Faculty
Professor Colin C. Blaydon
Objectives
The objectives of the Private Equity Finance course are to:
Develop an understanding of the role of private equity in the economy, the structure of the industry, its participants, and the forces that shape its ongoing development;
Learn analytical and deal structuring techniques used in venture capital and buyouts;
Interact with private equity professionals and entrepreneurs to gain first hand knowledge of issues and challenges in the field.
Course Scope
Private equity generally means the use of capital to invest in private or non-public companies. The amount of capital committed to private equity investments has grown dramatically over the last decade, with equally dramatic cyclical variation. Private equity investing can involve unique risks including information asymmetry, lack of liquidity, minimal regulatory oversight, and unproven companies. Accordingly, successful private equity investing requires different institutions, skills, and strategies from public equity investing.
The course is a comprehensive overview of the private equity sector of the economy. It is recommended for students interested in private equity investing, investment banking, investment management, or entrepreneurial management. The course conceptually covers everything from the seed funding for a start-up venture to the acquisition or buyout of a mature business. The course does not assume previous experience in private equity or financial skills beyond those taught in the first-year curriculum.
Topics
The course will be taught in four modules, each covering a group of related topics:
Module I: Industry Structure
Session 1: Industry Overview
Session 2: Limited Partners and Fund Screening
Session 3: Asset Allocation
Module II: Venture Capital
Session 4: Basics of Investing
Session 5: Early Stage Investing and Term Sheets
Session 6: Securities
Session 7: Late Stage Valuation
Session 8: Venture Capital Investing and Intellectual Property
Session 9: Recapitalizations
Module III: Buyouts
Session 10: VC vs. LBO, Careers in Private Equity
Session 11: LBO Basics and Deal Structure
Session 12: LBO Case
Session 14: LP Co-investments
Session 15: LBO Case
Session 18: Roll-ups and Consolidations
Module IV: Changing Industry Dynamics
Session 13: Private Equity, Capital Markets, and the Economy
Session 16: International
Session 17: Hedge Funds
Course Structure
The structure of the course includes lectures, case discussions, and guest speakers. You will learn the most and gain the best insight by carefully reading the assignments and then coming to class prepared with questions for the instructors and the guest speakers. Completing the readings is essential to asking informed questions and engaging in useful dialogue with the instructors, the speakers, and your classmates. Use the class discussions to help solidify your understanding of the industry, develop your career plans, and become a better investor.
Course Speakers
Successful private equity investing involves skills and judgment that typically develop only with years of experience. The private equity professionals who will be joining us as guest speakers offer you the opportunity to shorten your learning curve and increase the breadth of your knowledge. For the speaker sessions to be most effective you must be prepared with relevant questions to engage the speakers. Note that speakers may choose to cold call.
The slides used in class lectures and guest presentations will normally be available in the course folder within a day after each class. Please note that some guest speakers prefer their slides to remain confidential and these presentations will not be posted.
Many of the guest speakers generously offer time with students outside of class through small group lunches or dinners, roundtable discussions, or one-on-one office hours. Bios of the guest speakers and details of these activities as well as sign-up lists will be posted to the Visitors section of TuckStreams. Please note that most of the guest speaker activities are highly oversubscribed and are subject to a selection process, as described in the sign-up posting. Before signing up please make sure you are available to attend if selected.
Requirements
Materials
The course pack for PEF will be digital. The readings will be posted online, either as links in the TuckStreams syllabus, or as PDF documents in the Course Folder, as noted on the syllabus. For proprietary reasons, a few assignments will be handed out in paper copy only.
A paper syllabus may be obtained at the Copy Center. A paper syllabus and the first two weeks of readings will be placed on reserve at Feldberg Library for use during the add/drop period.
The syllabus posted to TuckStreams will be updated regularly with additions and changes, so it is advisable to refer to the electronic syllabus frequently. Please do not rely only on a printed paper copy as this will become out of date.
