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Private Equity
523Spring 2013
Professor: Gordon Phillips
Office: HOH 514
Office Phone: (213) 740-0598 (email contact however is
best).
E-mail: [email protected]
Lecture ClassTuesday orThursday
7:0010:00 Room:
Office HoursTuesdays 4:005:00
Thursdays 1:002:00
Introduction and Course Objective
FBE 523 uses a combination of lectures and the case method to
introduce you to private equity.Private equity is a broad
designation that includes venture capital, angel investing and also
leveraged
buyouts of existing private and public companies. This course is
time-consuming and challenging. Donot take this course if you are
not ready to work hard, learn and participate in class. The class
periodswill be a mixture of lectures and case discussion. Assigned
readings must be completed prior to class.
The major emphasis is how financiers (venture capitalists,
investment banks and private equity
partnerships) help growing firms using different types of
securities at different points in the industry's and
firm's life. We will study venture capitalists on the finance
side, young start-ups and more mature firmsthat go private on the
firm side. We will also study preferred stock, private financing
arrangements,
Initial Public Offerings (IPOs) as this is how entrepreneurs
cash out, private equity funds and raisingprivate equity during the
recent financial crisis.
Learning Objectives
Global Objectives: The objectives of this course are two-fold:1.
Provide an understanding of the institutions and economics of
private equity.2. To understand how to raise money for a businesses
at different stages of their life.
Detailed Objectiveso Understanding fundamental private equity
terms, concepts, principals, and theories.o Understand the
securities used in private equity.o Developing critical thinking
and communication skills related to private equity.o Evaluate a new
company from a financial perspective.o Understand a financing term
sheet.
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Required Materials
1) Course packet consisting of the following articles.1. Note on
the Financial Perspective: What Should Entrepreneurs Know?
Harvard Business School Note #9-285-087.
2. Method for Valuing High-Risk, Long-Term Investments Harvard
BusinessSchool Note #9-288-006.
3. New Venture Financing #9-802-1314. Deal Structure and Deal
Terms 9-806-085 (includes venture capital term
sheet)
5. How Venture Capitalists Evaluate Potential Venture
Opportunities 9-085-0194 interviews with venture capitalists.
6. Note on the Valuation of VC deals. (Stanford Case E-95)7.
Jensen, M., Eclipse of the Public Corporation,Harvard Business
Review,
Sept-Oct 1989..2) HBS cases - of which you will be responsible
for analyzing five (you will have 3 "passes") -
available in the course reader at the bookstore or from HBS
athttp://www.hbs.edu/research/cases.html
3) Other articles I will post on blackboard including:1) Fenn,
Liang, and Prowse (1998), The Economics of the Private Equity
Market (FLP).2) Kaplan, Steven N. and Per Stromberg, 2003,
Financial Contracting Theory Meets
the Real World: An Empirical Analysis of Venture Capital
Contracts, Review of
Economic Studies (Blackboard).
3) Ibbotson, I., J. Sindelar, J. Ritter, Initial Public
Offerings, Journal of AppliedCorporate Finance, VOLUME 1 NUMBER 2
SUMMER 1988, pp. 38-45,(Blackboard).
4) Klein, Zenner, Shivdasani, The Private Equity Revolution: Are
YouReady?, Citicorp corporate and investment banking group,
(Blackboard).
5) Kohlbert, Kravis, Roberts, Leveraged Buyouts,Journal of
Applied CorporateFinance, VOLUME 2 NUMBER 1 SPRING 1989, pp. 64-72,
(Blackboard).
6) Inselberg, I. and H. Kaufold, How to Value Recapitalizations
and LeveragedBuyouts, Journal of Applied Corporate Finance,VOLUME 2
NUMBER 2SUMMER 1989, pp. 87-96, (Blackboard).
4) Subscription to the Wall Street Journal online.5) Some
chapters from: Metrick and Yasuda (MY), Venture Capital and the
Finance of
Innovation, Wiley 2010 (VCFI), available at the bookstore but
sometimes cheaper onAmazon.
Prerequisites: Corporate Finance
Course Notes: Copies of lecture slides and other class
information will be available through your
Blackboard account.
Grading Summary:
Case writeups (4): 30% (7.5% each)
Case presentation (1): 20% (different case than the ones written
up).
http://www.hbs.edu/research/cases.htmlhttp://www.hbs.edu/research/cases.htmlhttp://www.hbs.edu/research/cases.html
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Midterm exam: 20%
Final exam: 20%
Participation: 10%
I evaluate participation by the quality of your course comments
on our case discussions and will keeptrack of participation. You
are required to bring your name card to class.
Attendance is not part of the course grade but missing more than
4 classes will result in a loss of 5% ofthe participation grade and
of course missing classes may affect your test performance.
