Please help - PE Modeling Question
I could really use some help here so I’m re-posting this question and asking it better. I've got a quasi-formal/quasi-info. interview coming up that may lead to an internship, which may lead to a FT in a small PE firm.
What kind of modeling does one typically do in "growth PE" and how does it differ from lbo models? I see the main differences being:
-- Only equity is invested in the portfolio co
-- Investments are sporadic and/or unpredictable (because cash needs of the port co are sporadic and/or unpredictable)
Are these the main differences between buyouts and growth PE? And more importantly, how do they affect a model? Thanks sooo much.
On one hand the debt structure is less complicated.
On the other hand the value of investments is more dependant on future growth. Therefore, there are usually mechanisms who take this into account and reward management/owners if the BP is achieved (stock options, etc.) or hedge the funds investments if the BP is not achieved (convertible bonds, etc.).
Summary of Growth vs. Buyout: - less complicated debt structure - more flexible capital structure
This is only based on my experience of a limited number of Buyouts and Growth equity investments, so it might not be totally accurate.
Hope this helps.
I will try to be as brief as possible.
for growth PE , i am assuming u mean venture capital investments or new technology investments... these investments have low predictability of cash flows. They dont have good comparable companies so the basis for valuation is pre and post money valuation. For Buyouts we use DCF as most of the investments in this category are stable and cash flow generating businesses. Relative value is alos used for LBOs as a check for DCF.
I hope this helps u.. I also have an interview for FT at a small PE> hope to learn from each otehrs experience..:)
Usually Growth PE refers to equity only investments in mature companies, with minority interest for the fund.
It makes sense... with high reinvestment in the growth company, PE wud go for minority interest unlike LBOs....
you use the same model for both. with the difference (as europebob pointed out)
that there is no debt financing for growth investment
Otherwise you still do your cash projection, figure out your terminal year ebitda through projections, exit at a multiple and you figure out your IRR based on this.
A few qualitative points on a growth investment situation:
the company won't have too much excess cash left each year since it needs to reinvest its cash to fund growth (capex, working capital and so on). but it doesn't matter because your company is not levered and does not need the cash to cover leverage interest. well actually it is the other way around, becase your company won't have too much excess cash left every year, this is why you can't LBO it and can only to all equity
hope it helps.
Voluptate earum culpa provident atque aliquid. Fuga rerum officiis nisi.
Quia qui sed omnis vero id quas. Inventore exercitationem accusamus praesentium dolores sequi exercitationem. Libero doloribus nihil labore eaque. Repellendus natus accusantium commodi molestiae et tempore qui iure.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...