Venture Capital and Corporate Venturing Quiz

Course Information

• Course title: Entrepreneurial Finance
• Course code: FNCE213
• Instructor: Dr Victor Ong DBA
• Affiliation: Lee Kong Chian School of Business, SMU

Course Format

• Presentation style lectures coupled with interactive discussions
• Video clips of private equity and venture capital topics from YouTube
• Case studies reviewed throughout the course
• Guest speaker session from the private equity and venture capital industry
• Assessments include:
  • Case studies
  • Midterm exam
  • Group project presentations
  • Final exam

Course Readings

• Ramsinghani: The business of venture capital (2nd Edition)
• Ippolito: Private capital investing: The handbook of private debt and private equity
• De Maria: Introduction to Private Equity, Debt and Real assets (3rd edition)
• Puca: Early Stage Valuation – A Fair Value Perspective
• Lecture slides available on ELEARN every Friday

Grading

• Class Participation: 10%
• Case Studies: 10%
• Midterm exam: 20%
• Group Project: 20%
• Final Exam: 40%
• Total: 100%

Instructor's Background

• Over 20 years of experience in energy and infrastructure investment (buy-side and advisory)
• Worked in multinational corporations (e.g., Royal Vopak, Trelleborg) and private equity firms
• Experience advising multilateral government-sponsored infrastructure funds
• Teaching experience at SMU, including courses on private equity, venture capital, and entrepreneurial finance
• Holds degrees from National University of Singapore, Alliance Manchester Business School, and Singapore Management University

Personal Hopes for the Class

• Sharing knowledge about private equity and venture capital
• Motivating students to pursue post-graduate degrees in the field
• Providing opportunities for internships in the private equity and venture capital industries
• Encouraging students to develop into PE fund managers or deal advisors/consultants

Life Cycle of a Venture

• Stages of new venture development: founding, seed, growth, and harvest
• Graph showing revenue, net income, and cash flow trends over time

Sources of New Venture Financing

• Chart showing various sources of funding for new ventures at different stages (R&D, Start-up, Early, Rapid Growth, and Exit)

Sources of Venture Financing

• Diagram showing overlapping circles for different sources of venture capital funding for different stages of a venture (e.g., friends and family, angel investors, seed funds, venture funds, private equity, etc.) at different investment amounts

Un-intermediated Finance

• Business angels and corporate venture capital (CVC) investing directly into portfolio companies

Business Angels

• Affluent individuals providing capital for start-ups
• Usually in exchange for ownership equity or convertible debt
• Investment gap between friends and family financing and venture capital
• Investment amounts range from thousands to millions
• Typically shorter investment horizons than venture capital firms

Incubators and Accelerators

• Supporting new businesses to attract VC investment
• Incubators focus on disruptive ideas; accelerators focus on scaling existing companies

Corporate Venturing

• In-house VC programs (funds, incubators, and accelerators)
• Facilitating the development of new businesses in a quicker and more flexible manner than traditional R&D
• Aimed at gaining strategic benefits rather than maximizing profits for VC strategies

Intermediated Finance

• Venture capital funds invest in high-growth startups with little or no leverage
• Buyout funds invest in mature, established companies, employing significant leverage
• Limited partners (LPs) invest in funds; general partners (GPs) manage the fund
• Entrepreneurs receive funding through a fund vehicle

Introduction to Entrepreneurial Finance (Session 1)

• No dedicated information

PE and VC Investment Industry Definitions

• No dedicated information

Private Equity Industry Snapshot

• Global PE assets under management are projected to reach 8.5 trillion by 2028
• 2024 alternative reports

Private Equity Deal Flow and Realizations

• Figures visualizing PE deal flow and realizations trends over time

Venture Capital Fund Raising and Dry Powder Status

• Charts showing fundraising trends and dry powder in venture capital

Private Equity Stakeholders

• General partners (GPs) manage PE funds; limited partners (LPs) invest in them
• Compensation for GPs typically includes management fees and carried interest
• Key stakeholders also include pension funds, endowments, financial institutions, insurance companies and sovereign funds