A Resources folder containing suggested background readings and websites of useful publications, industry associations, career organizations, and other information is available in the Course Folder.
Class Preparation and Attendance Policy
You may consult and work with any other student in the course to prepare for class. For certain classes, individual or group preparation details will be given in the course assignment for that day. You are expected to attend and be prepared for every class. If you are unable to attend a class, email Evy Huppert (with a copy to Professor Blaydon) as soon as possible. In order to make up for missed classes you may be required to complete additional assignments.
Laptop Policy
Laptops are not to be used in class unless authorized by the professor.
Honor Code
Your work in this course is subject to Tuck's Honor Code. The application of the Honor Code to class participation, exams, and assignments is fairly straightforward. Please do not hesitate to contact the professor if you have any questions about the application of the Honor Code in the course.
Grading
Class Participation: 50%
Voluntary class participation is encouraged. "Cold calls" will be made as necessary to ensure that the class enjoys the benefit of every student's contributions. The quality of your participation, more than its quantity, will determine the relevant portion of your grade.
Final Exam: 50 %
The final exam will be take-home, open-book, and open-note, with a time limit. The exam will include the entire course and will contain questions about material covered in class, including material presented by the guest speakers, and analytical exercises. It will be distributed on Tuesday, 3/2 by 5:00 pm and will be due by Thursday, 3/4 by 5:00 pm .
Students are to complete the exam using only the course-related materials and with no assistance from any other source or individual. Completed, exams are to be submitted, in hard copy only, to the box outside 110 Woodbury Hall by the deadline. Any special circumstances or exceptions must be approved by the professor in advance.
Schedule
Class #1
01/05/2010
Industry Overview
Be prepared to discuss the readings and answer the following questions:
Who are the players in the private equity sector and how do they relate to each other?
Review the Glossary terms “commitment,” “capital call,” “distribution,” “secondary market,” “limited partner,” “general partner,” “limited partnership agreement.” Be prepared to give a practical explanation of these terms.
How does cash flow into the private equity industry and how does it get returned to investors?
What are the forces that determine the private equity investment cycle? Why was there such a large expansion in 2004 – 07 and such a dramatic contraction in 2007 - 08? Is this cycle similar to what happened in earlier decades?
How have venture capital and buyout funds performed historically relative to public equities? Why is this a difficult question to answer?
Are 20-year historical returns in private equity sustainable in the next 5 years?
Executive Summary pp. 9-16, National Venture Capital Association Yearbook 2007, Thomson Financial, 2008.
Private Equity Glossary (see Course Folder).
Venture Capital Hits a Cash-Call Crunch, Pui-Wing Tam and Craig Karmin, WSJ, December 8, 2008
Class #2
01/06/2010
Limited Partners and Fund Screening
Note on Limited Partnership Agreements (see Course Folder).
Be prepared to discuss the readings and the following questions with the speakers:
What are the forces that will determine the final terms of a limited partnership?
How should an institutional investor address the problem of cyclical private equity markets? Are there ways to minimize the effects of “boom and bust” trends?
Why do institutional investors prefer to invest in private equity via limited partnerships? How is this different from direct investing and co-investing?
What are the major features of a limited partnership agreement on which limited partners and general partners are likely to disagree? How can incentives be aligned?
How do goals vary among corporate pension plans, state pension plans, and endowments?
What role do “fund of funds” managers play and what is your assessment of the future prospects for this investment vehicle?
Note on Private Placement Memoranda (see Course Folder).
Heard on the Street: Trouble is Brewing for Pension Plans, David Reilly, WSJ, 10/30/08.
Class #3
01/11/2010
Asset Allocation
Dartmouth Endowment Case 2007 (see Course Folder).
Prepare the questions at the end of the Dartmouth Endowment 2007 case.
