Advanced Structuring of LBOs & Private Equity Transactions ... · Spectrum of financing instruments in LBOs - overview Structuring parameters - creating an appropriate financial structure

The Banking and Corporate Finance Training Specialist

Advanced Structuring of LBOs &

Private Equity Transactions Masterclass

A 5-day Master-Class A comprehensive examination of PE – reviewing the 5 stages from PE, lender,

advisors, management and investor’s perspective

This course is presented in London on: 12-16 November 2018, 11-15 February 2019, 24-28 June 2019,

4-8 November 2019

This course can also be presented in-house for your company or via live on-line webinar

http://redcliffetraining.com [email protected]

+44 (0)20 7387 4484

Course Overview

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

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.

Day 1 - Advanced Private Equity & Leveraged 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

Course Objectives

Course Content

Background of the Trainer


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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


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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


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


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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


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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


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


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Loan as a radar system Typical structure Key parties (obligors, borrowers and guarantors)

Case Study: Review a detailed term sheet for a senior loan, identify the key

commercial aspects and how and where it should be amended to make it borrower / lender friendly

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 equity

can affect the returns of management 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


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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


+44 (0)20 7387 4484

The programme will review the impact of the draft ECB guidance on leveraged transactions.

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.

Course Summary


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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


+44 (0)20 7387 4484

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


+44 (0)20 7387 4484

09:30-17:00

London

Standard Price: £3000 +VAT Membership Price: £2400 + VAT

In-House Training

Delivering this course in-house for a number of participants could be very cost effective.

The venue and timing can be agreed to suit the client, as well as the selection of the trainer and the

precise contents of the seminar.

Tailored Learning

All of our training courses can be tailored to suit your company’s exact training needs.

We will work closely with you to help develop a training programme with content that is unique for your organisation.

Please email us on [email protected] for more information

E-Learning This course can also be presented as a bespoke e-learning programme created by you to fit your exact

requirements.

mailto:[email protected]

Documents

Advanced Structuring of LBOs & Private Equity Transactions ... · Spectrum of financing instruments in LBOs - overview Structuring parameters - creating an appropriate financial structure