Final grades represent how you perform in the class relative to
other students. Your grade will not bebased on a mandated target,
but on your performance. Historically, the average grade for this
class is
about a B. Three items are considered when assigning final
grades:
1. Your average weighted score as a percentage of the available
points for all assignments (the pointsyou receive divided by the
number of points possible).
2. The overall average percentage score within the class.3. Your
ranking among all students in the class.
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CLASS PROCEDURES AND ASSIGNMENTS DETAIL
Case Studies:
We will study 8 cases during the semester. While you will read
them all, you will not have to analyze
fully all of them as you will have 3 byes on the cases. Thus you
only do 5 cases (4 with written case
memos, including Dynatronics, and 1 with require a group
presentation) from the list below.
They will deal with venture capital, initial public offerings
and private equity used in buyouts. Finally,
the last case also has another different dimension. We will be
analyzing a recent private equity dealfrom the recent financial
crisis using online data.
.
The objective in using case studies is to provide examples of
companies or individuals that have faced the
topic at hand and to apply theoretical tools to real problems. I
will distribute questions and ideas that youmay use as guidelines
for analyzing the case.
In addition, for each case, I will assign study questions
concerning the case. For most of the classperiod, we will consider
these questions and the material in the case. You are allowed and
encouraged,
but not required, to meet in your groups outside of class to
discuss and analyze the cases. I expect thatthese groups will
complement class discussion well. In addition, you may discuss and
analyze the caseswith anyone you choose.
Each student will submit a two-page memorandum of analysis and
recommendations at the
beginning of each case discussion. If you are working in a
group, I will accept one memorandum fromthe group and count it for
all students in the group. If you choose to do this, the group
cannot exceed 4students. Each memorandum should be typed and
double-spaced. Do NOT write up the memo as
answers to the study questions. Write these as if you were
writing a executive memo with yourrecommendation to the major
decision-maker in the case. The two-page limit is for text only.
You may
attach up to 4 pages of additional excel exhibits or graphs.
Memoranda will not be accepted after the
class has met. Emailed or faxed memoranda will not be accepted.
Memorandum will be given agrade of 8,9 or 10 with a median grade of
9.
In your memoranda, you should argue as if you are in a funding
meeting rather than in a class. The
process of arriving at the answer is as important as getting the
answer.
Students sometimes ask that instructors case analyses be handed
out after the class has discussedthe case. I will not do this,
because there are usually no absolute right answers. The best cases
aredeliberately written to be ambiguous. While there are no right
answers, there are good arguments and bad
arguments. Among other things, this course is designed to help
you learn to distinguish between sensibleand senseless arguments.
Handing out my analyses would reduce the ambiguity in the cases and
partiallydefeat the purpose of doing cases. Handouts also tend to
circulate which is a problem when I teach the
case in another semester. If you are uncomfortable with
ambiguity, do not take this class.
Finally, if your name is on the report as part of the group, it
means you participated in the analysis. Youare on the honor code to
observe this requirement. If for some reason you are not able to
participate in
the case write-up with the group, you can turn in a write-up on
that case or a different case on your
own.
The content of the case memorandum is as follows:
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1. Write up your analysis as an executive memo to the major
decision maker in the case. Use anexecutive memo format with an
introductory paragraph containing your executive summary and
recommendation. Do not answer the questions with a 1. 2. 3.
Format. The questions are merelydesigned to get you start
thinking.
2. The case questions are designed to help you streamline the
issues to be addressed. If you believethat these questions do not
effectively address the problems in the case, feel free to go
outside the
parameters of the questions.
3. It is not necessary to rehash the case situation in your
write-up. Do not, however, assume that Iknow every single number
and detail. Use your best judgment on how much of the case
toinclude in your write-up.
4. Most importantly, you must take a position regarding the
problem in the case and make specificrecommendations on how to
solve it. Support your recommendation as succinctly and as
effectively as you can.5. The case write-up to be a
double-spaced two-page (maximum) report with up to an additional
4
pages of exhibitsfor a maximum total of 6 pages. The case
write-up should be double spaced,in 12 point type with 1 inch
margins.
*** I do not expect that you kill the case but rather that you
show a thoughtful, well reasoned
approach. I am looking for well structured argumentssome
mistakes are fine and will of course occur.***
Case Presentation:
Each team will be assigned to present one case. For each case,
one to two teams will present their casepresentation with their
analysis to the class. Note case teams will have a maximum of 5
members. The
presentation should consist of 20 powerpoint slides MAXIMUM with
30 minutes maximum presentationtime. These guidelines are strictly
enforced. Your grade will be based on both presentation skills
(25%)and also content (75%). Each team member is required to speak
and be responsible for covering a
minimum of 4 slides. Please come early to class the day of your
presentation so you can load your slides
onto the computer. You are also required to bring a printed copy
of your slides for me.Non-presenting teams will be asked to bring
several slides of their excel spreadsheets and I will take
avolunteer from the team to share their solution and methods. I
have found that this aids in focusing thediscussion. What is ideal
is that the teams bring one slide that states their assumptions
used and 1-2slides of the application of the solution to the
case.
