Advanced Private Equity & Leveraged Buy-outs Masterclass

Course Overview:

The first two days of this course are designed to provide participants with an in-depth view of buy-outs. Participants will develop a thorough understanding of the commercial, technical, legal and financial issues, a detailed understanding of the buy-out process and a practical approach to assessing, implementing, structuring and financing the deal.

The course is highly intensive and is suitable for practitioners who have some experience and are involved in, or servicing, the private equity industry (e.g. transaction services, corporate financiers and lawyers) as well as lenders of senior, junior and other forms of finance and entrepreneurs considering buy-outs.

The course will also discuss recent developments in the LBO space including the feverish activity in the Bond markets and the innovations that have occurred there (Expro, UPC) as well as the ramifications of the IMO carwash deal for junior lenders.

Case studies will be used during the first two days to reinforce and develop topics covered during the sessions.

The last two days cover 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 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 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 recovery analysis for a failed LBO transaction.

Case Study: The participants will use a variety of case studies and exercises during the four days, based on publicly quoted and generic businesses.

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

Course Content:

Offer Structure and Structuring issues
 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, debt, working capital, capex and EBITDA/cash run rate
 Techniques for mitigating the risks and identifying value
 SPA structuring – Locked box vs Completion Accounts
 The traditional PE value creation model (summary)
 New value creation model (deconstruction of the CAPM)
 Structuring issues
 Taking Security, Financial Assistance
 Tax issues
 Control / Squeeze-outs
 Structuring parameters - creating an appropriate financial structure (overview)
 Percentage senior, junior and equity in debt capital structure
 Ebitda multiples
 Target returns for PE & Mezz Funds

Financing Instruments: Key Terms, Conditions and Trends
 Spectrum of financing instruments in LBOs
 Senior loans
 Capex aspects
 RCFs – avoiding typical pitfalls
 Cash sweeps - typical, terms structure & issues
 Mezzanine and junior mezzanine
 Rationale of warranted vs. warrant-less
 Key issues for the warrant-holder
 Key issues in warrant-less deals
 High Yield Notes (FRNs and Fixed)
 Overview of HY market
 Pros & Cons of HY and why it has been so successful (Bonds vs Loans)
 Summary of key terms, pricing
 Call protection generally (FRNs vs Fixed)
 Issuance process & Bookbuilding
 Other forms of Debt (summary)1
 PIK & 2nd Lien
 Equity financing – typical structures and coupons
 Structure - Loans, Prefs, TPECs, DDBs
 Typical returns

The Lender’s Perspective
 Lender’s approach to credit decision
 measuring debt capacity
 security over assets
 exit routes
 Overview of loan documentation and impact on deal/restructuring
 Loan as a radar system
 Typical structure
 Key parties (Obligors, Borrowers and Guarantors)
 Key financial ratios / covenants
 Limitations / interaction of the ADSCR, Tot. Debt/Ebitda, Interest cover
 Selecting the appropriate ratio for the deal
 The four deal scenarios and the role of due diligence
 Inter-creditor agreement – overview of key issues

Sponsor’s Perspective
 Structuring the equity
 Ratchets
 Rationale, structure
 Pros and cons of positive vs. negative, stepped vs. linear
 Structure of the PE market – the main categories and impact on the deal metrics
 Structure and key terms for PE Funds (and impact of the deal)
 Investment period (how long)
 Preferred return (rate, calculation)
 Carry (European vs US approach)
 The 5 critical issues to Sponsors
 The business model
 Management - what PEs approach
 Approach to generating value/returns
 Exits – hard vs. soft

Management issues
 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

Leverage Overview
 Background to the LBO market
 Basic theory - The effect of leverage on firm value

Valuing the target
 Sourcing information – Historic and forecast date
 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

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 and 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
 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

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

LBO failure
 Calculating recoverability for different capital providers

Case Study VI: Estimating recoveries for different debt tranches

Delivery:	Classroom
Regions:	London
Category:	Advanced Corporate Finance