Private equity exposure in university endowments has increased due to the “denominator effect” – as marketable securities decrease in value the exposure to non-marketable securities increases on a relative basis within the asset allocation framework. Endowment and foundation portfolios which follow the endowment model, are becoming overweight in private equity on a relative basis in relation to the neutral asset allocations to the asset class and the pre-approved ranges around the neutral policy point.
Should university endowments increase or decrease their P.E. exposure at this time? How?
Keep in mind that the endowment model (i.e., multiple asset class diversification, exploitation of market opportunities and providing liquidity to high returning illiquid markets) has served the college and university universe well for nearly 30 years.
Is this endowment model broken? Should it be changed? How?
As the Rest-Of-The-World (ROW) de-levers, should endowments leverage? (BTW Harvard, UVA and Duke were all leveraged coming into the current recessionary environment.)
Why did Harvard raise $2.5 Billion in taxable and tax-exempt debt in December 2008?
Yale’s Swensen Sees ‘Extraordinary’ Opportunity to Snap Up Debt, Oliver Staley, Bloomberg.com, 01/02/2009.
Yale's Endowment Drops 13.4%, Geraldine Fabrikant, New York Times, 12/17/2008.
Harvard-Led Sale of Private Equity Stakes Hits Values, Jonathan Keeher and Jason Kelly, Bloomberg.com, 12/01/2008.
Optional: Optional Background Reading:
Dartmouth Endowment case 2002 (see Course Folder).
Note on Private Equity Asset Allocation (see Course Folder).
You Can’t Eat IRR, Howard Marks, Memo to Oaktree Clients, July 12, 2006 (see Course Folder).
Class #4
01/12/2010
Basics of Investing
Expanding Pie Exercise (see Course Folder).
Complete the Expanding Pie Exercise. Solutions will be reviewed during class.
Shrinking Pie Exercise (see Course Folder).
Note on Private Equity Deal Structures (see Course Folder).
Term Sheet, Golden Goose Technology, Goodwin Procter LLP 2005 (see Course Folder).
Trends in Terms of Venture Financings in the San Francisco Bay Area (Second Quarter 2008), Fenwick & West LLP.
Complete the Shrinking Pie Exercise. Solutions will be reviewed during class.
Be prepared to discuss the readings and the following questions:
Review the Glossary terms "pre-money valuation, "post-money valuation," "common stock," "convertible preferred stock," "participating preferred," "term sheet," "recapitalization." Be prepared to give a practical explanation of these terms.
Since 2000, as the industry went from boom to bust to recovery to the current challenging environment, how would you expect deal terms to have changed during that cycle?
Do multiple liquidation preferences cause a fundamental misalignment between investor and entrepreneur interests? If you were an investor, would you include multiple liquidation preferences in your standard term sheets? Why or why not?
When a down round significantly dilutes management’s equity ownership and the employee option pool, how can the venture investors retain members of the executive team and key employees?
Should an investor in a previous round be punished for not participating in a new round?
What typically happens to the current deal terms in a future round with a new lead investor?
Should investors focus on adding value to their portfolio companies or protect their interests in case the companies do not achieve their target valuations?
Class #5
01/19/2010
Early Stage Investing and Term Sheets
SignStorey (see the Course Folder for the assignment and materials).
Be prepared to discuss the readings and the following questions:
What are the key factors of a fundable business plan?
What motivates a typical angel investor?
If you build up a multimillion dollar net worth, will you allocate a portion of your investments to seed stage angel financing? Why or why not?
From an entrepreneur’s perspective, what are the risks of accepting angel capital?
Should an entrepreneur be dissatisfied with the relatively small percentage ownership in the company he/she founded after an IPO is complete?
Golden Goose Term Sheet (see Course Folder).
Note on Fundable Business Plans (see Course Folder).
Riding on Angels’ Wings, Fred Wainwright, Financial Times, August 15, 2003.
Note on Angel Investing (see Course Folder).
Optional: Optional Background Readings
Note on Due Diligence in Venture Capital (see Course Folder).
Note on Venture Capital Portfolio Management (see Course Folder).
