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…
Could you post the solution
The answer will be covered in a webinar, Wed July 6th, 5:00pm EDT. https://www.anymeeting.com/632-091-607
Might've missed this, but when/where is the webinar?
Is the webinar Wed July 6th or Thur July 7th?
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?
Username checks out.
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
Wow, great little exercise. Thanks for posting @Matrick -- looking forward to checking answers with solution.
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?
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
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?
I will never be able to solve this...
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...
The case states that transaction fees are 2% of firm value. Forget about amortizing financing fees.
Thank you! Yes I meant financing fees. My bad.
Looking forward to seeing the solution covered- thanks for posting this
Will try to get that scheduled asap.
bump.
Great practice case
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?
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
Do you really see debt providers let equity holders dividend anything out before paying them down?
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?
Had a go here:
https://www.dropbox.com/s/fg6srghiu41jw2n/WSO%20v3.xlsx?dl=0
Cool, I'll check it out later
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%20LBO%202.xlsx?dl=0
I like your approach but I am not sure about financing capex with equity as well as your waterfall...
Very Helpful. Thanks for posting this good example.
Will there be an audio only feed?
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#"
https://www.dropbox.com/s/fnjcm4pvd39yh66/160705%20Special%20Situation%…
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.
Hi Matrick, has WSO posted the Excel solution yet?
Has anyone found a solution yet?
Deleted
Would someone please PM the materials for this case study? I missed the webinar and would greatly appreciate it.
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.
I would really appreciate if someone could send me the material as well. Thanks
Did either of you get the solutions? I can't seem to find it anywhere on this site.
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.
I agree, also couldn't reconcile the distributions in the official answer sheet
How is this special sits? Just because of the equity structure?
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?
also interested
Couple questions on distressed investing case (Originally Posted: 01/16/2017)
I'm working through a distressed case and had a couple questions, figured I'd give it a shot on here.
Is a Debtor-in-Possession loan a given even if the company has slightly above breakeven EBITDA, $80M of cash, $40M in interest expenses before I expect them to default on the debt when it comes due, $20M available on the revolver, and about $4M/year in maintenance capex.
I noticed in indenture a line about "replacement assets," which is defined as "tangible assets that will be used or useful in a Permitted Business." Does cash and cash equivalents qualify? (More background: They have a provision that if they sell an asset they have to use excess cash to buy back the debt at par, unless they use it to buy replacement assets, acquire a company, spend on capex, etc.)
Thanks in advance for any help.
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).
Got it, thanks, appreciate it!
CASE STUDY INTERVIEW TOMORROW IN SPECIAL SITUATIONS FUND (Originally Posted: 12/18/2017)
How do I best prepare? This is the information I was given for a special situation fund private equity associate role:
2-3 Hour case study on a laptop 30-45 minute debrief
Please help ASAP! Thanks!
Hi wso_lady, hope I can help. Do any of these links cover what you're looking for:
If we're lucky, the following pros may have something to say: ledger123 dlarsen1781 Joshmmay
Hope that helps.
commenting to save
Can you re-post the solution? Thanks!
bump
bump
appreciate the WSO official solution.
bump
Can someone post the answers? Thanks
Can someone please share the solution with me please?
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