Private Equity Returns and Business Model

• PE funds typically have a 10-year investment horizon
• Top-quartile PE managers have demonstrated performance persistence

Top 20 PE Firms by Capital Raised

• Table listing leading private equity firms and their capital raised in the last 10 years

PE Remains as the Highest Performing Asset Class

• Graph illustrating PE's historical outperformance of other asset classes

Outperformance of Private Equity 

• Data visualizing Private Equity's outperformance relative to other investments

Annual PE Returns

• Correlation analysis reveals negative correlation between PE returns and S&P 500 returns

Correlation Analysis of Traditional and Alternative Asset Classes

• Tables displaying correlation analysis data for various assets, including private equity

PEVC Fund Structure

• Diagram illustrating the structure of a PE/VC fund (Warburg, Pincus & Company; Limited Partners; Insurance Pension Funds; Other Venture Funds)

Private Equity Structure

• Diagram illustrating the 2 & 20 fee structure of a Private Equity firm

How a Waterfall Distribution Works

• Illustrative diagram depicting how distributions are made to LPs and GPs based on hurdle rates

Waterfall Distribution with Catch Up Feature

• Detailed example illustrating LP and GP payouts with a catch-up mechanism

J Curve Effect in PE

• Chart demonstrating a J-curve pattern in PE investments, starting with negative returns, then eventually showing positive returns

PE Fund Types and Strategies

• Detailed summary of various PE fund types and strategies (Buyout funds, Growth/Pre IPO, Co-investment, Secondaries, PIPE, Infrastructure and Real estate PE Funds, Fund of funds)

PE Strategies (Continued)

• Explanation of various PE strategies, including different types of buyout funds, growth investments, co-investments, secondaries, and PIPE investments into public equity.

PE Strategies (Continued 2)

• Description of private investment into public equity, infrastructure and real estate investments

Overview of PE Fund Strategy Performance

• Charts comparing performance of different PE strategies using different performance metrics such as multiple and DPI

Investor Preferences on Fund Strategies

• Graph showing investor preferences for different fund strategies in Asia

Venture Capital

• Startup financing through capital exchange for equity
• Methods of exit include sale, IPO and strategic partnerships
• Various VC firms are discussed: Cisco and Intel capital, Singtel ventures, SPH ventures

Choosing a Venture Capitalist

• Guidelines and considerations for selecting a VC (financial strength, management style, network, exit strategy, VC with Singapore presence)

Venture Capital Investment Stages

• Stages in venture capital investment: seed, early, Series A & B, and Late Stage (Series C)

Top 20 VC Firms by Capital Raised

• Firms and their respective capital raised in the past 10 years

Venture Capital Deal Numbers by Stage

• Charts displaying VC deal numbers across different stages over time, highlighting the relative number of funding deals in earlier stages

Family Offices

• Investment vehicles set up by family-owned or controlled businesses
• Aim for long-term sustainability and diversification outside the core business
• Primarily focused on lower amounts of investments
• Employing mostly family members in some cases and hiring professionals in many cases

Multilaterals and Sovereign Investors

• Institutions supported by state governments
• Multilaterals like the World Bank and IFC invest directly in infrastructure projects
• Sovereign wealth funds have a significant presence in the PE market

Top 10 Sovereign Wealth Funds Globally

• Table listing the top 10 Sovereign wealth funds and their assets, inception date, and origin

PE Investment Process (Overview)

• Cyclical process: sourcing, selection, negotiation, and monitoring

Steps from First Contact to Deal Conclusion

• Detailed steps from initial contact to deal completion stages

PE and VC Governance - Investment Committee

• Structure and functions of an investment committee
• Key tasks for deal approval and oversight

Class Activity 1

• Hypothetical scenario: setting up a PE investment program with $500 million allocation

Performance Measurement

• Different tools for PE fund performance evaluation
• Importance of understanding how the different tools work
• Comparison of PE versus Mutual funds & listed funds

Performance Measurement (Continued)

• Further exploration of Net IRR, Multiple, DPI, RVPI, and PME metrics

Performance Measurement (Continued 2)

• Further exploration of these valuation metrics for PE funds within investment horizons

