Hi, share your knowledge with the community!

How to approach PE Investment Cases best?

Anonymous A

What is the best way to structure a case in which a PE ist considering an investment?

Thanks a lot in advance!

  • Upvotes
  • Date ascending
  • Date descending
Currently non-active expert
Expert
replied on 02/05/2018

Hey anonymous,

Let me recover one proposal I ellaborated just a few days ago to a (relatively) similar query.

1. analyze the market/external factors

how sizable is currently the market and any growht expectation into the future? (demand side)

what about the competitive landscape? (supply side)

any relevant regulations/barriers to entry? (supply side)

2. analyze the company internal factors

what's the historical financial performance (traditional profitability tree; include benchmark vs. competitors and market share)?

do they have the right/needed capabilities (production, distribution, transport, management)?

3. transaction details

adequate pricing (valuation piece)

how to finance the transaction

exit strategy

Best

Bruno

Vlad replied on 02/05/2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

At the consulting interviews you may have two types of PE cases:

  1. Due-diligence of the target company
  2. Synergies calculation of two merging companies

You can check which type of case you have by asking whether the PE fund already has another company in the portfolio for the synergies.

1. For DD you can use the following structure:

Market

  • Size
  • Growth rates
  • Profitability
  • Segments
  • Distribution channels

Competition

  • Market shares of competitors and their segments (see the next point)
  • Concentration / fragmentation (Fragmented market with lots of small players is less mature and easier to enter from a scratch. Concentrated market is hard to enter but has potential acquisition targets)
  • Unit economics of the players (Margins, relative cost position)
  • Key capabilities of the players (e.g. suppliers, assets, IP, etc)

Company

  • Unit economics (Margins, costs) in current or target markets
  • Brand
  • Product mix
  • Key capabilities

Feasibility of exit:

  • Exit multiples
  • Exit time
  • Existence of buyers

2. For Synergies Calculation you can use the following structure:

  1. Revenue synergies - here you calculate the synergies in price and quantity (depending on the case it may be new geographies, new products, new distribution channels, bigger share on shelves crosselling opportunities, etc.)
  2. Cost synergies - typically you use a value chain structure tailored to the industry (e.g. supply-production-distribution-marketing-after sales support)
  3. Risks - major risks that can decrease the synergies (tip: don't underestimate the merging companies culture factor)
  4. Total synergies potential in $, adjusted by risk (probability of failure)

In private equity interviews, the cases will be much more detailed in financial part. Depending on the company you'll need to:

  • Find the relevant information in P&L and Balance sheet
  • Do the simplified valuation using NPV: calculate cash flows and make assumptions about growth rate and discount rate
  • Do the valuation using comps - you'll have to explain which comps you will use and why

Good luck!

Andrea
Expert
replied on 02/05/2018
Former BCG decision round interviewer with 300+ real interviews in 8 years

I agree with both answers. Maybe to get a little sharper on two points:

1) goal clarification --> if it's a PE firm you can ask immediately what is the exit hurdle rate and time horizon of investment. It's a fair assumption that a PE doesn't acquire for just "making a profit" but has a clear threshold in mind. Also In terms of synergies, that goes back to how do those synergies turn into reaching the threshold for both current target and old portfolio company (very rare)

2) valuation --> while is good to list all methods, would feel that suggesting to do a DCF during a live interview would be sadist unless a table with discount rates for all years is provided. My preference always goes for multiples and then ask if they do have a DCF done to compare between the two.

hope it helps!

andrea

Francesco replied on 02/05/2018
#1 Expert for coaching sessions (1700+) | Ex BCG | 850+ reviews with 100% recommendation rate

Hi Anonymous,

quoting a previous post that I wrote, I would consider the following steps:

1) GOAL CLARIFICATION. It is always good to start with the end in mind – thus what is the specific reason why they want to buy the company? Just make profits reselling in 3 years for a higher price? Benefit from synergies with a portfolio company? Test the market for a bigger acquisition?

2) INDUSTRY. There are two macrovariables here.

  • Key industry numbers/facts. This includes for the market and potential subsegments the following
    • Growth
    • Size
    • Barriers to entry (BTE)
  • Key industry players. This includes:
    • Customers segmentation
    • Competition
    • Occasionally for some cases: suppliers and substitutes.

You should present this area connecting with the goal, and not purely listing the elements to analyse as if it was a laundry list. The best way to do so is explain how a certain variable will help you to achieve you goal. Eg, if your goal is to increase revenues, don’t simply say “I want to look at growth, size and BTE”, rather “I want to look at growth and size – this will tell me if the market has the potential to provide enough revenues for our client. I would also like to check BTE, to understand which are the obstacles in entering such a market and thus increase revenues”.

3) COMPANY - TARGET OBJECTIVE FEASIBILITY. Here you want to check the fit between the client and the selected industries.

  • Can our specific client reach its objective in the selected market (eg profits, revenues, increase in value, etc)?
  • Are there positive or negative synergies with the acquisition?

In the first point, you will probably have to go through a profitability/revenue/cost framework, to calculate the effective result.

4) PRICE AND CAPABILITIES. Once you know the industry is attractive and you can reach you goal, you should consider if the price is fair and you have enough capabilities

  • Is the price fair? To understand so, you should do a comparison between the acquisition price and the company value, using multiples in the industry or a DCF analysis.
  • Do we have enough money and other required resources (eg more proper management) to implement our strategy?

You can find more information on the DCF analysis at the link below: https://www.preplounge.com/en/consulting-forum/case-net-present-value-calculations-325

5) RISKS AND NEXT STEPS. What are the major elements that we should further analyse based on the previous points (eg regulator decision, potential other targets to consider, implementation risks, exit strategies)?

Hope this helps,

Francesco

(edited)

Related case(s)

PE Portfolio Strategy

Solved 2.9k times
4.1 5 292
| Rating: (4.1 / 5.0)

We are a private equity firm operating primarily in the automotive industry. We would like you to figure out whether we should increase our portfolio in the sensor market or not. We would like you to do a profit/margin growth potential analysis and tell us how we can add value to this company given ... Open whole case