Private Equity (PE) Modeling - A Comprehensive Training

Private equity is a source of capital from institutions and people with high liquidity for investing and acquiring equity ownership in companies. The partners of a private equity firm raise and manage the capital for yielding profits for their shareholders. The typical investment horizon for private equity is four to seven years.

The capital may be used to purchase shares of public or private limited companies that are delisted from stock exchanges. These companies often undergo a private transfer of ownership. The minimum amount of capital required for investment may vary depending on the fund raised and the policies of the private equity firm.

How does a private equity firm work?

A private equity firm will usually acquire 100% stake in the target company. It’ll then use a combination of debt and cash for financing the acquisition. A major advantage of using debt is that the firm has to invest less cash. The return on equity, thus, is higher and the firm can undertake more and bigger investments. Once the target company has been acquired, future cash flows are used for paying off the debt. If the firm has resorted to leveraging, they would require a financial sponsor. Banks, typically, come forward to lend money to private equity firms.

The aim of private equity firms is to take over a company or business, enhance its value, and then sell off its shares. Such a firm would typically target 20% returns each year. There are several ways by which the private equity firm can improve the business of the acquired company. These may involve changing the management, improving production efficiency, reducing costs and various other possible actions. A private equity investment is usually less risky compared to venture capital because the acquired company is usually large. Chances are unlikely that its value will collapse in the future.

Phases in private equity

Typically, there are three phases of private equity investing. They are as follows.

• Capital commitment: The investor inks a legally binding agreement for paying a fixed amount of capital to the fund house for a period of time. This is usually three to five years.

• Drawdown: The private equity fund manager draws down i.e. calls the committed capital of the investor in increments. This is because the fund managers find attractive investments, usually with five to 15 days prior notice.

• Distribution: The investor gets a distribution when the fund exits the investment i.e. sells off the acquired company. The distribution is largely in cash but may be used to offset the future drawdowns.

Private equity versus venture capital

A venture capital firm often has a similar business model like that of a private equity. The focus, however, varies. Venture capital funds mostly invest their capital in startup and young companies. These companies usually don’t have any track record of performance. Buyout and private equity funds, on the other hand, invest capital in a more established business that has a high potential for growth and value appreciation. They enhance the performance of the business over a long period of time via strategic management, structural changes, and operational improvement.

Private equity versus hedge funds

Private equity funds seek to create value in the long term. Hedge funds, on their part, have a shorter investment horizon that’s more in line with the stock market movements. Private equity firms usually invest and own everything of a company and have a fixed line of interest with the managers in the company. This ensures that both the investors and the company attain the growth potential over time. They succeed only if the company returns robust numbers.

A hedge fund is a pool of capital. The money is invested in stocks, bonds, commodities and similar financial instruments and typically doesn’t involve purchasing a controlling stake in the company. Hedge funds try capitalizing on short-term market movements. They use a complex trading strategy that involves derivatives, options, and similar other instruments. In many cases, hedge funds bet against shares of the company they don’t own i.e. short selling, expecting to bag profits from the falling share prices.

Private equity money back strategies

Private equity firms usually get a return on their investment in one or all of the following ways.

• Initial public offering (IPO): Shares of the acquired company are floated in the open market for the public to subscribe. It provides a prompt return on their investment via the sale of shares.

• Merger or acquisition: The company’s shares may be sold to another company interested to own it. The sale may also happen on an all-cash deal.

• Recapitalization: In this method, cash is distributed among the shareholders i.e. investors, either from the cash flow generated by the acquired company or by raising a debt or other securities for funding the distribution.

Private Equity Modeling Course description

The private equity modeling training course description is as follows.

• Private equity fund: You are introduced to private equity funds in this section.

• Fees in private equity: You learn about the various fees in private equities.

• Returns in private equity: The returns from private equity are taught in this section.

• Deal structuring: This section is divided into five parts. You learn about pre and post money, preferred shares, participating in preferred shares, multiple liquidation preference, and other structures.

• Private equity strategies and investments: In this section, you learn about the various strategies and investments in private equities and deal structuring (Microsoft Excel file).