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CLASS GUIDELINES
Add/Drop Process
The class will remain open enrollment (R-clearance) for the
first three weeks of the semester. Ifthere is an open seat in an
FBE Undergraduate classes, students will be freely able to add a
class
using Web Registration throughout the first three weeks of the
term. If the class is full, studentswill need to continue checking
Web Registration to see if a seat becomes available. There are
no
wait lists for these courses, and professors cannot add
students.
There are no centralized wait lists for Marshall undergraduate
courses. Although there are no wait
lists, the Undergraduate Advising Office provides a system by
which students can indicate theirinterest in enrolling in classes
that are currently full in order to track demand and manage
classroom space effectively.
If you do not attend the first two class sessions or the first
class session of the semester for a once-a-week class, I may drop
you from the course without any notification. This procedure is so
thatstudents from any wait list can be accommodated and to ensure
the class forms teams and works
constructively together. In addition, if you are absent six or
more times prior to the last date towithdraw from the course, I may
ask you to withdraw by that date. These policies maintain
professionalism and ensure a system that is fair to all
students.
Retention of Graded Coursework:
Final exams and all other graded work which affect the course
grade will be retained for 1 year
after the end of the course if the graded work has not been
returned to the student; i.e., if I returneda graded paper to you,
it is your responsibility to file it, not mine.
523 Technology Policy
Laptop / tablet use is not permitted during academic or
professional sessions unless we are workingon a case and then the
use is solely for analyzing the case and no internet browsing is
permitted.
Use of other personal communication devices, such as cell
phones, is considered unprofessionaland is not permitted during
academic or professional sessions. ANY e-devices (cell phones,
PDAs,I-Phones, Blackberries, other texting devices, laptops,
I-pods) must be completely turned off duringclass time. Upon
request, you must comply and put your device on the table in off
mode and FACEDOWN. You might also be asked to deposit your devices
in a designated area in the classroom.
Videotaping faculty lectures is not permitted, due to copyright
infringement regulations.Audiotaping is permitted in 423. Use of
any recorded material is reserved exclusively for USCMarshall
students.
Statement for Students with Disabilities
Any student requesting academic accommodations based on a
disability is required to register withDisability Services and
Programs (DSP) each semester. A letter of verification for
approved
accommodations can be obtained from DSP. Please be sure the
letter is delivered to me (or to TA)as early in the semester as
possible. DSP is located in STU 301 and is open 8:30 a.m.5:00
p.m.,Monday through Friday. The phone number for DSP is (213)
740-0776.
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Statement on Academic Integrity
USC seeks to maintain an optimal learning environment. General
principles of academic honesty
include the concept of respect for the intellectual property of
others, the expectation that individualwork will be submitted
unless otherwise allowed by an instructor, and the obligations both
to
protect ones own academic work from misuse by others as well as
to avoid using anothers workas ones own. All students are expected
to understand and abide by these principles. SCampus, the
Student Guidebook, contains the Student Conduct Code in Section
11.00, while the recommendedsanctions are located in Appendix
A.http://www.usc.edu/dept/publications/SCAMPUS/gov/
Students will be referred to the Office of Student Judicial
Affairs and Community Standards forfurther review, should there be
any suspicion of academic dishonesty. The Review process can
befound at: http://www.usc.edu/student-affairs/SJACS/ Failure to
adhere to the academic conduct
standards set forth by these guidelines and our programs will
not be tolerated by the USC Marshallcommunity and can lead to
dismissal.
Emergency Preparedness/Course Continuity
In case of emergency, and travel to campus is difficult, USC
executive leadership will announce anelectronic way for instructors
to teach students in their residence halls or homes using a
combination of Blackboard, teleconferencing, and other
technologies. Instructors should beprepared to assign students a
"Plan B" project that can be completed at a distance. For
additionalinformation about maintaining your classes in an
emergency please access:
http://cst.usc.edu/services/emergencyprep.html
Please activate your course in Blackboard with access to the
course syllabus. Whether or not youuse Blackboard regularly, these
preparations will be crucial in an emergency. USC's
Blackboardlearning management system and support information is
available atblackboard.usc.edu.
Incomplete Grades Explanation:
In incomplete (IN) grade may be assigned due to an emergency
that occurs after the 12 th week of
classes. An emergency is defined as a serious documented
illness, or an unforeseen situation thatis beyond the students
control, that prevents a student from completing the semester.
Prior to the12th week, the student still has the option of dropping
the class. Arrangements for completing anIN course should be
initiated by the student, and negotiated with the instructor. Class
work to
complete the course should be completed within one calendar year
from the date the IN wasassigned. The IN mark will be converted to
an F grade should the course not be completed.
