Special Sits PE Case Study Example

Matrick's picture
Rank: Almost Human | 9,932

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-equi...

Comments (61)

Jun 16, 2016

Could you post the solution

Jun 16, 2016

The answer will be covered in a webinar, Wed July 6th, 5:00pm EDT. https://www.anymeeting.com/632-091-607

    • 3
Jun 18, 2016

Might've missed this, but when/where is the webinar?

Jun 29, 2016

Is the webinar Wed July 6th or Thur July 7th?

Jul 7, 2016

Thanks again for doing this! So you mentioned on the call the excel would be posted somewhere on WSO...did I miss something or has it not been posted yet?

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Apr 29, 2017

Username checks out.

Jun 16, 2016

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

Jun 18, 2016

Wow, great little exercise. Thanks for posting @Matrick -- looking forward to checking answers with solution.

Jun 16, 2016

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?

Jun 16, 2016

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

    • 2
Jun 17, 2016

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?

Jun 17, 2016

I will never be able to solve this...

Jun 16, 2016
marcus2012:

I will never be able to solve this...

It looks more difficult than it actually is.

Jun 18, 2016

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.

    • 1
Jun 19, 2016

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...

Jun 16, 2016

The case states that transaction fees are 2% of firm value. Forget about amortizing financing fees.

    • 1
Jun 19, 2016

Thank you! Yes I meant financing fees. My bad.

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Jun 19, 2016

Looking forward to seeing the solution covered- thanks for posting this

Jun 16, 2016

Will try to get that scheduled asap.

Jun 21, 2016

bump.

Jun 21, 2016

Great practice case

Jun 21, 2016

@Matrick can you clarify a few things:

1) is the exit multiple assumed to be the same as the entry?
2) is the the $10m of growth capex assumed to be the preferred equity investment?
3) do the preferred holders get any of the returns from the dividends within the 5 year period or just the returns at exit?

Jun 16, 2016

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

    • 1
Jun 24, 2016

Do you really see debt providers let equity holders dividend anything out before paying them down?

Jul 5, 2016

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?

Best Response
Jun 22, 2016
    • 4
Jun 16, 2016

Cool, I'll check it out later

Jun 18, 2016

Took a stab at it as well. Wasn't clear on on some of the assumptions (e.g., $10M growth capex is non-recurring and is funded by management preferred equity, exit = entry multiple, etc.). Any feedback welcome.

https://www.dropbox.com/s/xjougb2qc7ajs8g/Paper%20...

    • 1
Jun 19, 2016

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.
    • 1
Jun 23, 2016

Very Helpful. Thanks for posting this good example.

Jun 23, 2016

Will there be an audio only feed?

Jul 6, 2016

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

"To call-in to the presentation, dial (323)-920-0091 (USA), and enter this pin: 9633561# (same for all webinars). To call in from Canada: dial 438-800-2937, UK: 0121 368 0009, attendee pin: 9633561#"

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Jul 5, 2016

https://www.dropbox.com/s/fnjcm4pvd39yh66/160705%2...
Took a stab as well. Since the case mentioned the entire distribution setup is for exit -> I calculated year 1- year 4 cash dividend based on equity ownership. Appreciate any thoughts and thanks for sharing the case.

Jul 13, 2016

Hi Matrick, has WSO posted the Excel solution yet?

Jul 11, 2017

Has anyone found a solution yet?

Aug 18, 2016

Does someone mind posting the solution? Thanks!

Oct 31, 2016

Would someone please PM the materials for this case study? I missed the webinar and would greatly appreciate it.

Mar 6, 2017

Can someone please PM me the solution for this case study? Seems like a solid case study that I'd like to try myself, but I was not aware of the original webinar.

Mar 7, 2017

I would really appreciate if someone could send me the material as well.
Thanks

Mar 7, 2017

Did either of you get the solutions? I can't seem to find it anywhere on this site.

Mar 7, 2017

I saw a solution going around... forgive me if I am mistaken, I think it is wrong, the distributions doesn't add up to the total equity proceeds.

Apr 30, 2017

How is this special sits? Just because of the equity structure?

Mar 12, 2018

Hate to bring back an old post but does anyone have a solution for this?

Is there any way to access the video after it's occurred?

Mar 18, 2018

also interested

Mar 18, 2018

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).

    • 1
Mar 18, 2018
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Mar 18, 2018
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