BUSI 4422 TU Investment Proposal Cazoo Car Dealers Research Paper

DescriptionProject guidance 2023
BUSI4422 Venture Capital and Private Equity (MSc)
Provide an investment proposal for the project brief outlined below.
“Imagine you are an executive in a venture capital (VC) or private equity (PE) firm.
Identify a potential UK target investment in any market sector or size of your choice. The
target can be a start-up or a management buy-out/buy-in. Prepare a report justifying
why this is a potentially attractive investment for a VC or PE firm. Topics you may wish
to cover include: current ownership of the venture, likelihood that the company is for
sale, their unique selling proposition, market characteristics, competitive landscape,
personnel and fixed capital resources, price/valuation, possible financing structure,
source of potential gains, and possible exit strategy.”
In completing the report:
 You should demonstrate good knowledge of the material and theories covered in
lectures,
 you should demonstrate the ability to select an appropriate case and conduct a
research enquiry, collecting and analysing secondary data, synthesising and
reporting your evaluations in the form of an investment proposal,
 you should make this investment proposal as realistic as possible. It will be read
not only by your module convenor, but also by some of our speakers
(practitioners),
 ensure to include a 1 page executive summary (350 words max),
 report all financial information in GBP.
Word limit:
2,000 words (excluding references and appendices). The word count includes
the title page and the executive summary (approx. 350 words).






The actual word count of the assignment must be stated by the student on the
first page (cover sheet) of the assignment.
The overall word count does include citations and quotations.
The overall word count does not include the references or bibliography at the end
of the coursework.
The word count does not include figures and tables.
Appendices are not included in the overall word count.
The word limit may vary by a maximum of +/- 10% allowance).
Students should prepare and submit their coursework assessments in the
following format:
Font:
Verdana 11 point
Spacing:
1.5 spaced
Margins:
Normal (2.5cm)
Referencing:
Harvard citation style
1
Deadline Date for Submission of Coursework
You need to submit an electronic copy of your coursework to Moodle. For further details
of this process see your Student Handbook (on Moodle). The deadline for the coursework
submission is 3pm (BST), Thursday 4 May 2023.
Additional Project Guidance
This guidance is not intended to provide you with an explanation of how to do the project,
how many words should be devoted to each section, or how many references there
should be. There is not a template or ideal project. Your project is unique and will be
considered on its own merits. Please note that this is an individual course work. Below
are some issues that you might want to consider.
Report structure
The structure of lectures provides a useful structure to follow for your dissertation. You
can also use the OUTSIDE IMPACT due diligence structure, if you think this is appropriate.
It is worth noting that this is an investment report, not a business plan. Emphasis should
therefore be placed on the investability of the idea/team/market, the valuation of
company, the financing structure of a deal, the source of potential gains, the risk
associated with the investment and the possible exit strategies.
Selection of firm
Please select an existing organisation. They can be at any life stage (e.g. seed, start-up,
secondary-buy-out, late-stage LBO, turnaround, etc.) and from any industry. However,
think about the types of firms that generally seek VC investment and also the types of
firms that are appropriate targets for an LBO. Practice and academic literature can guide
this. Part of this assignment is to pick an appropriate business to investigate. After a firm
is selected both VC and PE firms undertake due diligence, which is a response to an
adverse selection problem. Please pick a company you can collect sufficient information
on to make an investment decision. On Moodle you find links to a number of resources,
including the GOV Companies House, Patent office, access to relevant databases, etc.
VC and PE firms will undertake some market analysis. What are the characteristics of the
proposed target market in terms of size, growth rate and competitiveness? If the firm is
in its early stages, does the target firm or entrepreneur have a business proposition to
be successful in its market? If it’s a LBO, how well is it performing compared to the
industry average or key rivals? Which metrics are you using to judge their performance
and competitiveness? If it is underperforming, what can be done to change that (see
value creation below)? Are there weaknesses in corporate governance determining
under-performance?
Valuation
There are standard ways of valuing businesses and the multiples that are used. Please
refer back to the Valuation lecture (week 3) by David Falzani to guide you on the VCs
perspective. In the case of the LBO of a mature business, standard corporate finance
techniques can be applied. Gilligan and Wright (2014) provide some insight on this. In
an LBO a premium for control is sometimes paid. You might want to consider what is
driving this. The VC valuation method may also be appropriate when analysing earlier
stage companies.
