise: Are We Ready to Ask for the NDA?
- This details and summarizes the "why not" issues involved in moving to the next phase—the NDA
NDA: Seller Provisions
- The buyer is required to remove all confidential information post-disengagement—unless they move forward with the deal—from the transaction.
- This provision requires the return of the material in-person or physical destruction of files containing the confidential material.
The NDA: Seller Employee Considerations
- The seller will only want senior employees involved in the process—as they are the appropriate authorities to speak about the issue.
- Distraction to the employees of the company can destabilize the business.
- Additional parties that are competitors will seek to hire the employees from the company to run their own operations.
NDA: Purpose, Process, and Role
- The NDA defines the confidential information that can be exchanged.
- It maintains confidentiality of the company’s identity.
NDA: Review Exercise
- What "confidential" information is considered so?
- The term of the NDA, and its enforceability length?
- The non-solicit clause and how long it remains enforceable?
Decreasing Division Risk
- The signing of the NDA is performed at an entity level restricting the scope of the deal to the relevant fund.
How many funds can an advisor send a Teaser to? Is there a downside to sending too many?
- The number of potential buyers depends on the decision between seller and advisor—there is no downside to engaging many potential buyers.
Calls
- Calls with PE firms and sell-side banks are not common after a teaser.
- Lenders are more likely to call buyers after an LOI has been sent to ensure the process moves forward properly.
Sale Process Structure
- There are two methods found in structuring a sale process: a broad or a narrow approach.
- A broad method has a wider net cast to attract more potential buyers.
- As a general rule, a higher buyer competition results in a higher valuation.
- The narrow (fireside chat) approach is less common and often used when there are pre-existing relationships between buyer and seller.
The CIM and IC Memo
- The purpose is to present the findings, from the CIM, and the preliminary investment thesis.
LOI Phase
- Lenders are generally "backward-looking" and focus on past performance when considering loan terms for deals.
- This is different than equity investors who are focused on future potential.
- Lenders are often focused on the downside case due to uncertainty with the company.
- The investor needs to consider minimum working capital requirements.
Goal of the Sell-side
- The goal is for the seller to present a comprehensive overview of the company's business and to gather sufficient interest from the PE sector.
- Lenders are generally "backward looking" so providing accurate and clear information is critical.
First Pass Review
- The initial focus is on how the company's business meets the fund's investment criteria or whether to proceed further.
- The financial profile is also considered as part of this review.
Other Key Considerations
- In evaluating a deal, focus on free cash flow conversion and historical profitability.
- Companies with high Capital expenditures requirements are considered less attractive as LBO candidates.
- Cyclicality—material swings in business performance. This can be an issue in deals with substantial debt; private equity investors value stability.
ACEP Scenario
- An illustration of the importance of understanding risk factors when making an investment.
Concentration Rule Exception
- The presence of long-term, enforceable contracts can mitigate risk.
Cyclicality Risk
- Companies with major fluctuations in performance are usually concerning.
- PE investors value stability in revenue predictability.
CIM: Summary
- CIMs are typically 20 to 100+ pages long.
- Important details on the Overview, Investments, Industry, Products & Services, Customer Profiles, Revenue, Management, and Financials of the business.
CIM: Review Exercise
- Set of questions that help analyze the company's characteristics and industry.
Reviewing the CIM
- Common questions when reviewing the CIM.
Investment Highlights #3: Multiple Expansion Opportunities
- This section describes JoeCo's opportunity to expand to new customers.
CIM: Key Questions
- Questions to ask when reviewing the CIM, beyond a comprehensive understanding of the company.
Process Letter & Next Steps
- Interested parties submit indications of interest by [Date] which outlines the proposed purchase price, transaction structure, sources of financing, and the desired due diligence process/items.
- Once the indications are received, the sell side advisor selects invited parties, also known as those who are more likely to move forward with the deal to continue with more in depth diligence.
Is JoeCo a cyclical business?
