The deal-making process in private equity – from sourcing to execution to closing – is no cakewalk. Before reaching the bargaining table with a seller, plenty of due diligence and valuation homework needs to be completed, yet still then hurdles remain

Alas, private equity deals do not fall into one’s lap, like manna from heaven. Identifying potential deals may be quite simple, given the number of companies seeking funding in the corporate jungle. Yet identifying the ones that are worth pursuing is a different matter altogether. This may explain why a typical PE company such as Bridgepoint will review 800 opportunities each year, yet only analyze 150 in some detail (preliminary due diligence), and only take 35 to its investment committee for discussion and approval. Of those 800 initial options, only 5 investment deals will be finalized; so a meagre 0.6% (page 73). Yet this deal flow is critical to the livelihood of the PE fund, with deals being identified by both internal staff, and by intermediaries.

Due diligence – the process of analyzing a prospect’s business and financials in order to come up with a valuation for the investment – is done in various stages throughout the life of a PE deal. The preliminary due diligence might be quite cursory; barely sufficient to provide a qualified judgement on the investment, without wasting precious time and resources on dead-end losers. Formal due diligence is another matter altogether, with data room, management meetings, site visits and a larger scope of inquisition. This level of due diligence will cover not only commercial, operational and financial matters, but also legal and human resource aspects.

End in sight
The end result of all this analysis? Normally, a pretty solid idea of what the opportunity is worth, and therefore what valuation can be set. And of course, what price can be offered to the seller (or, in the case of venture capital, the entrepreneurs). Yet valuation is also a tricky game, with a “football field” (see page 93) of values, based on different measures, benchmarks, multiples, and ratios. And, in the end, valuation is only as good as one’s ability to defend one’s numbers against those put forward by competing bidders, or by the selling side.

With their valuation in pocket, bidders can submit bids and start the fun of the auction, often the norm in PE deals with competing bidders. Typically an auction will include a first round with numerous bidders, the field then being pared down to a shortlist of bidders who proceed to formal due diligence and second bids. But getting on the shortlist is only half of the race, since only one bidder will be invited to the final confirmatory due diligence and discussion of the final, edited Sales & Purchase Agreement. Even with the deal signed, some flexibility in pricing remains, with buyout pricing adjustments and closing mechanisms defined in the paperwork, as well as post-closing price adjustments and remedies.

Big deals mean complex financing
As covered in our previous instalment, for smaller deals PE firms raise financing in series of funds, the proceeds of which are typically placed as equity in VC or growth opportunities. Matters get more complicated for larger leveraged buyouts (LBOs), where debt gets added to equity in the funding mix. This implies that commercial and investment banks are called upon to provide various financing tranches: senior debt and junior debt, themselves cut up into revolvers (revolving credit facilities), lien loans, mezzanine loans or high-yield bonds, bridge loans, vendor financing and finally shareholder loans. Within this club sandwich of funding tranches, each has its own ranking in the overall picture, defining interest rates paid, bullet payments, and claims against the buyout company in case of default.

Readers with legal penchants will appreciate the explanations provided about various Special Purpose Vehicles (SPVs): Bidco’s, Equityco’s, Prefco’s, Mezzco’s and other institutional or management strips set up to complete the deal structures. These entities help manage tax and legal implications for the various classes of LBO fund-providers.

Last but not least, and in order to justify their fees (and provide some degree of legal protection), lawyers, financiers and other deal participants consecrate each deal with thousands of pages of transaction documentation. From Non-disclosure agreement (NDA) to Letters of Intent (LOI), to Sales and Purchase Agreement (SPA), and then the closing Documentation on both debt and equity, private equity deals provide management with plenty of reading material for those late night sessions in neon-lit conference rooms.

Stay tuned for more
Given the depth of the material in the book, we are planning to publish four instalments of which the first three cover theoretical aspects, while the last article will focus more on the numerous case studies:

* in Issue 59 we examined the basics of private equity;
* in the current issue (Issue 60) we look at deal sourcing for PE players;
* in Issue 61 we’ll examine how PE funds are managed;
* in Issue 62 we’ll cover how the authors see the outlook for the industry.

