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The world of financing entrepreneurial ventures, providing insights into investment strategies, risk assessment, and portfolio management for venture.
A due diligence question that includes understanding the market environment and the external factors affecting the business.
This legal due diligence provides a summary of any pending litigation, history of past litigations, and what may arise in the company, such as environmental, employment, customer or worker compensation issues.
One restrictive characteristic is that it is often not pre-payable by the company for a few years, so that high yield debt investors can lock-in their high interest rate for at least a couple years.
This legal due diligence includes a detailed review of key operating or capital leases.
A characteristic of an LBO firm that is crucial to success as private equity firms will provide strategic guidance but will almost exclusively rely on management to execute their operating strategy.
This legal due diligence understands any potential liabilities the business is exposed to in its environment while conducting the day-to-day processes, such as hazardous material or toxic waste.
Examples of a good LBO candidate include selling underperforming assets, increasing the efficiency of operations, pricing optimization, organizational structure, and diversifying the customer base.
As PE firms grow their capital base from funds, they are able to grow the firms, as a result of the increased fees received for managing the investments in the various funds they are managing.
A financial sponsor may realize gains in a portfolio company investment via a sale to a strategic acquirer. This allows for an immediate liquidity event for the financial sponsor. Strategic buyers typically intend to hold the acquisition over the long-term and thereby gain a greater competitive advantage and market share in its respective industry. A strategic buyer is usually a non-PE firm, and the acquisition is in the buyer’s strategic interest (whether it’s for market growth, trade secrets, new products, synergies, or other business improvements). Therefore the trade sale will usually command the highest sale price. For these reasons, the sale to a strategic buyer is generally the preferred exit option for an LBO investor.
A good LBO candidate characteristic is exemplified by high barriers to entry, high switching costs, and strong customer relationships.
This legal due diligence includes looking at software or hardware agreements with external parties, contractually obligated product features or service level agreements, license agreements, and other technology agreements.
They deal routinely with the private equity firm’s Investment Committee.
This legal due diligence looks at employment terms/agreements, individual contracts, collectively bargained agreements, and retention/severance agreements.
This legal due diligence looks at past and current material contracts.
Private equity firms create funds to focus on areas where they think that can create value for companies.
A due diligence question that looks into the company’s historical performance in order to understand how realistic the company’s forecast projections are.
This type of PE usually involves investor compensation in the form of interest combined with upside participation.
In these transactions, a financial sponsor or a consortium acquire the target company using debt instruments for the majority of the purchase price.
They are expected to generate investment opportunities and potential acquisition ideas.
Before 2008, large-scale buyouts were becoming ever more prevalent. Which company generated the largest Leveraged buyout of US$44B?
This type of PE is the acquisition of a publicly or privately-held company, typically characterized by the significant amount of debt financing used for the acquisition relative to the equity financing used.
A due diligence question that includes understanding how sustainable the target’s business model is and where it is positioned relative to its competitors.
A good LBO candidate characteristic requires having relatively low exposure to seasonal fluctuations in cash flows, as well as low sensitivity to cyclical fluctuations.
It is used to service and pay down the outstanding debt during the ownership of the company.
A main area of financial due diligence that confirms the historical earnings of the company excluding non-recurring costs/expenses, as this will affect the valuation of the company.
This legal due diligence process is to confirm that all corporate filings have been filed correctly and to understand the legal organization of the company, such as whether there are any strange corporate structures.
This type of PE investments can help reduce the overall required rate of return on the capital used to execute the LBO, by lowering the required equity investment, and thereby make some LBO deals feasible that otherwise were not.
Today, practically all PE deals are executed with the sole intention of creating economic value for shareholders and the economy at large.
A main area of financial due diligence that assumes that the company needs a normal level of working capital to remain in business, and thus removes it from the purchase price.
Works closely with the senior partners of the firm on strategy and negotiations.
The company that was considered to have made the first leveraged buyout in history with his purchase of Carnegie Steel Company in 1901 from Andrew Carnegie and Henry Phipps for $480 million.