- No, the consensus is that JoeCo is not a cyclical business, as consumers continue to consume coffee in recessions.
CIM: Pro-Tips
- VPs and above typically skim the CIM to see if it looks interesting.
- Associates review in detail and pull out key findings to summarize for the whole deal team.
- Learning the typical structure of a CIM — through examples of past memos—and steps for a review of any such docs helps organize analysis and to take appropriate steps.
Investment Committee (IC) Memo
- IC Memos are presentations to the deal team/firm, sometimes the whole firm that summarizes the key findings from the CIM, due diligence processes, and initial thoughts on the proposed bid.
Pre-IOI IC Memo: Purpose, Process, and Role
- This memo details the findings and initial investment thesis from the preliminary diligence analysis.
- The purpose of this memo is to present the initial findings and gather feedback from stakeholders.
- This process sometimes involves the entire firm to review and offer advice and/or comments.
Pre-IOI IC Memo: Summary
- This is a 5-to-25+ page summary of the key findings delivered to senior members, the whole deal team, and/or the entire firm.
- It gives a detailed information about the target company's business.
Pre-IOI IC Memo: Content Deep Dive
- This section details what's in the pre-IOI IC memo, for a better understanding.
What about firms without an internal operations teams?
- Some firms, such as KKR Capstone, have their own internal operation teams.
- Consultants are often brought in later to assist with the transition after acquisition.
Mini-Model
- A simple model with management and base case assumptions, often derived from the financials.
How many lenders is it generally accepted as appropriate to reach out to?
- Usually 3-5 lenders for a deal.
- Some deals may include 5-10 lenders in an effort to identify the best possible terms.
Initial Financing Source Indications: Purpose, Process, and Role
- Initial financing sources provide information about the lending terms.
Initial Financing Source Indications: Summary
- A 1-2 page document.
- Includes important details such as debt tranches, leverage, maturities, interest rates, covenants/provisions, and fees.
Lender Pushback on Assumptions
- Lenders usually focus on past performance and not overly optimistic numbers.
- A conservative approach is more likely than a significant issue with the terms.
- Lenders seek protection.
Collateral Pool
- There's a general understanding of what constitutes collateral among lenders, however, it can slightly differ deal-by-deal, (e.g. 80% of Accounts Receivables plus 65% of inventory).
- Inter-creditor agreements—how different debt tranches are prioritized.
Balancing Different Assumptions
- Management projections are often considered optimistic.
- Sponsors look to find a reasonable middle ground to bridge the gap between management's projections and lender’s concerns which are usually more conservative and focused on past performance.
- A "safe margin" is critical to assure repayment.
Rationale of Providing Conservative Case
- Debt covenants are often set as a multiple of a company's EBITDA on a quarterly basis.
- It's typical for the covenant to have a "cushion" to account for variability in performance.
- A higher EBITDA is beneficial for making sure the deal can be successfully executed.
Potential Impact on Debt Terms
- Optimistic projections usually don't result in worse lending terms.
- If the projections are too low, lenders usually reject the deal.
- The firm should be aware of the threshold for various lenders and should adjust projections to get acceptable terms.
The Right Number of Lenders
- Firms generally work with 2–5 lenders, though some deal strategies might involve reaching out to 5-10 lenders in an effort to attain the best possible terms—usually through relationships that have been built that support trust.
- Trust and relationships are important when working with multiple lenders.
Initial Financing Source Indications: Content Deep Dive
- Critical aspects of the financing source (e.g., debt tranches, interest rates/spreads, maturities, prepayment options, covenants and provisions).
Initial Financing Source Indications: Content Deep Dive (cont'd)
- This section details specific aspects within the initial financing documents and why these are important.
What makes the JoeCo LOI aggressive?
- Key components and how they could be perceived as unfavorable or aggressive. This includes the size of any termination fees.
LOI Decision Makers
- The major decision-makers in an LOI are the principals and partners.
- They authorize the revisions and changes that will be made to the LOI and terms.
