Private credit investment case study

For a direct lending or private credit investment case study, here's how you can structure your approach and focus your time effectively:

1. Structuring Your Investment Memo (IM)

Your IM should be concise and cover the following key sections: - Executive Summary: A brief overview of the investment opportunity, including the company, industry, and your recommendation. - Business Overview: Highlight the company's operations, market position, revenue drivers, and competitive advantages. - Financial Analysis: Focus on key credit metrics like leverage ratios, fixed-charge coverage ratio (FCCR), debt service coverage ratio (DSCR), and EBITDA trends. - Debt Structure: Propose a debt structure (e.g., senior, unitranche, mezzanine) and justify your choice based on the company's financials and risk profile. - Collateral Package: Identify potential collateral to secure the loan and assess its quality. - Risks and Mitigants: Outline key risks (e.g., recession sensitivity, customer concentration) and how they can be mitigated. - Recommendation: Conclude with your investment thesis and why the deal makes sense.

2. Key Analysis to Focus On

• Debt Capacity: Build a simple LBO-style model to assess the company's ability to service debt. Exclude equity returns and focus on debt repayment capacity.
• Comparable Analysis: Create a list of public comparable companies and analyze their capital structures, leverage ratios, and interest rates to benchmark your assumptions.
• Covenants: Review recent term loan covenants in similar deals to understand market standards and include them in your proposal.
• Downside Case: Model a downside scenario to stress-test the company's ability to meet its obligations under adverse conditions.

3. General Assumptions and Rules of Thumb

• Leverage: Avoid excessive leverage. For example, if the company's peak multiple is 10x and trough multiple is 4x, keep leverage at a conservative level (e.g., 3x EBITDA).
• Interest Rate: Use debt comps to determine a reasonable coupon rate. Consider the company's risk profile and industry trends.
• Collateral: Focus on assets with stable value and low volatility, such as receivables or inventory.
• Recession Resistance: Prioritize companies with recurring revenue, diverse customer bases, and strong margins.

4. Preparation Tips

• Practice Modeling: Familiarize yourself with building a basic cash flow and debt schedule model. Include key credit metrics like DSCR and FCCR.
• Review Debt Primers: Brush up on debt structures, covenants, and credit metrics to ensure you're comfortable discussing them.
• Mock Case Studies: Practice with sample case studies or create your own using publicly available filings and research reports.
• Understand the Industry: Research the private credit market, recent deals, and trends to provide context during your presentation.

5. During the Case Study

• Time Management: Allocate your time wisely—spend the first hour building a rough model, the second hour refining your analysis and preparing your IM, and the final hour preparing for the presentation.
• Be Clear and Concise: Focus on the most critical aspects of the investment case. Avoid overcomplicating your analysis.
• Defend Your Assumptions: Be ready to explain and justify your assumptions, especially around leverage, interest rates, and risk factors.

By following this structure and focusing on these areas, you'll be well-prepared to tackle the case study and impress the MDs with your investment thesis. Good luck!

Sources: Private Credit Resources and Prep, Private Credit Case Study, Private Credit is Paradise