Performance Persistence in PE

• Academic research and persistence of top-quartile PE performance findings

Performance Persistence in PE(Continued)

• Concerns from academic research on PE performance measurements

Class Activity 2

• Hypothetical scenario: an LP evaluating investments across different PE funds

Concluding Remarks

• Course wrap up, expectations, and Q&A session

Fund Raising and Deal Sourcing Process (Session 2)

• Fund raising process as not a glamourous process
• Steps in Fund Raising Process: Prepare- Soft-Launch - First Close - Final Close

PE and VC Fund Raising Issues

• Difficult and stressful for GPs.
• Steps in Fund Raising: Private Placement Memorandum; Subscription agreement; Limited Partnership Agreement; General Partner agreement; Side letters;

Fund Raising Process - Not a Fun Process

• Common concerns for fund managers

Fund Raising Process Stages

• Preparing for a fund raise
• Soft launch: Meeting with investors, seeking feedback and obtaining soft commitments
• First close: Reaching the target or percentage set for the fund to be fully invested
• Final close: occurs within 12 months of the first close

Fund Raising Process - The Mechanics

• Details of paperwork and procedures in a fundraise

Fund Marketing Materials - PPM

• Preparation of a Private Placement Memorandum (PPM)

Fund Marketing Materials - PPM (Continued)

• Sections of a PPM, emphasizing the importance of the presentation deck and executive summary

Presentation Slide Deck

• Presentation guidelines for fund raising

Key Fund Terms

• Fund Size, Commitments, Investment Strategy, Industry Focus, Geographic Focus, Term, Investment Structures, and Portfolio construction and governance are all analyzed

IPO Underpricing Issues

• IPOs generate strong returns but can be underpriced
• The goal is for the stock price to rise on the first day for the benefit of investors and underwriters

IPO Underpricing Issues (Cont'd)

• Money left on the table: company to investors

Private Exchanges

• Description of private exchanges (intermediaries)

Special Purpose Acquisition Company

• IPO structure for acquiring or merging with other companies

Exits through Secondaries PE Transactions

• Secondary transactions in the PE market

Valuing Secondary Stakes

• Methods of estimating the secondary price of a PE transaction through discounting future cash flows

Example of a Secondaries Deal Valuation

• Hypothetical secondary market valuation example

Process and multiple skillsets in PE and VC

Investment stages

• Illustration of the skillsets required at different stages of PE and VC investment lifecycles

Bloomberg Article Discussion

• Discussion points based on a Bloomberg article focused on IPOs

Class Activity 1

• Hypothetical scenario: A seasoned PE fund manager team setting up their own fund

Class Activity 2 (Cont'd)

• Further hypothetical scenarios: How to negotiate the scope of engagement and fee structure for deal advisory firms

Concluding Remarks

• Course wrap-up, expectations, and Q&A session

Course Wrap Up and Review (Session 11)

• Recap of the course coverage
• Hypothetical case studies and discussion questions

Case Study 4 - Discussion

• Case study: Usertip - startup that provides training modules for company staff

Course Coverage and Focus Areas (Cont'd)

• Review of the course structure & important topics

Group Project Presentation Briefing

• Presentation guidelines and requirements for group presentations

Final Exam Briefing

• Exam guidelines are laid out (length, specifics)

Hopes and Expectations for the Course

• Student expectations for the overall course
• Opportunities for future engagement in the PE/VC sector

PE Performance and LBO Analysis (Session 6 and 7)

• Principles of Performance Attribution
• Value Attribute Analysis

Performance Metrics

• Overview of metrics used to evaluate PE fund performance (Net IRR, Multiple, DPI, RVPI, PME)

LBO Method and Analysis

• Background information on Leveraged Buyouts (LBOs)

Video Clips Time – LBOS during the 80s

• Visual aids showing examples of LBOs via videos

Different Types of LBO

• Different types of LBO situations

Typical LBO Candidate

• Characteristics of companies that are commonly acquired via LBOs

LBO Scenarios

• Scenarios under which LBOs occur

Some more reasons for LBO deals

• Various reasons why companies initiate an LBO

LBO Capital Structure - Sources and Uses

• Different sources of capital for an LBO
• How capital is utilized in an LBO transaction

Financing Instruments in an LBO

• Financing instruments typically used in LBOs (Senior Debt, Subordinated Debt, Mezzanine Financing, Equity)

Recapitalization Definition

• Description of leveraged recap

Management Buyout (Envy Ratio)

• Applying the Envy Ratio in a buyout context – relationship between equity ownership prices by private equity investors versus the managers.

