Advanced Private Equity, Leverage Buy-Outs and Advanced LBO Modelling 5-Day Masterclass

£3,000.00 +VAT

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This course can also be presented face to face in-house or via live in-house webinar.

Advanced Private Equity & Advanced LBO Modelling Course Objectives:

Participants will:

  • Be introduced to the PE value creation model and PE fund structures
  • Get an overview of the acquisition: adding value and reducing the risk at entry
  • Have explained to them how to select the right investment with the 5 critical issues to sponsors
  • Master how to negotiate the deal with the management team
  • Gain an understanding of the key issues for sponsors and management
  • Learn about the financing options for private equity houses
  • Be appraised of the key issues for senior debt
  • Be taught about how to negotiate the optimum debt package (including lender and borrower approaches)
  • Have an overview on the different debt instruments – mezzanine, unitranche, second lien, PIK loans and high yield notes
  • Learn about the LBO Market and the effect of leveraged on the value of a business
  • Get an overview of the LBO process, including how to determine the capital structure and assess the value creation.
  • Have explained to them how to value the target by sourcing information, building a DCF valution and comparing and contrasting DCF and the LBO model structure
  • Master the key elements of an LBO model including debt waterfalls
  • Gain an understanding of the debt capacity for LBO financing
  • Learn about the capital providers and their typical characteristics
  • Analyse value creation in a transaction

Course Content:

Day 1  of the Advanced Private Equity & Leverage Buy-Outs

Introduction to Private Equity: The PE value creation model; PE fund structures

Introduction & background

  • Overview of the PE market
    • Venture capital
    • PE / leveraged deals
  • The three stages of the deal
    • Entry, operations & exit
  • The traditional PE value creation model – the 3 key value drivers
  • Techniques for enhancing returns
    • Capital structure’s impact on value
    • Using soft exits recaps / refinancings
    • Equity bridges
    • Leveraging the fund

Structuring issues & structuring parameters

  • Structuring issues
    • Taking security / collateral generally
    • Security contrasted: UK vs Europe vs USA
    • Financial assistance
    • Ranking & priority of senior vs junior debt & pari passu loan/bond structures
    • Tax issues – group tax relief & thin cap
    • Squeeze-outs
  • Spectrum of financing instruments in LBOs – overview
  • Structuring parameters – creating an appropriate financial structure (overview)
    • Percentage senior, junior and equity in debt capital structure
    • EBITDA multiples
    • Target returns for Private Equity & mezzanine funds
  • Deriving the funding structure
    • Funding uses
    • Funding sources

Structure and key terms and trends for Private Equity funds

  • Review of typical (Luxco) fund structure
  • Key terms & conditions
  • Investment period (how long)
  • Preferred return (rate, calculation)
  • Carry (European vs US approach)
  • How Private Equity fund structures optimise value
  • Hot topics for LPs & GPs

Generating and originating deal flow

  • Why proprietary origination matters
  • Deal sourcing strategies
  • What makes a good originator
  • What motivates intermediaries
  • What motivates target’s / sellers
  • How the “right type” of specialisation can boost returns
  • Three ways to use networks
  • Identifying “exit signals” from various sources
  • Why & how social media matters

Case Study: Calculating the entry and exit value, the funding sources, the basic approach to deriving the equity split between PE and management on entry and exit and introduction to estimating the correct capital structure

The Acquisition:  adding value & reducing risk at entry

The Acquisition – offer structure

  • Offer structure – cash free, debt free with normalised working capital/net asset value etc
  • Risk matrix – analysis of the five key value drivers / areas for due diligence
    • Cash & trapped cash
    • Debt – what’s included?
    • Working capital (key to the deal?)
    • Capex
    • EBITDA (the good news & bad)
    • Establishing the run rate
  • Value matrix – techniques for mitigating the risks and identifying value
  • SPA structuring – Locked box vs Completion accounts
    • Pros & cons of each
    • How it can affect value
    • Risk in Locked box

