Special Sits PE Case Study Example

The webinar for this case is TODAY, July 6th, at 5:00pm EDT. If you miss it, it will be replayed for free on the homepage on August 6th

Even though recruiting season is not necessarily around the corner, I thought I'd share the below with the community. If anyone has a case study/modelling test coming up, going through the below will prove beneficial and give you an idea what you should expect. You should be able to complete everything in 60 minutes.

Overview
Special Situations Partners LLP is looking to invest in an Oilfield Services company in Europe.
In the last reported year, the company generates $50mm in revenue and had an EBIT margin of 38%.
We can buy the asset for 7.0x EBITDA (cash- and debt-free) and can use 80% total debt, of which 75% is senior debt (5% interest rate) and 25% is Mezzanine debt (15% total interest rate, 7% cash and 8% PIK). Interest on cash is 0.5%.

In order to facilitate growth, the company needs $10mm in growth capex upon acquisitions and the current management team has signalled interest to invest $10mm as common equity. Our investment would be structured as preferred equity.

Holding period is assumed to be 5 years, with transaction costs estimated to be 2% of firm value. The company's revenues are growing at 3% over the forecast period, the EBITDA margin stays stable throughout the forecast period, D&A is assumed to be 2% of revenue per year. Maintenance capex is equal to D&A. The tax rate is 10% and there is no minimum cash balance and all excess cash flow is distributed as dividends.

Upon exit, any returns up to 10% are distributed 2/3 to preferred equity holders and the remainder to common equity holders. Between returns of 10-20%, preferred equity payout goes down by 20% with the remainder being distributed to common equity holders. Above 20%, preferred equity payout goes down by 30% and the remainder goes to common equity holders.

What is the IRR and money multiple for both preferred and common equity holders?

There will be a webinar related to this topic on July 7th, 5pm et (with a free replay on the frontpage August 7th) //www.wallstreetoasis.com/event/webinar-private-equ…

 

As an associate that works with businesses with $0M - $30M EBITDA I focus a lot on both majority LBOs and structured minority growth investments. This case captures a lot of stuff. Definitely a really solid one to make sure you are good at doing.

+1 for posting

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
 

hope you don't take offense to this, but is this how simple PE 'case studies' are (only interviewed for HF's and never really cared enough to ask my friends what their case studies were like)? or is this purely the modeling exercise portion?

 
Best Response

It will vary based on firm.

I've had only a 90 minute model test that you don't really have to defend, just do the model right based on assumptions such as above

I've had a firm give me a CIM and management presentation for a obscure bsiness (specialty chemicals for example) and say I have 4 hours to build a full lbo model from scratch + write and present a 1 page memo. You then spend 60 minutes presenting and defending assumptions to 1-3 people at the firm

My firm does something similar but uses a public company and gives you a 10-k/10-q for a $1B-$5B market cap business and gives you ~4 hours

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
 

These would freak me out due to the time constraint, more so the 4 hour than the 90 minute. I've only done HF style 3+ day case studies.

Having 3-4 hours is difficult just in terms of time management and order of operations. How would you approach a 3-4 hour case where someone expects a short deck and you have to defend assumptions? Start with MD&A > then model > then assumptions > then output?

 

Looking forward to the webinar. I just started as a PE associate at a lower MM shop and this is exactly the type of model I would be asked to build, albeit with a boilerplate template.

 

Thank you so much for this! Very helpful. I have just one question regarding the assumptions. Is it EBIT margin of 38% or EBITDA? The reason I am asking is because D&A will actually be higher than 2% of revenue as transaction fees are capitalized and therefore amortized over the lifetime of the loan.. It is not very hard to adjust in I&S but I just wanted to make sure...

 

1) that's an assumption you should make when completing this case. However, usually you wouldn't assume multiple expansion for this type of case 2) no, it is additional that needs to be funded 3) for that you need to build a return waterfall. In general, there shouldn't be any cash above the minimum cash balance left in the business

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing. See my Blog & AMA
 

Is the dividend only to preferred? Does management begin to receive a return of capital throughout the holding period via dividend or only at the point of exit? Do the figures given for distribution apply to dividends or only at the point of sale?

 

I like your approach but I am not sure about financing capex with equity as well as your waterfall...

  1. Why don't you use CFs from the company to finance non-recurring growth capex?
  2. With a 10% hurdle rate, I would think that you need a 10% return every year compounded. Why would you use all the proceeds in year one for the first hurdle? In your case, you are distributing $12.2 mm to preferred and common which is equal to a ~27% return... I would distribute 10% in year one on the first hurdle, then up to 20%, etc. So in your case, I would distribute only ~$4.5 mm to preferred and common in year 1. I might be wrong but that's how I would do it. Feedback are welcome.
 

you can call into the presentation, here's the info:

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May be wrong on either of these two, but here's a shot:

1) Unless a company is going to be liquidated, yes. DIPs are very lucrative usually and if the company has some value (which is why it won't be liquidated) then why wouldn't you do the DIP? 2) Assuming I understand what you're saying right, you can usually just change buckets around (sell an asset, use that cash for your normal capex and take cash flow that you noramlly wouldn't have used for your capex and use it for w/e else you want to do).

 

Hi wso_lady, hope I can help. Do any of these links cover what you're looking for:

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If we're lucky, the following pros may have something to say: ledger123 dlarsen1781 Joshmmay

Hope that helps.

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

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