Post-LOI Work
- Deal team and third-party advisors wrap up the diligence process in the post-LOI phase, reviewing the information gathered.
- Presentations of the findings to the firm.
Post-LOI Work (cont'd)
- This section describes additional deliverables for deal team members and third party advisors on completing the diligence process.
Finalized Deal Percentages
- Success rate of post-LOI deals is in the 40–60% range.
- A high percentage of initial deals fall short when moving from the LOI stage to the final agreement stage.
- Credit risk is a significant driver with the selection of bidders and their commitment to the deal.
Working Capital Peg; SPA & APA
- Working capital and its adjustments - especially important for the finalization of the transaction.
Working Capital Peg
- The working capital target will be finalized and calculated based on the last 12 months of averaged, actual working capital.
- The final amount will be verified in a supplementary balance sheet.
Working Capital Closing Process
- On the day of closing, the seller is responsible for delivering the working capital target.
- A true-up process may be required if the amount delivered differs from the initial target.
Purchase Agreement
- The purchase agreement defines the entire terms and structure of the purchase.
- The seller typically wants the purchase amount immediately.
Purchase Agreement (cont'd)
- Protecting the buyer in the event of issues post-closing is critical – typically, there will be items covered (such as indemnification) within the document.
LOI Below Initial Bid Range
- EBITDA may not be the only factor influencing valuation.
- Industry experts and market analysis can affect a bid.
- Issues discovered later in a deal can cause bids to be reduced; for the buyer, this can lead to a lower-end LOI, needing further justification.
LOI: Purpose, Process, and Role
- The role of the LOI, and how it is reviewed.
- The steps involved in constructing and presenting the LOI.
LOI: Summary
- The document typically comprises 5-20 pages.
- Critical sections within the LOI are specific price, committed financing, working capital, final due diligence requests, exclusivity clause and conditions to closing a deal—and how long the timeframe will be to reach a final agreement.
LOI: Content Deep Dive
- The crucial elements within the LOI document itself.
The Data Room Loop
- The step-by-step process followed when the team receives access to a data room.
Third Party Advisors
- The common types of advisors involved in the process.
Third Party Advisors: Lawyers
- The purpose of using external legal advisors, and the types of assistance provided in the process.
Third Party Advisors: Accountants
- The purpose and role of accountants when involved in a deal.
- The purpose and role of accountants is to understand the financial performance, and the quality of earnings.
Accountants' Role in "Normalized" EBITDA
- Accountants verify the validity of the EBITDA number provided within the CIM by the seller.
- Buyer and seller will work towards a consensus to adjust the EBITDA.
Third Party Advisors: Strategy Consultants
- The purpose of the consultants and their role in a PE deal.
Data Room: Purpose, Process, and Role
- Data from the data room is used to perform diligence on the target.
Data Room: Summary
- Details the various kinds of data found in a data room, including the typical information shared.
Data Room Access (cont'd)
- Data rooms for strategic buyers differ; they aren't given access to the same degree of information as other participants.
Third Party Advisors: Lawyers
- The purpose of using external legal advisors, and the issues addressed.
Third Party Advisors: Strategy Consultants
- The purpose and role of strategy consultants when involved in a deal.
Management Meetings
- A management meeting is typically scheduled near the company's main headquarters or conference center to meet with stakeholders.
- Site visits usually follow this meeting.
Management Meetings (cont'd)
- The meeting serves two major purposes: gathering information from the management team and determining how well the team will function, and a site visit provides further business insight.
Management Meeting Presentation: Purpose, Process, and Role
- The purpose, process, and the various roles involved in management meetings.
Management Meeting Presentation: Pro-Tips
- Best practices for preparation, especially for VPs and Associates, in a management meeting setting.
Debt Commitment Letter
- A formalized letter providing a formal commitment of loan terms.
Debt Commitment Letter: Purpose, Process, and Role
- A formalized letter providing a formal commitment of loan terms. The purpose/process involves determining financing needs for the deal.