Capital Structure
There are two issues to consider here: (i) structuring a deal in a particular way is partly
a necessity of financing the deal (although the maximum debt in the capital structure is
determined by the amount of cash available to service the debt) (ii) structuring the deal
2
to create financial incentives for both the VC/PE firm and the management. Academic
literature provides guidance on how debt and equity attenuate the agency problem. Also
be mindful of assessing both the business and financial risks when structuring the deal.
For instance higher risk (business risk) early stage businesses tend to be structured
more conservatively debt wise (financial risk). LBOs tend to have a lower business risk
and therefore can cope with a higher degree of financial risk through higher levels of
debt. Lectures 4 and the Hoots case presented by David Achtzehn might be particularly
helpful here. You may also recommend contractual tools (e.g. tag/drag along rights,
ratchets, etc.) to help structure a fair deal and manage the risks.
Value creation
Firm value is increased when a firm is more profitable. Simply, profit = total revenue
minus total cost, so profit will increase if the portfolio firm generates additional revenue
streams or costs can be cut. Higher gross margins can also improve profitability for a
given cost base.
A key driver of value creation are the financial incentives created by VC and PE deals. In
particular, the theory in the academic literature suggests that equity creates
entrepreneurial incentives and debt disciplines use of cash flows, preventing managers
from wasting cash.
In early-stage VC deals an explanation of how the firm will penetrate a market and
create profit is required. Equity provides managers with incentives and VCs with the
incentives to be active investors.
In the LBO of a listed company, restructuring the firm, refocusing on core business and
the firm and management focusing at what they are good at could be considered. The
sale of assets might be used to pay down debt. Remember, financial incentives are
driving behaviour. Equity provides managers with financial incentives and PE firms with
incentives to be active investors.
Consider the roles played by VCs and PE firms – are they providing more than finance?
Will you offer strategic guidance to support value creation?
Exits
A key feature of the VC and PE business model is exit. It is how the investors liquidate
the value that has been created and realise their investments. Consider the pros and
cons for different types of exit for the portfolio firm in your project and recommend the
most appropriate option in your case (e.g. tradesale – can you identify potential buyers
for the business x years down the road?).
Frequently Asked Questions
Should I choose a real life example?
Yes. You must use a real life example of a UK company. The aim of the report is to make
it as realistic as possible.
Can I use real accounting/financial information?
Yes. If you are considering an LBO (MBO or MBI) you might want to choose a larger firm
where accounting/financial information are easily available from their websites,
Bloomberg, or Datastream. Sometimes it is possible to get information on subsidiaries,
so this opens up the possibility of a project examining the LBO of a whole firm or the
LBO of a division/subsidiary. Articles of respectable news outlets are another good
source for financial information, as well as reports from the CompaniesHouse.gov.uk
If you cannot access all financial information (e.g. future revenue growth) you will have
to make sensible and realistic estimations. Support your forecasts with appropriate
research (e.g. by comparing them to relevant competitors and market growth rates).
3
Do I need to include full financial statements in my report?
No. We expect you to synthesising and digest all information/financials and report your
analysis, evaluations and recommendations. It is your responsibility to filter through the
large amounts of information available and make a judgment call. Please make sure all
financial data in presented in GBP.
Are tables included in the word count?
Yes. It may be useful to organise text in a table if that helps to clarify your points. This
might include calculations of financial scenarios, such as those relating to deal structure,
IRR, and enterprise values. It may also include a SWOT or attributes of competitors.
We advise that a limited number of financial scenarios are required when used. Last year
some reports had a large number of scenarios. There is no need for more than three
scenarios, for example: ‘low, medium, high’, or ‘good, neutral, bad’, or ‘recession,
stable, growth’. It would just involve a bit of care in selecting scenarios for illustration.
4
Marking Rubric for MSc Venture Capital and Private Equity Coursework 2023
Investment
The investment opportunity (attractiveness/
appropriateness of target company for a VC/PE) is
articulated clearly.
A convincing and realistic value adding strategy is
presented.
Structure
Structure (e.g. OUTSIDE IMPACT) and
Comprehensiveness
0-29
Poor, irrelevant or
unconvincing
investment
opportunity and
value adding
strategy.
