Private Equity and

Venture Capital
Atul Kedia
Investment Process
Session 12

Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 2
PE Value Chain

Preliminary
Deal Formal due Negotiation &
due Closing
sourcing diligence Documentation
diligence

Number of Deals decrease

Use of Internal & External Resources Increase

Costs Increase

Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 3
Deal Sourcing
Proprietary
Opportunities Reviewed: Deal Flow
800
Sell-side
Preliminary DD:
150 Advisors Buy-side
Deal Sourcing
IC Review: Independent
35
Syndicate
Partners
Formal DD:
20

Investments: Other
contacts
5
Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 4
Due Diligence
Deal sourcing Preliminary DD Formal DD Confirmatory DD

• NDA • Deal Team

• CIM • DD Questionnaire
• Mgt Presentation • Data room
• Site Visit

Commercial DD
Financial DD
Legal DD
Human Resources DD

Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 5
Valuation  Deal Pricing Dynamics
Initial valuation is based on incomplete set of info and assumptions
Likely to be adjusted basis further DD (e.g., additional risk factors)
Purchase price + form + closing certainty

Deal Bidding Price Adjustments, Post-closing

Closing adjustments

•Competitive •Defining Net •Contingent

•Reservation Debt payment
price •Locked-box •Breach of
•Fixed IRR vs mechanism contract
Fixed Debt •Completion
•DD deck Accounts
•Two-stage mechanism
auction

Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 6
Deal Structuring
Securing various forms of capital to fund a buyout transaction
Set up a framework of investment vehicles for flow of capital
Process to optimize Pco’s capital structure and legal structure
LBO instruments are far more complex than vanilla VC and growth equity investment
Financing instruments:
Debt
Senior debt  seniority + security + covenants + low rate of interest
Junior debt
Vendor financing
Shareholder loans
Equity – PE and management
Preferred shares (with control / special rights!)
Common Equity

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LBO financing
Senior Debt
Sources of Uses of
funds funds Largest portion of debt; issued by bank(s)
Shortest term (5-8 years); least expensive
Secured against identified assets
Purchase
Senior Debt Priority claim in case of bankruptcy
target equity
Most stringent covenants
Multiple tranches (one amortising, others bullet)
Refinance Junior Debt
Junior Debt
net debt
Private institutional market / high-yield bonds
Unsecured and subordinated to senior debt
Transaction Longer maturities (8-10 years)
Equity
costs
Typically bullet repayment
Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 8
Structuring example

Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 9
Structuring example

Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 10
Transaction Documents

Authorized for use only in PEVC course at IIM Indore from Oct 2020 to Jan 2021. 11