Co-investment Case Study
Hello,
I am working on a co-investment case study (it is almost an LBO model test from my perspective):
- That target company is a fictitious public company. The sources and uses are quite straightforward to compute, although I am not sure whether to use Total Equity Value or Total Enterprise Value in the "Uses" section.
- There is a preferred equity contribution from a 3rd party for, say, $10MM with PIK interest of 10%. Hence, this makes the case study a "co-investment", I assume.
- There is a section where we all need to build out the Debt schedule, which is not an issue to me but they ask me to incorporate "Preferred Equity Schedule" in this debt schedule too. I am not familiar with this
Are they asking me to treat Preferred Equity as a form of debt in this case? Thank you in advance!
Hey there!
Based on the most helpful WSO content, it seems like you're dealing with a pretty interesting case study!
In the "Uses" section, you typically use the Total Enterprise Value. This is because it represents the total value of a business, taking into account both liabilities and equity. It's the sum of equity value (market cap) and net debt (total debt minus cash).
The preferred equity contribution does indeed make this a co-investment. Preferred equity is a bit of a hybrid between debt and equity. It's equity because it represents ownership in the company, but it's similar to debt in that it has a fixed, predetermined return (the PIK interest in this case).
When they ask you to incorporate the "Preferred Equity Schedule" in the debt schedule, they're likely asking you to treat the preferred equity as a form of quasi-debt. This is because, like debt, it carries a fixed obligation (the PIK interest). So, you would include it in your debt schedule, but remember to account for its unique characteristics, like the PIK interest.
Remember, this is a bit of a simplification and the specifics can vary based on the exact terms of the preferred equity. But hopefully, this gives you a good starting point! Keep swinging from those financial branches!
Sources: cash-free debt-free basis, Is debt more attractive than equity right now?, Typical PE Credit Interview Questions, https://www.wallstreetoasis.com/forum/private-equity/convertible-pref-question-asked-by-mega-fund?customgpt=1, Question regarding debt financing on 4% LIHTC
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