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PE Case Study - question about Valuation
 

johnny_quest's picture
IB
(Monkey, 50
 
Points)
 on 7/1/12 at 1:28pm

Hey guys,

I have a case study that I need to complete on a potential LBO opportunity. I was provided a CIM and was asked to come to a conclusion on whether I would invest in this company or not?

This is a fairly small MM target company that I'm looking at, so my first question is how do I come up the valuation for this target (e.g. entry multiple, etc.) so that I can even begin to come up with a capital structure.

Any insight would be helpful!

couchy's picture

valuation in PE is no

(King Kong, 1,389
 
Points)
 on 7/1/12 at 1:31pm

valuation in PE is no different than valuation in IB..

johnny_quest's picture

I will be doing a LBO model

IB
(Monkey, 50
 
Points)
 on 7/1/12 at 1:40pm

I will be doing a LBO model but the valuation will be affected by my Entry Multiple - I'm not sure what the right multiple would be, as this would dictate what the equity purchase price is.

I dont think the scope of the case study is to do a DCF, or comps analysis (there are no comps, as its a very small company with no public competitors).

JDimon's picture

I'm an undergrad student so I

(Orangutan, 258
 
Points)
 on 7/1/12 at 3:06pm

I'm an undergrad student so I literally have no idea what I'm talking about here, but aren't there industry standard multiples you can pull off Bloomberg for that sort of thing?

There is already a book on you. That book is already being written. And if I talked to your friends, your teachers, your professionals, your family, I would know so much about you I wouldn't even have to meet you. You write the book the way you want to be

Sandhurst's picture

There are always comps, and a

IB
(King Kong, 1,248
 
Points)
 on 7/1/12 at 3:30pm

There are always comps, and a good PE firm will have access to them. Also, as alluded to above, you can pull industry standars/average multiples (which is just a proxy for comps). Also, you can run out a DCF to get a sense of what those multiples should generally look like from a valuation standpoint.

"There are three ways to make a living in this business: be first, be smarter, or cheat."

couchy's picture

value the company focusing on

(King Kong, 1,389
 
Points)
 on 7/1/12 at 3:56pm

value the company focusing on returns, checking if that valuation makes sense for the seller, and if investment return satisfy the risk involved in the company's financing package / operations.

I would first do a very short LBO test to get a valuation, build the operating model, and caluclate returns. Then finish with a quick DCF.

You should focus on capital structure more than growth. Your assumptions need to make sense for the business operations.

again, I would focus on analyzing the capital structure.

WonBuyLand's picture

I recently evaluated five

PE
(Monkey, 34
 
Points)
 on 7/1/12 at 10:51pm

I recently evaluated five deals for a small pe firm and they gave me an offer so...

Seperate the eval into buckets:

Management
Business Model
Financial evaluation
Questions

Always ask a ton of question in your evaluation.
Start with the P&L. What are the company’s revenues? Expenses? How much does that mean it makes in operating earnings? Does it require a lot of cap ex? Does it have any debt on it? How much does it cash flow, after interest and taxes? Assuming it didn’t have any debt, how much cash could it produce after taxes? How much would you be willing to pay for it (hint: start with your targeted rate of return (say 20%) and work backwards… if you need a 20% return and it cash flows $5 / year, you’d be willing to $25, right?)? Assuming you could put 3x EBITDA worth of debt on it and paid 5% in interest, then how much would you be willing to pay for it?

johnny_quest's picture

Does a mezz investor

IB
(Monkey, 50
 
Points)
 on 7/3/12 at 8:46pm

Does a mezz investor typically make a co-investment as % of their mezz investment or as a % of total new equity into the transaction?

Here are the assumptions:Lets assume they make a 10% co-investment. Total new equity in LBO: $500mm; Total mezz investment: $100mm. Does that 10% apply to the mezz tranche or total equity that's being put in.

For example, Mezz firm invests $100mm in the mezz tranche and would like to make a co-investment. Would they a) make an equity investment sized based on a % of their $100mm mezz hold (i.e. invest $10mm equity co-investment), or (B) make a 10% based on the $500mm (new equity), or $50mm.

Does that make sense? I'm just confused what the 10% applies to..

nyc123's picture

10% equity co-investment

(Baboon, 150
 
Points)
 on 7/3/12 at 11:37pm

10% equity co-investment would mean 10% of the equity in the deal, so 10% of the $500mm not the $100mm

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