Class #6
01/20/2010
Securities
Answer the questions in the Crystal Dynamics case. Be prepared to explain your analysis in class.
Crystal Dynamics Case (see Course Folder).
It’s Time To Do Away With Participating Preferred, Colin Blaydon and Fred Wainwright, Venture Capital Journal, July 2006.
Liquidation Preferences: What You May Not Know, Colin Blaydon and Michael Horvath, Venture Capital Journal, March 2002.
Bury the Ratchets, Colin Blaydon and Michael Horvath, Venture Capital Journal, January 2002.
Class #7
01/25/2010
Late Stage Valuation
MedAptus Business Plan and Consulting Reports (to be handed out before the class).
Review the MedAptus business plan and assignment materials. Prepare a valuation analysis of MedAptus and be prepared to make a brief presentation to the class and speakers. You may work in study groups and use resources such as Yahoo Finance and Venture Xpert. Per the Tuck Honor Code, please do not copy or distribute any of the MedAptus related materials. Turn in the MedAptus business plan at the end of class.
Fair Value is Here to Stay, Colin Blaydon and Fred Wainwright, PEI Manager, July 2007 (see Course Folder).
Class #8
01/26/2010
Venture Capital Investing and Intellectual Property
GlycoFi Business Plan,
Executive Summaries,
and Term Sheets
(to be handed out).
Review the GlycoFi business plan, two executive summaries, and three term sheets. Then:
Assess the GlycoFi Business Plan from the point of view of potential venture capital investors.
Compare the financing offers to GlycoFi represented by the term sheets. Which offer should GlycoFi accept? Why?
Be prepared to discuss the readings and your answer to the question on the assignment sheet with the speakers. You may work in study groups. Do not access the GlycoFi website or GlycoFi information in public websites. Per the Tuck Honor Code, please do not copy any of the GlycoFi materials. Turn them in at the end of class.
Class #9
02/01/2010
Recapitalizations
BIA Case and Assignment (paper copies in student mailboxes).
Be prepared to discuss the readings and assignment with the speakers.
Is Your CEO Lying?, Jonathan R. Laing, Barron's, Jun 26, 2006.
Class #10
02/02/2010
VC vs. LBO, Careers in Private Equity
Be prepared to discuss the readings and the following questions with the speaker:
If you were forming a private equity firm today would you focus on venture capital or buyouts? Why?
How would you diversify a private equity portfolio? What should be the selection categories?
What are the advantages or disadvantages of multi-billion dollar funds?
Should fund managers who adjust their investment thesis with the investment climate be penalized for “mission drift?"
What are typical career paths in private equity?
How do compensation and career risk differ in private equity from other financial services sectors?
What are the key factors of a successful career in private equity?
Running the Private Equity Firm: Blending Art and Science, ViewPoints, Private Equity Leadership Network, Tapestry Networks, Ernst & Young, April 26, 2006 (see Course Folder).
What Does Henry Kravis Want?, NY Times, Andrew Ross Sorkin and Julie Cresswell, 9/7/2008.
Private Equity: It Isn't a Downturn, It's Decimation, WSJ.com Deal Journal, Heidi N. Moore, 12/23/2008.
Schwarzman Promises a "Wonderful Time" for Buyout Deals, Bloomberg.com, Jason Kelly, 01/29/2009.
Class #11
02/08/2010
LBO Basics and Deal Structure
Note on Leveraged Buyouts (see Course Folder).
Read the Lexmark case and answer the case questions.
Lexmark Case (see Course Folder).
View the Bloomberg News video, "Donald Gogel calls Buyout Firms Capital Pool 'Mini Tarp'. To view the video:
Go to www.Bloomberg.com
Go to Search News and enter Donald Gogel
Find the article in the list and click on "play"
Be prepared to discuss the readings and answer the following questions:
What are the characteristics of a company that is an attractive candidate for an LBO?