Day 2 – Advanced Private Equity & Leveraged Buy-Outs

Case Study: Identifying problematic items in reconciling equity value to enterprise value and the correct approach to calculating the correct level of working capital

Adding value during the operational stage

Selecting the right investment – the 5 critical issues to sponsors

  • Portfolio fit
  • The business model
  • Management – what PEs approach
  • Approach to generating value/returns
  • Exits – hard vs. soft
  • How to avoid the value trap

Case Study: Calculate the exit value and discuss how structuring the PE equity can affect the returns of management

Adding value: operating partner models

  • The new value-creation model – 4 key areas
  • Operational improvements – 6 aspects
  • 7 Methods PE can add value via teaming up with executives
  • The operating partner model (3 approaches)
  • The operating partner model in practice – “typical” role

Liquidity events

  • Hard exits vs soft exits
  • Exit strategies – using dual or triple track to enhance value
  • IPOs
    • The key ingredients for IPO
    • What about the management – problem areas
  • Sale of equity – partial vs complete sale
    • Problem areas – trade vs secondary PE deals
  • Soft exits – a useful way of enhancing returns
    • Refinancings & recaps
    • Other ways of extracting value
    • Management and other fees

Case Study: Discuss the pros and cons of a dual/triple track exit strategy and the key issues to both the PE and management

Negotiating the deal with management team:

Key issues for Sponsors

  • Structuring the equity
    • Structure – loans, preference shares
    • Typical returns
  • Structuring the payment waterfall
    • Issues for management
    • Differences in primary and secondary deals
  • Equity ratchets
    • Rationale, structure
    • Pros and cons of positive vs. negative, stepped vs. linear

Key issues for Management

  • Multifaceted role and duties of management
    • Issues vis-à-vis role as director, employee, shareholder, warrantor
  • Key documents & terms
    • Shareholders’ agreement vs articles/ statues (pros & cons)
  • Critical issues in the investment agreement
    • Good vs. bad leaver
    • Management warranties
    • Equity – valuation issues pre exit (why “fair value” is dangerous)
    • Transfer issues – drag, tag-along rights
  • Critical issues in the service agreement
    • Restraints
    • Termination

Financing options for PEs

Introduction & overview of the funding spectrum

  • The spectrum of financing options for borrowers
  • Review of typical debt structures in the market for all deals sizes
  • Senior only
  • Senior/ junior structures
  • Pari loan bond structures
  • Loans vs Bonds – whats the difference (maintenance vs incurrence covenants)

Senior loans: key facilities & issues

  • “Typical” terms
  • The main facilities
  • RCFs – why they matter & typical pitfalls
  • Capex facilities
  • Margin ratchets

Mezzanine key terms

  • Is there still a market for mezzanine
  • Pros and cons
  • Use an application
  • Rationale of warranted vs. warrant-less
  • “Typical” terms

Unitranche / direct lending financing

  • Review of the various market structures
  • “Typical” terms
  • Pros and cons
  • Use and application – where they work and where they don’t

Second lien loans

  • “Typical” terms
  • Pros and cons
  • Use and application

PIK loans (making a comeback)

  • “Typical” terms
  • Why has the PIK market spring to life
  • Pros and cons for sponsors
  • Use and application

Day 3 – Advanced Private Equity & Leveraged Buy-Outs

High Yield Notes

  • Spectrum of instruments
  • Pros & cons of high yield and why they appeal to borrowers
  • Use and application
  • Loans vs bonds compared
    • Loans’ maintenance covenants vs Bonds’ Incurrence covenants

Case Study: Reviewing a capital structure and how different instruments can be used to optimise the capital structure, provide more head room and handle capex

Negotiating the optimum debt package – Lender’s vs Borrowers

Negotiating the debt package – The lender’s approach

  • The Lender’s approach to credit decision
    • measuring debt capacity
    • security over assets
    • exit routes
  • Different types of lenders: Banks vs Alternative lenders
    • Whats the difference
    • How and where it matters
  • Overview of loan documentation and impact on deal
    • Loan as a radar system
    • Typical structure
    • Key parties (obligors, borrowers and guarantors)