• Role of banks in private equity: This section deals with the role played by banks in private equities.

• Value of private equity investment: Determining the value of a private equity investment is taught in this section.

• Private equity structuring: In this section, you learn about the value of private equity investments, financial engineering, and private equity structuring.

• Private placements memorandum: This section deals with buying shares or assets.

• Fund structures and investment process: This section is divided into eight parts. Topics covered include private placement memorandum, the flow of money in a fund structure, the fund structure’s organization, private equity which is often used as a fund structure, and the investment process. The last named, on its part, includes approaching the private equity firm, inquiries and negotiations, and due diligence.

• Refinancing and exit of private equity: The final negotiations and completion of the investment process is discussed in this section.

• Fund manager’s perspective: Points to consider, and the bid-ask spread is discussed in this section along with exit routes in the investment process, the relevance of the term sheet, and the process to bridge the bid-ask gap.

• Private equity financial modeling: You are introduced to financial modeling in this section and also learn about the post-investment performance.

• Cost sheet: Topics covered include direct costs and revenue buildup sheets.

• Working capital management: Indirect costs in the cost sheet and historical ratios in the working capital schedule are discussed here.

• Depreciation schedule: This section covers projecting in a working capital schedule, and capital expenditures and forecasting in the depreciation schedule.

• Amortization schedule: Linkages in the depreciation schedule is covered here.

• Shareholder’s equity schedule: You learn about the shareholder’s equity schedule and completing the income statement.

• Debt schedule: You are taught about cash flow and completing the balance sheet and calculate the cash available to service the debt.

• Pre-money valuation: Linkages to the debt schedule, calculation of FCFF, Beta and WACC are taught here.

• Post-money valuation: Calculation of equity value during post-money valuation is taught in this section.

• IRR and comparable company analysis: You learn how to prepare the cap table and IRR analysis.

• Term sheet: This section is divided into five parts. It covers comparable company analysis, capital structure, conditions and covenants, drag and tag along rights, and other terms and provisions.

Requirements of Private Equity Modeling

Those intending to make a career in private equities modeling should at least have a bachelor’s degree with majors in accounting, statistics, economics, finance or mathematics. Private equity firms usually don’t hire straight after college or business school, unless the candidate has done an internship in a private equity firm or has relevant work experience. Working as an investment banker or an analyst for at least a couple of years is an important qualification. You can expect to make much headway in this profession if you know the right headhunters or have a good network in private equity firms.

Target Audience Private Equity Modeling

The private equity modeling training course is of intermediate level. Investment bankers, fund managers, business leaders and other finance professionals, who want to understand the private equity landscape better, may attend this course. Students interested to understand the concepts of private equity can also join the course. Private equity professionals and career pursuers, people wanting to found their own private equity fund, asset managers, pension funds and endowment trustees, accountants, investment consultants, private bankers, independent financial advisers, family office representatives, private investors, hedge fund managers, investor relations managers, corporate financiers, quantitative analysts, actuaries, and risk managers, can attend the course.

Private Equity Modeling- Career Benefits

The private equity modeling training course develops your confidence and makes you a top professional in this rewarding field. You can go back to your company with a better and bigger understanding of the global private equity industry. You arrive at your workplace with the practical tools for better managing the mechanics to select and structure a deal and instill value-enhancing strategies.

Following are some of the major career benefits.

• Acquire skills to execute confident private equity investments by engaging in key marketing techniques and practices, armed with investment instruments.
• Master private equity funds and their fee structure.
• Understand the mechanics behind the real selection, structuring, and valuation, crating values and harvesting.
• Understand the financial and legal aspects involved in buyout transactions.
• Infuse more value and minimize risk by going through cross-industry case studies.
• Get real-life insights through classroom interaction and business cases and debate with corporate lawyers, financiers, private equity experts, investors, and the rising stars of the industry.
• Build a network of international and national contacts that are highly diverse and also relevant to your business.

Benefits to your organization

• Get back to your company with fresh perspectives that you gained from the world-class faculty.
• Independently select and structure the best private equity deals for your company.
• Increase the value of your company’s future deals, and exhaustively learn the financial and legal requirements.

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