Debt Commitment Letter: Summary
- A typical 1–10-page document, summarizing elements of the initial financing source (including covenants, flex language, relevant event/conditions, and proceeds) presented in a formal letter format.
Operating Model
- Defines the detailed forecast build of the target company’s financials.
Investment Memo
- Investment memos summarize diligence finding, and highlight investment theses.
Pre-LOI IC Memo
Pre-LOI IC Memo: Pro-Tips
- Associates review memos and analyze the information presented in the memo.
- VPs take the lead in gathering, preparing, and interpreting findings from memos for presentation..
Initial Financing Source Indications
Preliminary Lender Discussion
- Lenders are generally more conservative in their projections compared to PE firm projections.
Lender/Equity Investor Disconnect
- Lenders are principally concerned with a company's ability to repay debts over time rather than future value potential.
Lender Case Assumption Differences
- In many cases lenders are not concerned with overly optimistic projections to assess whether a firm can generate the agreed upon amount of cash flow - however overly conservative projections may raise the rates a deal costs, and/or make securing such a deal challenging.
Initial Financing Source Indications: Purpose, Process, and Role
- The purpose, process, and various roles involved in providing initial indications to lenders.
Initial Financing Source Indications: Summary
- The LOI document provides information.
Initial Financing Source Indications: Content Deep Dive
- Key components of an LOI - that should be included.
Is the cash flow sweep pretty typical?
- Cash flow sweeps are not commonly done.
- The process is designed to ensure that the company can maintain its working capital and that there will be enough cash generated to cover obligations (debt service).
Minimum Equity Contribution
- Minimum equity contribution provisions are often included in financing deals, particularly with high-leverage situations.
Prepayment Optionality
- Prepayment is not as common and is treated as an "excess cash flow" element.
Prepayment in Theory vs. Practice
- A divergence exists between prepayment models and how they're actually implemented—it is more common for companies to hold onto the debt as long as possible.
Prepayment in Theory vs. Practice (cont'd)
- If a company prepays, it's typically only responsible for interest on the outstanding (remaining) principal balance.
Business Development Companies (BDCs)
- BDCs are non-bank alternative lenders who are generally more aggressive with risk.
- Unlike bank lenders, BDCs often assess their debt terms in order to force the company to prepay a premium (fee) for early repayment.
Prepayment Penalty Reasoning
- Non-bank lenders emphasize higher returns due to higher risk tolerance—to offset the risk of prepayment.
Unitranche Debt
- Traditionally, lenders will specify first and second lien debt to two separate financial sources.
- Non-bank institutions are frequently used in a unitranche deal and will provide comprehensive debt financing in order to finalize the deal.
Highly Confident Letters
- A commitment letter from the lender, that implies the capital can be secured but does not provide details—and the extent of the liability is only for their balance sheet.
Staple Financing
- The seller works directly with debt focused hedge funds or institutional investors when an investment bank provides them with some financing for the deal—rather than the bank absorbing the entirety of the financing.
SPA/APA (Stock Purchase Agreement)/
- SPA or APA define the terms and transactions.
SPA/APA: Summary
- 20–100+ page documents that contain details of definitions, purchase price, deal conditions, covenants, reps and warranties, indemnification, and termination clauses.
APA/SPA: Content Deep Dive
- Details of the different aspects needed in an APA/SPA deal including the different types of purchase prices, the process, and reasoning behind their importance.
Data Room
Data Room: Summary
- The summary provides details of the different information typically required in order to finalize a deal.
Data Room Loop
- The process of accessing, reviewing, analyzing, and completing diligence work.
Who can we bring in to help with the pre-LOI phase (i.e., digging deeper into the company)?
- Strategy consultants, industry experts, and operational partners, for market sizing analysis and trending insights.
Third Party Engagement Timing
- Third-party advisors are expensive, so the timeframe for engaging these advisors helps determine how serious a buyer might be.
- Advisors' diligence and engagement can help gauge a buyer's commitment.
