The Mechanics of Private Equity: Demystifying Private Equity Fundamentals and Leverage Buyout (LBO) Valuation Modelling for Startup Founders, Entrepreneurs, Fund Managers, and Investment Bankers - Softcover
Synopsis
Private Equity is the single most important source of twenty-first-century wealth creation; many billionaires can trace their fortunes directly back to Private Equity. The best-known are those associated with Blackstone Group's Stephen Schwarzman and KKR's Henry Kravis and George Roberts. The co-founders at Carlyle are led by David Rubenstein, William Conway, and Daniel D'Aniello, while Apollo Global Management has Leon Black.
The Forbes Billionaire list is cluttered with individuals with backgrounds in Private Equity or fortunes tied to Private Equity. Despite such an impact on the Global economy and the markets, Private Equity functions behind closed doors.
The Mechanics of Private Equity aims to offer practical advice and closely examine the inner workings of a clandestine and lucrative asset class.
As part of "The Mechanics of Private Equity Advantage," you will be granted access to all the Leverage Buyout (LBO) Excel Models created within this title to enhance your learning experience.
This title suits any finance enthusiast, rookie investment banker, founder, or business owner. Its concept combines theoretical knowledge and hands-on experience through multiple case studies tailored to varied skill sets with detailed Excel Models.
In this book, you will learn:
- Basic Principles of Private Equity - Learn the bare essentials of what you need to know to talk with confidence about Private Equity
- Sourcing Deals - Understand how private equity funds source deals for proprietary and process-driven deals.
- Executing investments - Obtain information about the investment process in new private equity fund deals.
- Portfolio Management - Explain how private equity funds generate value from their portfolio.
- Exit Investments - Use specific examples to show how private equity funds sell their investments and book the associated profit.
- Private Equity Fund Considerations - Learn the basic principles of how funds are managed and should be benchmarked
- Breaking into Private Equity: Learn the strategies already known to improve your chances of being hired in the private equity industry.
You will learn how to respond to practical questions like maximum debt capacity, lenders in an LBO, and types of value creation LBO strategies.
Deep-diving into the following case study - Dell's legendary LBO deal, known as the "Deal of the Century."
- Carry out two in-depth Leveraged Buyout case studies to give firsthand skills, such as "hands-on skills," and bridge the apparent gaps between theoretical principles and their realizations.
- Napkin LBO, Master of the art of putting together a Simplified One-Page Financial Model, is commonly used in investment banking interviews; hence, it is excellent for beginners to get their basics right.
- Sophisticated LBO Modeling Practical Case Study (Excel Models Included) - Develop detailed financial models, including transaction costs, goodwill, fixed asset roll forward, P&L, balance sheet, cash flow, Equity, and debt schedules.
- Enhancing your financial modeling skills while executing an involved, multi-layered LBO valuation is what distinguishes players in this intensely competitive field known as finance.
"synopsis" may belong to another edition of this title.
About the Author
Umran Nayani, MBA, is the #1 Best-Selling Author of 15 titles on Entrepreneurship and Finance. While he has an apparent flair for making money, he is adept at demonstrating how to do so. Over 141,000 students from 185 countries concur. Umran bootstrapped his first crowdsourcing startup in 2013 and grew it to multiple eight figures in less than three years. He is currently focusing on building a World-class Publishing and Licensing Empire.
From the Back Cover
The Mechanics of Private Equity aims to offer practical advice and closely examine the inner workings of a clandestine and lucrative asset class.
I designed this title for finance enthusiasts, aspiring investment bankers, founders, and business owners. It provides theoretical knowledge and hands-on experience through multiple case studies, catering to various skill levels.
In this title, you will learn:
Core Principles of Private Equity - Discover the absolute essentials of what you need to know to speak confidently about private equity
Sourcing Deals - Dive into how private equity funds source deals for both proprietary and process-driven deals
Executing Investments - Learn about the investment process for new deals at private equity funds.
Portfolio Management - Understand how private equity funds create value within their portfolio.
Exiting Investments - Use practical examples to understand how private equity funds sell investments and realize profits.
Private Equity Fund Considerations - Understand the core concepts of how funds are operated and benchmarked
How to Break into Private Equity - Discover the established strategies to optimize your likelihood of entering the private equity industry.
Leverage Buyout Deep Dive - This title will help you Gain a solid foundation in leveraged buyout theory and learn about the complexities of LBO transactions, including various financial instruments, covenants, and structures.