What are the ways that a buyout fund can improve its returns from an LBO and how will such changes affect the financial statements of the portfolio company?
The Balance Between Debt and Added Value, Colin Blaydon and Fred Wainwright, Financial Times September 29, 2006.
Lessons from the Front,
Michael Weisser, Matthew Cammack,
Private Equity Alert,
February 2007.
Class #12
02/09/2010
LBO Case
Lindsay Goldberg Case (see Course Folder).
Read the LG case and answer the case questions.
Class #13
02/15/2010
Private Equity, the Capital Markets, and the Economy
In this class session we will discuss what we have been hearing about the issues facing Private Equity in the current environment in the capital markets and the economy.
Review the PowerPoint slides from the Renny Smith presentation in class #10, particularly slides #43 through #50.
Reflect on the speech given by Wilbur Ross at the Private Equity and Growth Ventures Conference. If you did not hear the speech, there are several dvds of his presentation on reserve at Feldberg Library.
Read the Boston Consulting Group study, "Get Ready for the Private-Equity Shakeout."
Identify one published article about PE (either Venture or Buyout) in the current environment that you think is particularly insightful. Be prepared to summarize the article, its conclusions, and your reasons for finding it useful.
Be prepared to discuss the following questions:
What were the developments prior to July 2007 that led to the current conditions in PE?
What were the immediate reasons for the seizing up of large cap PE transactions in July 2007?
What is the curent state of PE?
What is the future for PE, both short and long term?
Class #14
02/16/2010
LP Co-investments
Fred's Propane Materials (see Course Folder).
Read the Class #14 assignment and related materials (see Course Folder). Respond to the assignment questions and be prepared to discuss your answers.
Note: You may work in study groups. Do not access any outside information. Per the Tuck Honor Code, please do not distribute the assignment materials to anyone outside of Tuck.
Class #15
02/22/2010
LBO Case
Symmetry Medical and Olympus Partners Letter (see Course Folder)
Respond to the questions in the Symmetry Medical Case and be prepared to discuss your answers.
Class #16
02/23/2010
International
Note on Private Equity in Israel (see Course Folder).
Be prepared to discuss the readings and the following questions:
[If you are not originally from the US] What conditions would have to exist in order for a more vigorous private equity sector to exist in your country? For venture capital? For buyouts?
[If you are from the US] Select a country in which you are interested and evaluate the opportunities and challenges for the development of a vigorous private equity sector. You may want to work with a non-US classmate to review their home country.
Prepare a brief PowerPoint that summarizes your conclusions.
Review your section's International PE Country Chart and the categories we will be discussing in class (see Course Folder).
Class #17
03/01/2010
Hedge Funds
Note on Hedge Funds (see Course Folder).
Be prepared to discuss the readings and the following questions with the speaker:
What are the various subcategories of hedge funds? Should hedge funds be a separate asset class?
Why have overall hedge fund returns decreased?
How can hedge funds differentiate themselves with increasing competition?
Compare and contrast the investment philosophies of private equity fund managers and hedge fund managers.
What is your view of the previous popularity of hedge fund investing among institutional investors and the challenges in the current crisis?
Why did the markets fail to see what Mr. Markopolos identified and what are the consequences of that failure?
Harry Markopolos, November 7, 2005, Submission to the SEC, Madoff Securities LLC, "The World's Largest Hedge Fund is a Fraud."
Optional: Testimony of Harry Markopolos, CFA, CFE, Before the US House of Representatives Committee on Financial Services, February 4, 2009, WSJ.com 02/03/2009.
Class #18
03/02/2010
Roll-ups and Consolidations
Building a Utility Roll-Up Machine, Markian Melnyk, Public Utilities Fortnightly, May 2007.
Be prepared to discuss the readings and the following questions with the speaker:
What characteristics make an industry attractive for consolidations?
How would you motivate management in a rollup?
What should be the characteristics of a successful CEO in a consolidation strategy?