30-39
Inadequate
relevance or
unconvincing
investment
opportunity and
value adding
strategy.
40-49
Limited investment
opportunity and/or
unrealistic value
adding strategy.
50-59
Adequate,
reasonable
investment
opportunity and
realistic value
adding strategy.
60-69
Good, convincing
and relevant
investment
opportunity and
realistic value
adding strategy.
70-79
Thorough, clear and
convincing
investment
opportunity and
realistic value
adding strategy.
80-100
Outstanding, logical
and convincing
investment
opportunity and
realistic value
adding strategy.
Poorly structured
and incomplete
piece of work with
a lack of connecting
key elements.
Inadequate
structure to the
work showing
inadequate
connection and
insufficient detail of
key elements.
Limited structure to
the work with
limited attempt to
cover and connect
key elements.
Reasonably
structured piece of
work with
reasonable attempt
to cover and
connect key
elements.
Good structure to
the work showing
good cover of and
connection
between key
elements.
Well-structured
piece of work
effectively covering
and connecting key
elements.
Cogently structured
piece of work
effectively covering
and connecting key
elements.
Missing or
incomplete analysis
and evaluation.
Inadequate analysis
and evaluation.
Limited analysis and
evaluation.
Adequate analysis
of core elements.
However,
descriptive at
times, lacking depth
and original
evaluations.
Good analysis of
core elements.
Some depth and
originality in
evaluations
demonstrated.
Very good analysis
of core elements,
demonstrating
depth and
originality in
evaluations.
Excellent analysis of
core elements,
demonstrating
outstanding depth
and originality in
evaluations.
Relevant subheadings might include: exec. sum., mgt.
team, market analysis (growth), USP, competitor
analysis, SWOT, valuation, deal structure, summary
financials, exit route, VC returns, sensitivity/risk
analysis, 100 day plan.
Analysis
The subheadings mentioned above are analysed and
evaluated comprehensively.
5
Continued…
Financial
Understanding of the financial requirements e.g.
valuation, deal structure, summary financials, exit route,
VC returns, sensitivity/risk analysis
Coherence
Coherence, clarity and focus.
Referencing
Background Research and Citations
All work must use Harvard Style referencing.
0-29
Poor, irrelevant or
unconvincing
acumen of the
financial
requirements
demonstrated.
30-39
Inadequate
relevance or
unconvincing
acumen of the
financial
requirements
demonstrated.
40-49
Limited acumen of
the financial
requirements
demonstrated.
Complies with specification of written work.
60-69
Good, convincing
and relevant
acumen of the
financial
requirements
demonstrated.
Financial analysis
and forecasts are
largely sensible and
realistic, with minor
mistakes in the
calculations.
Writing is coherent,
demonstrating
good clarity and
conciseness, and is
easy to follow.
70-79
Thorough, clear and
convincing acumen
of the financial
requirements
demonstrated.
Financial analysis
and forecasts are
sensible and
realistic.
Writing is insightful,
demonstrating
thorough clarity
and conciseness
throughout.
80-100
Outstanding, logical
and convincing
acumen of the
financial
requirements
demonstrated.
Financial analysis
and forecasts are
very sensible and
factually backed up.
Writing is
incoherent,
demonstrating poor
clarity and focus.
Writing is
incoherent at times,
demonstrating
inadequate clarity
or creating
confusion as to the
point being made.
Writing is
incoherent at times,
demonstrating
limited clarity or
creating some
confusion as the
point being made.
Writing is coherent,
demonstrating
adequate clarity
and conciseness,
and is relatively
easy to follow.
Largely anecdotal,
with poor or no
citations or
referencing is poor
or absent.
Largely anecdotal,
with inadequate
citations to support
claims, or there is
inadequate
referencing.
Limited use of
citations of relevant
academic and nonacademic sources
to support claims;
limited referencing.
Adequate use of
citations of relevant
academic and nonacademic sources
to support claims,
with adequate
referencing.
Good use of
citations of relevant
academic and nonacademic sources
to clearly support
claims, with good
referencing.
Thorough use of
citations of relevant
academic and nonacademic sources
throughout work to
clearly support
claims; well
referenced.
Writing is insightful,
demonstrating
outstanding clarity
and conciseness
throughout;
development of
ideas is easy to
follow.