Be able to answer practical questions such as determining maximum debt capacity, the lenders in an LBO, and the different types of value creation LBO strategies.
Go through a case study of Dell's legendary LBO deal named the "Deal of the Century."
Engage in two comprehensive Leveraged Buyout (LBO) case studies to cultivate practical expertise and close the divide between theoretical understanding and actual implementation.
Master crafting a 'Napkin LBO' - a simplified one-page financial model often requested in investment banking interviews, perfect for beginners to grasp the essentials.
Step-by-Step LBO Modeling with Excel Models - Dive into a more intricate LBO valuation, building a comprehensive financial model involving transaction fees, goodwill, fixed asset roll forward, P&L, balance sheet, cash flow, equity, and debt schedules.
Enhance your financial modeling expertise while working on a sophisticated, multi-layered LBO valuation, setting you apart in the competitive world of finance.
From the Inside Flap
Chapter 2. What does Private Equity mean?
Private equity differs from other asset class types because of certain key factors. The first is that they actively inject capital into businesses. Private Equity funds raise capital from Limited Partners. The money raised from Limited Partners (LPs) is put together to be invested in different businesses. These investments form the Private Equity fund portfolio. Businesses usually need money or cash to grow faster and make money over time.
The goal of a PE fund would be to invest capital, take majority control, overhaul the operations, improve efficiencies within the company, and increase the entity's value. This means that when a private equity firm tries to sell their share or the whole business, they'll get a good return on their investment .
The second thing that separates private equity funds is that they are close-ended. What I mean is that they will die at some point. It could be five years, seven years, ten years, or more. It depends on what they're putting their money into and how far along the companies are. What these funds do share, though, is that they all want to put money into businesses and make those businesses more valuable. At the same time, they're owned, and then those businesses are sold for a profit.
Third, you should know how the fund manager (called the "General Partner") works with the clients (called the "Limited Partners"). These investors include family offices, pension funds, sovereign wealth funds, and endowments. General Partners, i.e., the Fund Managers, are in charge of running the funds day-to-day, monitoring the investments in the portfolio, and managing the whole portfolio. This can also mean making investments, nurturing investments, and finally exiting those investments.
What does the Private Equity value offer look like?
I see this in two different ways. The first question is why investors, or LPs, who put money into private equity funds like it the way it is. In the past, it's been because they offer attractive and uncorrelated returns. By "attractive," we mean that private equity returns have usually tried to provide a 20 to 30 percent annual rate of return in terms of percentage. By "uncorrelated," we mean that when the stock market or public markets go down a lot, private equity provides a buffer against the losses and volatility.
As for why companies would want to do it, why would they want to borrow money from a private equity fund? This is because private equity funds and those who run them, called fund managers or GPs, can offer more than just money. They can also provide strategy advice and their knowledge. They've done this many times, mainly with other businesses in the same general field. Because of this, they can help these owners and management teams make money and grow their businesses.
The Stages within Private Equity.
Just about every PE fund will go through these five straightforward steps. The first is "Fundraising," i.e., "Getting Money." The General Partner needs to get funds from Limited Partners for a new closed-end fund. There is also something called "Investment" time. This is where the fund manager has the chance and time—usually a couple of years—to put the money into a few companies that fit the investment criterion.
For example, if it's to invest in tech startups still in their early stages, that's what they should be doing then. After the money has been put in, they start managing the stock. This means that the focus changes from looking for investments to caring for them. They need to find ways to make the companies they've invested in more valuable. Usually, there are three ways to do this: maximizing and speeding up growth, tackling and achieving profitability, and maximizing the capital structure, which could mean taking on more or less debt or putting more or less equity into the business.
Finally, they will sell all of their shares in the portfolio. We can see this happen in two main ways. The first option is to sell the company to a prospect. Offer shares to the public in an Initial Public Offering or IPO. They could also go through a sales process. The message could be to a strategic investor or another private equity fund that says the investments still have room to grow and make money. That business works in the same field as the one trying to sell. That means it might have some monetary value.
Once everything is finished, they can return the limited partners' capital. Not just the original capital, but hopefully some return, preferably a very good return, since they had to keep their capital in the fund for so long. An above-a-hedge return means that the general partner has reached a certain rate of return. Of course, this is eight percent a year. We will talk about that later. The fund manager will then get a share of the extra gain, which is the return over the limit rates over the fund's lifetime.
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