Negotiating the debt package – The borrower’s approach

  • The four deal scenarios and the role of due diligence
  • The key financial ratios / covenants
    • Cash flow cover
    • Leverage
    • Interest cover
    • Capex
  • Selecting the appropriate covenant for the deal; borrowers v lenders
    • Do covenants really matter – if so how, when & where
  • Step 1: How to identify the borrower’s objective
  • Step 2: Identifying the key requirements for the borrower
  • Step 3: Deciding on which type of debt & lender is most appropriate
    • Loans v bonds
    • When and where to use junior debt
  • Step 4: Strategies for negotiating with lenders
  • Step 5: Getting what you paid for
  • Inter-creditor issues – review of key issues

Case Study: Calculate the exit value and discuss how structuring the PE

Days 4 & 5 – Advanced LBO Modelling

Leverage Overview

  • Background to the LBO market
  • Introductory theory – The effect of leverage on firm value

Valuing the target

  • Sourcing information – Historic and forecast data
  • Analysing equity research
    • Key attributes of broker analysis
    • Pluses and minuses of equity research
  • Building a DCF valuation using equity research
  • Modelling the stand alone valuation
    • DCF valuation
    • Use of multiples in valuation (EV/EBIT, EV/EBITDA)

Case Study I: Participants model the stand alone valuation of the target using historic data and equity research

LBO Modelling Overview

  • Key elements of an LBO model
    • Comparing and contrasting DCF and LBO models
    • Sources and uses of funds
    • Key drivers in an LBO model
  • From stand alone valuation to LBO analysis

Case Study II: Participants use the stand alone valuation of the target to complete an LBO model

Assessing debt capacity for LBO financing

  • Financial interdependencies
  • Financing growth
  • Sustainable debt
  • Target debt capacity assumed in a WACC calculation, debt capacity and interest cover Debt capacity in LBOs
  • Debt capacity multiples in practice and credit analysis

Case Study III: Modelling the debt capacity of the target using multiple and credit analysis

Capital providers and their typical characteristics

  • Institutional and management equity
  • Traditional/new lenders
  • Senior tranche profiles
    • A, B, C, RCF
  • Subordinated tranche profiles
    • Second lien
    • Mezzanine (with/without warrants)
    • PIK
    • High yield bonds
  • More complex issues – warrants and options
  • Typical LBO transaction sensitivity analysis, management, base and payout cases

Case Study IV: Modelling a more complex capital structure with various scenarios calculating exit value and IRR for each of the capital providers

Assessing value creation in LBO transactions – APV analysis and dividend recaps

  • Key components of an APV valuation
    • Unlevered value
    • Value of the tax shield
    • Direct and indirect cost of leverage
  • APV valuation and DCF valuation
  • APV valuation in a steady state
  • Calculating AP in a steady growth environment
  • Incorporating APV analysis in an LBO transaction analysis
  • Sustaining returns via a dividend recap

Case Study V: Where has value been created, modelling APV analysis and dividend recap for an LBO transaction

Background of the Trainer:

The trainer is a consultant, public speaker and author. He provides training programmes globally to a blue-chip client base on private equity, debt finance, loan documentation and restructuring. He is a senior consultant with Debt Xplained, with Grant Thornton UK (Debt Advisory) and is also a Senior Advisor to KPMG Finland.

He has spoken at conferences in the UK, Europe, Australasia & South Africa. He provides training to a wide range of clients on a bespoke in-house basis & publicly through Redcliffe Training Associates. Additionally, he is the Programme Director for the infrastructure/project finance module for the MBA programme at the Cass Business School in London.