Management Meetings
- The role of management meetings in assessing company performance, the management team and gauging their potential as partners.
Management Meetings (cont'd)
- The potential buyer and seller are looking to use the meeting to assess credibility and potential of a deal.
Management Meeting Presentation: Purpose, Process, and Role
- The purpose, deal process, and various roles involved in the management meeting.
Management Meeting Presentation: Pro-Tips
- Provides best practices and strategies for both VPs and Associates in a management meeting setting.
Debt Commitment and LOI
- Debt commitments are needed from the lenders prior to moving forward with a final bid.
Commitment Letters
- These letters are delivered, from the lenders, to formalize the commitment of the loan terms.
Lender Protections
- Usually, an unexpected event or downturn is an important condition. The inclusion of conditions provides protection for lenders—they don't "take the hit" for any negative events beyond their control.
Debt Commitment Letter
- Discusses what a firm commitment letter is and the roles of VPs and Associates in the process.
Debt Commitment Letter: Summary
- The purpose and critical features of a commitment letter in a private equity deal.
Operating Model
- A model often used in a post-LOI stage that provides detail and functionality to the business.
Investment Memo
- A significant document produced and presented, summarizing diligence findings and an investment thesis to gain support for moving on with the deal.
Pre-LOI IC Memo: Purpose, Process, and Role
- The purpose, deal process, and roles for a Pre-LOI IC memo.
Pre-LOI IC Memo: Summary
- Usually 25–100+ pages long—typically a presentation deck or memo covering a breakdown of the company, the diligence review findings, the key findings from accounting/legal diligence, summary return profile and full model.
Pre-LOI IC Memo: Content Deep Dive
- This section describes the various components of a pre-LOI IC memo.
Purchase Agreement (cont'd)
- A discussion of the elements important to a buyer.
LOI Exercise
- Practical questions for reviewing an LOI.
JoeCo LOI
- A description of the components and aspects of a typical LOI.
What happens if there is another open bid?
- If another offer or bid comes up, typically a winning LOI or agreement will supersede any existing offers; the exclusivity clause limits other bids until a final agreement is completed.
Post-Signing Climate
- The buyer-seller relationship typically shifts from one of collaboration to one that is usually more formal after the deal is finalized (though some tension can arise)..
Unsolicited Offers
- Sellers could incur liabilities if solicited offers are received during a term of exclusivity, especially in instances of bidding on better offers.
Break-Up Fees
- Fee amounts are predetermined and paid if a deal is terminated.
What happens if the buyer walks?
- The seller may have to start again with a different buyer, but with less negotiating power and/or reduced expectations to the possible bid terms.
LOI Flexibility
- In an LOI, there is still room for negotiations.
- If there is a dispute, the seller may renegotiate certain parts of the LOI, which usually drives a mutually favorable outcome.
Aggressive LOI Characteristics
- The aspects of an LOI (like fees, and associated liabilities) that may cause conflict during the closing stage.
LOI: Pro-Tips
- The critical points of diligence should be considered when constructing an LOI.
Why is working capital important?
- Working capital shows that a company will have the cash flow, and/or other resources available to continue its operations.
- Important for investors to determine if a deal can move toward finalization (due to working capital issues).
Working Capital Target
Working Capital Target Finalization
- Defines the working capital target level—based on the last 12 months of activity, which is typically based on the business's performance characteristics.
- This target is part of the purchase agreement. A "true-up" process may occur if the amounts at closing differ significantly from the target.
Working Capital Peg Negotiation
- Discussions regarding the definition of working capital are required.
Working Capital Composition
- The working capital peg will be reflected, but may not be reflected individually within the Sources & Uses section; rather, it is reflected in the net cash proceeds delivered on the closing date.
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Description
Test your knowledge on the role and content of a teaser in the private equity deal process. This quiz covers essential aspects such as investment highlights, risks, and considerations for pursuing deals. Determine your understanding of how teasers function in private equity transactions.