LBO Analysis: Buy-side and Sell-side

• Discussion of the analysis from both sides of an LBO context

Procedural Steps of an LBO Analysis

• Qualitative and Quantitative steps required for valuing companies acquiring through LBOs.

A Simple Example of an LBO Deal

• Walkthrough of a hypothetical deal based on the characteristics identified previously

More Advanced LBO Model (Excel Model Run)

• Details about running a more advanced LBO model in excel

How Can Sponsors Boost LBO Returns?

• Various strategies for promoting LBO returns

Case Study: Acquisition of RJR Nabisco 1988

• Detailed analysis of one particular successful LBO case

Case Study: Acquisition of Celanese by Blackstone

• Detailed case analysis of a major buy-out

Attempted MBO of a Listed SGX Company

• Detailing another major case analysis (MBO)

Private Capital Investment Differences

• Comparison of VC, Growth Equity/Pre-IPO, and LBO deals

Class Activity 2

• Discussion points to consider for a later LBO and VC analysis

Concluding Remarks

• Course wrap-up, expectations, and Q&A session

Case Study: Mobike

• Detailing a case study on Mobike – a bike sharing business in China

Case Study: Mobike (Discussion Board)

• Discussion around the implications of Mobike-related investments

Case Study: Actis

• Detailed analysis of the Actis case study – detailed scenario-based approach and considerations

Case Study: Actis (Cont'd)

• Further discussion points related to the Actis case study

Case Study: Actis (Discussion Board)

• Continued discussion relating to Actis case

Extra Knowledge: PE Performance (Doctoral Research)

• Focus on dissertation coverage topic

Proposed Research Hypotheses

• Research hypotheses for a study on PE fund returns

Data and Methodology

• Data handling: Data sources, variables used (including detailed variables)

OLS Baseline Regression Model

• Details of regression model for testing hypotheses

OLS Baseline Regression Model Findings

• Summarizing major findings from the regression model in respect of PE fund performance

OLS Main Regression Model

• Details of the main, more complex regression model

OLS Main Regression Model Findings (Cont'd)

• Additional findings from the main regression model, including detailed statistics

Geographical Diversification and PE Returns

• Analysis of various findings using various data visualization methods relating to graphical representation of data

Deal Structuring in PE and VC (Session 9)

• How deal structuring works in PE and VC, as well as the factors of deal structuring

Stress Points: Differing Goals of Entrepreneur and Investor

• Potential stress points in deal structuring between investors and entrepreneurs

Investment Structure in VC Deals

• Different forms of VC investments

Structuring to Generate Target Returns

• Key factors in structuring a PE or VC deal

Deal Documentation

• Detailing important documentation types in a deal sourcing

Letter of Intent (LOI), Term Sheet and Legal Docs

• Importance of legal documentation for a PE transaction

Share Purchase Agreement (SPA)

• Describing the elements of a Share Purchase Agreement

Share Purchase Agreement (SPA) Cont'd

• Further detailing about the SPA process

Shareholders Agreement (SHA)

• Provisions common to Shareholders Agreements

Shareholders Agreement (SHA) (Cont'd)

• Further details related to Shareholders Agreements

Case Study: Brazos Partners

• Detailed analysis of a case study on Brazos Partners in relation to leveraged buyouts

Case Study: Brazos Partners (Cont'd)

• Discussion points relating to the Brazos Partners case study and its implications

Some Best Practices in PE and VC Management

• General best practices during investment (fund governance, management, and operations)

Bloomberg Article Discussion

• Discussion points on the shift of PE focus

Class Activity

• Specific case study exercises used to analyze real-life PE and VC transactions

Concluding Remarks

• Last session summary