Course Summary:

This programme provides participants with a comprehensive view of private equity, particularly the various types of buy-outs (e.g. LBOs, MBOS).  The programme takes participants through all the major stages of the deal; from entry, through the operational phase to exit (liquidity events).  In doing this the course provides insight into how the PE firm can add value to the process at each of the three major stages. To do this it approaches PE from the respective perspective of all the main protagonists; Private equity professionals, lenders and other providers of debt financing; the various professional advisers (lawyers, accountants in due diligence or audit), corporate finance advisors and management teams looking to enter or exit the market. It will also appeal to investors who may wish to invest directly (co-invest) or indirectly (via funds) in different parts of the debt or equity capital structure, such as pension funds, insurance companies, private family offices and corporates who are trying to understand the radically different business model of their PE competitors

Whilst simple in theory private equity, the highly competitive nature of the PE market means that adding value can no longer be achieved by leverage and reliance on rising markets.  The course covers the three key stages of PE value creation. Stage 1; the acquisition, where it is vital to structure the transaction in the optimal fashion in terms of both the Offer to minimize risk. Disastrous mistakes can be made ab initio by failing to understand the main risk areas of the equity bridge (i.e. the value traps from enterprise value to equity value) or in the completion method (e.g. locked box rather than completion accounts).  Developing the optimal capital structure is a critical as it is essential to use both the correct level of debt for and the most appropriate type of debt that will allow the company to achieve its business plan (e.g. organic growth or buy and build).

The second stage requires the PE firm to add value during the operational phase and here there is much the PE firm can do in terms focusing on operation improvements. These do not occur in a vacuum and require the best management team. Top quartile PE firms have large in-house teams to assist them in the process but smaller firms can achieve the same results through different “operating partner” models. In the current seller friendly environment, deal origination is another key point of differentiation between top quartile teams and the course reviews various ways of approaching this issue

The third and final stage relates to liquidity events however PEs have the luxury in the current market of opting for soft as well as hard exits to generate value for LPs.

The programme adopts a pan-European approach to the topic but the presenter has experience of PE in other jurisdictions including, USA, Asia Pacific and Africa. Reference will be made to current trends and data in the markets across Europe.

Participants will be provided with numerous case studies to reinforce the various aspects and will also be provided with an LBO model which will be used to structure a transaction. Post the course participants will receive a number of other PE related models (e.g. how to calculate warrants and ratchets) as well as current review of debt trends in the debt market.

The fourth and fifth day of the course covers the key elements of modelling in an LBO analysis. Participants will value the target business using historic data and available equity research. The valuation process will incorporate absolute and relative valuation techniques. Once the target business has been valued, participants will be introduced to LBO analysis and construct an LBO model. The LBO modelling analysis will be developed by assessing the debt capacity of the business to determine the range of capital structures available for the transaction and how credit analysis is used in the LBO modelling process.

The participants will then cover more complex LBO instruments such as warrants and PIKs, how they can be incorporated into an LBO structure and how to calculate returns to each of the equity and debt providers. Participants will model a more complex capital structure and calculate exit values and the IRRs generated by each investor. Using the integrated model participants will then analyse various scenarios (management case, base case, payout case) to derive the optimum financing structure taking into account the financial constraints of each investor.

The participants will then undertake an adjusted present value (“APV”) analysis to determine where value has been created in the LBO transaction using an APV model and finally look at a recovery analysis for a failed LBO transaction.

Case Study: The participants will use a variety of case studies and exercises during the two days, based on publically quoted and generic companies.

Participants will be required to bring a laptop and a calculator to the course.

What Redcliffe’s clients are saying about the course:

 

“Practical approached combined with a great Trainer”

— Senior Associate, KPMG

 

“Case studies and build-up of the models were good”

— Associate Director, Barings

 

“Highlighting theory as well as practice was good”

— Investment Associate, Bridgepoint

Great presentation! Very Good!”

   — Head of European Portfolio Operations, The Blackstone Group

 

 

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Discounts

5-6 participants – 20% discount,7-8 participants – 25% discount,Over 9 participants – 30% discount

Select-your-course-date

12-16 November 2018, 11-15 February 2019, 24-28 June 2019, 4-8 November 2019