In this type of buyout, the creditors are likely to become equity holders, they will acquire many rights as full or partial owners of the business, and this can lead to very important issues regarding control of the business.
A main area of financial due diligence that looks into IT issues can cause a significant block in a smooth transition if the systems are not reviewed correctly and comprehensively.
A good LBO candidate characteristic with low maintenance capital expenditure requirements providing management more flexibility in terms of how it can allocate the company’s capital and run its operations.
Fundraising for PE investments has been much more promising after 2008 because of investors having more capital to invest in private equity.
In this type of buyout, a private equity firm purchases a financially agitated company below market value with the intention of divesting the company in the future for a higher value.
Select which are included in an associate's daily responsibilities.
In 2012, private equity buyouts were again in billions surpassing the 2005-2007 boom years.
A main area of financial due diligence that entails providing a detailed analysis of the federal, state, local, and international tax situation.
It has the most junior portion of the capital structure.
Large LBO firms generally have a more regimented hierarchy and firm structure where the roles are more defined for associates, and where there are unlimited internal promotion opportunities and unlimited opportunities to get involved in deal sourcing
Instead of being seen as an industry that focuses on making operations leaner through layoffs and restructuring, PE firms are starting to be seen as being able to help sustain and build companies, as well as increase employment levels.
RJR Nabisco’s deal during the 1980s was a substantial success for the investors who bought the company.
It has the lowest financial cost and is the first in line in the capital structure to receive its money during the liquidation of the company.
A characteristic of an LBO firm that continually search for companies that are well-positioned to benefit from attractive industry trends, since it results in above market growth and provides stronger equity return potential as well as stronger downside protection for the investment.
They interact directly with the management of portfolio companies, target companies, and investment banks.
A private equity firm’s performance fees are also called incentive fees, carried interest or commission.
Typical management fees of PE firms represents what percentage of the total assets under management annually.
A due diligence question that includes understanding the “stickiness” of customers and the company’s reliance on suppliers.
Performance inventive fees of PE firms represents what percentage taken from exited investments.
Firms that do hire analysts straight out of college will offer those analysts roles focusing more on logistical tasks, such as participating in conference calls, reviewing data and legal documents, and supporting the associate and vice president with internal investment materials.
This PE investments are made at an early stage in the company’s life cycle.
A good LBO candidate characteristic has a balanced and diverse growth strategy, so that a company’s success is not completely reliant on one driver.
Private equity firms were able to complete blockbuster buyouts during 2005-2007 due to stringent US monetary policy and strong credit markets.
To make the accurate assumptions, you will have to understand the types of companies the sponsor likes to invest in and their investment strategy, such as the purchase price, capital structure, growth and margin assumptions, and exit strategy.
Main responsibilities is to source investment opportunities by cultivating and maintaining relationships with investment bankers, consultants, and others.
Smaller firms will often promote associates to senior associates, and those firms in general tend to provide less opportunities for internal promotions to more senior roles.
The most notorious leveraged buyout was Kohlberg Kravis Roberts’ buyout of which company for US$31.1B?
This type of PE is characterized by the size of investment between $50,000 to $5M.
Capital structure considerations are important for all private equity deals.
Handles most of the financial modeling and initial due diligence for investment opportunities
A typical fund for a private equity firm has a total lifespan of approximately how many years?
The largest component of an LBO company’s capital structure.
It has less restrictive covenants or limitations, a longer time to maturity, and no required amortization payments.
A due diligence question that includes understanding of the total capital needed to run the operations of a business is needed, especially during difficult times.
This PE investments can add significant value in order to help companies realize their market potential and become market leaders in their respective industries.
A main area of financial due diligence that looks into that which affects payroll and that in turn affects the taxes for which the company is responsible.
Companies of relatively large sizes and industries can be targets of leveraged buyout transactions
A main area of financial due diligence that calculates the company’s total debt-like items outstanding, because it will impact the total amount given to the sellers.
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