Assignment Submission Policy
Assignments must be turned in on the due date/time
electronically via Blackboard. Any assignmentturned in late, even
if by only a few minutes, will receive a grade deduction (for
example, if your
work is a B+ grade, you will be given a C+ grade). If your
internet breaks down on the due date,you must deliver a hard copy
at the beginning of class on that day. If you are unable to attend
classon that day, make arrangements for it to be delivered to the
classroom or to my box by the start ofclass. Late or not, however,
you must complete all required assignments to pass this course.
Evaluation of Your Work
http://www.usc.edu/dept/publications/SCAMPUS/gov/http://www.usc.edu/dept/publications/SCAMPUS/gov/http://www.usc.edu/dept/publications/SCAMPUS/gov/http://www.usc.edu/student-affairs/SJACS/http://www.usc.edu/student-affairs/SJACS/http://cst.usc.edu/services/emergencyprep.htmlhttp://cst.usc.edu/services/emergencyprep.htmlhttp://blackboard.usc.edu/http://blackboard.usc.edu/http://blackboard.usc.edu/http://blackboard.usc.edu/http://cst.usc.edu/services/emergencyprep.htmlhttp://www.usc.edu/student-affairs/SJACS/http://www.usc.edu/dept/publications/SCAMPUS/gov/
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You may regard each of your submissions as an exam in which you
apply what youve learned
according to the assignment. I will do my best to make my
expectations for the various assignmentsclear and to evaluate them
as fairly and objectively as I can. If, however, you feel that an
error has
occurred in the grading of any assignment, you may, within one
week of the date the assignment isreturned to you, write me a memo
in which you request that I re-evaluate the assignment. Attachthe
original assignment to the memo, and explain fully and carefully
why you think the assignment
should be re-graded. Be aware that the re-evaluation process can
result in three types of gradeadjustments: positive, none, or
negative.
All grades assigned by faculty members are final. Students have
the right to seek explanation,
guidance, counsel and reasons for the assignment of a grade.
Students may appeal a gradeaccording to university policy as set
forth in SCampus. Faculty may initiate a change in grade if
there is an error in the calculation of a grade. However, a
faculty member may not change adisputed grade outside the formal
appeals process. In response to a disputed academic evaluation
by an instructor, a student is entitled to two levels of appeal
after review by the instructor: first tothe chairperson of the
department and then to the appropriate dean of the school. The
fulluniversity policy can be found on page 125 of SCampus and
at:
http://www.usc.edu/dept/publications/SCAMPUS/gov/disputed_academic_evaluation_procedures.html
http://www.usc.edu/dept/publications/SCAMPUS/gov/disputed_academic_evaluation_procedures.htmlhttp://www.usc.edu/dept/publications/SCAMPUS/gov/disputed_academic_evaluation_procedures.htmlhttp://www.usc.edu/dept/publications/SCAMPUS/gov/disputed_academic_evaluation_procedures.htmlhttp://www.usc.edu/dept/publications/SCAMPUS/gov/disputed_academic_evaluation_procedures.htmlhttp://www.usc.edu/dept/publications/SCAMPUS/gov/disputed_academic_evaluation_procedures.html
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COURSE READINGS/CLASS SESSIONS
Daily Activities Tasks, Readings, and Due Dates
Week 1
Dates
Introduction / Class Overview Th: Readings: MY Chapter 1-2
Week 2
DatesLecture on security issuance / Case 1 Tu: Read MY, Chapter
3-4
Th: Turn case 1
Week 3
Dates
Lecture on security issuance Tu: Read MY, Chapter 5-6Th: Turn in
case 2
Week 4
DatesDynatronics case: Part 2 / Lecture on VC
Week 5
DatesLectures on Venture Capital (VC) Tu/Th Read MY, Chapter
7-10
Week 6Dates
Lectures on VC continuedVenture capital case 1
Th: Turn in case
Week 7
Dates
Case 2 / Industry Speaker Tu: Turn in case
Week 8Dates
Midterm
Week 9
DatesLecture on scenario analysis and simulation/ Review Crystal
Ball
Th: Do Crystal Ball tutorial
Week 10
DatesCase on biotechnologyLecture on Initial Public
Offerings
Tu: Turn in case
Week 11
DatesCase on IPOs Part 1 / Lecture/ Lecture on convertible
bonds
Tu: Turn in case
Week 12
DatesPart 2 of IPO case.Lecture on private equity and LBOs
Tu: Turn in case
Week 13Dates Private LBO case
Industry SpeakerTu: Turn in case
Week 14
DatesLectures on Convertible bonds and warrants
Week 15
DatesFinancial Crisis cases Tu/Th: Turn in case, date depends
on
which case you are assigned to present.
FINALDate