Book Data 

Title: Mastering Private Equity; Transformation via venture capital, minority investments and buyouts.
Authors: Claudia Zeisberger, Michael Prahl, Bowen White
Pages: 350
Publisher: Wiley
Price: ca. $60.00

Book Data – Accompanying case studies
Title: Private Equity in Action; Case studies from developed and emerging markets
Authors: Claudia Zeisberger, Michael Prahl, Bowen White
Pages: 402
Publisher: Wiley
Price: ca. $55.00

Author/s Bio

Claudia Zeisberger
Claudia Zeisberger is a Senior Affiliate Professor of Decision Sciences and Entrepreneurship & Family Enterprise at INSEAD, and is the Founder and Academic Director of the school’s private equity centre (GPEI). Before joining INSEAD in 2005, she spent 16 years in global investment banking.

Professor Zeisberger is a founding investor of INSEADAlum Ventures (IAV), the business school’s first dedicated seed fund and she devotes a significant amount of her time to mentor early stage companies with a special interest in robotics and artificial intelligence.

She launched INSEAD’s popular MBA elective ‘Managing Corporate Turnarounds’ and built an intensive computer-based simulation involving an iconic car brand and its struggle with bankruptcy. As a natural extension, she teaches INSEAD’s Risk Management elective and the Private Equity elective in the MBA & EMBA programmes.

Professor Zeisberger is known for her extensive research on PE in emerging markets, and her close working relationships with GPs and their portfolio firms, institutional investors, Family Offices and SWFs.

Bowen White
Bowen White currently serves as the Associate Director of INSEAD’s GPEI, where he leads its research and outreach activities and has published on topics including operational value creation, responsible investment, LP portfolio construction and minority investment in family businesses.

Bowen has spent his career working in and conducting research on the global alternative asset management industry. In the New York hedge fund industry, he researched topics from statistical arbitrage investment strategies in commodities markets to macroeconomic trends and global hedge fund performance. Having worked for both a proprietary trading firm and a fund of funds, he has seen first-hand the challenges faced by investors and allocators of capital to the hedge fund industry. Bowen has also advised on a range of VC and growth equity fundraising opportunities across Southeast Asia.

An alumnus of INSEAD’s MBA program, Bowen earned a BSBA from the Kenan Flagler Business School at the University of North Carolina at Chapel Hill.

Michael Prahl
Michael is an INSEAD Distinguished Fellow at GPEI with a focus on LBOs and Asian Private Equity. Based out of Hong Kong, Michael is a founding partner at Asia-IO Advisors, an asset manager focused on implementing innovative, thesis-driven Asia/Asia-nexus private equity co-investment programs for an alliance of large institutional and corporate investors.

An INSEAD alumnus, Michael served as GPEI’s Executive Director from 2010 to 2015 and was instrumental in shaping all aspects of the centre’s activity and developing its core research agenda. During his tenure as Executive Director, Michael oversaw the expansion of the Centre’s research and outreach activities and drove specific research projects related to co-investments, risk & return propositions in emerging markets PE and family offices. Michael continues to engage directly with the INSEAD community as an Adjunct Professor teaching the MBA Leveraged Buyout elective.

Prior to joining GPEI, Michael spent nine years with Apax Partners, a global private equity firm. He worked on some of the most high profile retail and consumer investments for Apax in Europe and the US including regular buyouts, public to privates, PIPE’s, minority investments and privatisations. He moved to Hong Kong beginning of 2006 to help set up Apax Partners’ Asian operations. Prior to Apax Partners, Michael was associated with the Corporate Venture Capital arm of Deutsche Telekom and The Boston Consulting Group.

Michael is a graduate of INSEAD (MBA) and Handelshochschule Leipzig (MSc Business) and holds undergraduate degrees in business and law.

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Source: INSEAD Website/s