Outstanding use of
citations of relevant
academic and nonacademic sources
throughout work to
clearly support
claims; well
referenced.
Poorly formatted
with poor or no
evidence of proof
reading, numerous
errors or not edited
to expected word
count.
Inadequately
formatting with
some errors,
inadequate
evidence of proof
reading, numerous
errors or not edited
to expected word
count.
Limited formatting
with errors, limited
evidence of proof
reading or not
edited to expected
word count.
Adequately
formatted with few
errors, evidence of
proof reading and
within expected
word count.
Good formatting
with very few
errors, good
evidence of proof
reading and within
expected word
count.
Well-formatted
work, with very few
errors showing
thorough proof
reading, edited to
expected word
count.
Well-formatted
work, free from
errors showing
extensive proof
reading, edited to
expected word
count.
Depth, relevance, quality of sources, etc.
Comply
50-59
Financial
assumptions are
adequate but may
include some
mistakes in
calculations.
6
Structuring Deals
Hoots Case
Prof David Falzani, MBE
lizdf1@exmail.nottingham.ac.uk
22nd February 2023
Last week we covered valuations: We did a worked example together of the VC method,
and discussed the relative merits of Aidcraft and Plantland.
This week, we’re focusing on a really interesting case to explain how to Structure Deals.
It puts you in the position of being the venture capitalist. You are going to structure a
deal in order to meet your design objectives in terms of rewards for the different parties.
So please start by reading the Hoots case.
Schedule & Moodle
2
BVCA Report on Investment Activity 2017
Hoots is an MBO.
£22.23bn overall
Myth that VC is mostly investing in start-ups -> most money is in Buyouts
(MBO/MBI/LBO)
-> why is the governance structure of a buyout so popular?
Agency theory – align mgt and shareholders interest and incentive (legal control over
mgt through ratchets)
Leveraged (debt larger than equity) – why -> cheaper, debt replayed first, tax shield,
currently low interest rates
Debt focuses mgt -> improve profitability, better use of money, cut cost, less waste
Example – Boots (11bn/9 bn debt – e.g. loan/bond/mezzanine/etc.) vs ToysRUs
UK stock exchange 3000 down to 2000 companies
3
Deal Structuring
• Key issue for VC/PE is to maximize the return for the amount they invest
• Do NOT start with equity stakes – the end point!
• MBO’s: Optimize/maximize the amount that can be borrowed
• Cost lower than for equity
• “Levers up” the return on equity
VC wants return for investments (at least 35%, in this case 40%, last week biotech
example was 50%)
Focus on exit, end point and calculate back
Max debt, why (cheaper), tax shield (deduct debt before tax), amplify return on equity
Deal Structuring
• Focus on initial deal structure that meets the VC/PE’s
minimum IRR requirement on most likely assumptions
• This may not be the final deal structure but provides basis for
negotiation
• Can vary assumptions to see what happens to the structure
and equity stakes
So, focus on a deal structure that meets your minimum Internal Rate of Return
requirements, based on the most likely assumptions. What does that mean?
The most likely assumptions here is the business plan forecast. You have a forecast going
out over 4 years so you can use that to work on your deal.
You can ask what is the structure I require? What is my minimum IRR requirement, it is
40% per year. What will that look like after 4 years, and how do I work backwards to find
a deal structure that delivers this?
In the real world, this case information is pre due diligence, so we only have a summary
level of information. Therefore the deal structure we produce will probably not be the
final deal, but be the basis for negotiation with the management team.
And perhaps most usefully, once we have an initial deal structure we can change some
of the assumptions and see how that changes the valuation – if things go better or
worse than expected, how does that change the rewards to the VC and rewards to the
management?
It’s worth noting that, normally, when we design a deal we want to align our interests
(the investor interests) with those of the management team. We want the management
team to feel that they can do well. If the management team do well we do well. If the
management team do extra well, and the outcome is better than expected, then they
should be extra rewarded. However, if things don’t go as well as planned, then we, as
the VC, require some form of insurance – perhaps getting more money back than the
management team. So, we like the management team’s interests to be aligned with our
own plus we like some ‘insurance’.
Once we have a structure, we can do ‘what if?’ analysis to see how outcomes change
with different scenarios.
Deal Structuring Steps – Group Work, 10 Mins
1. Establish funding requirement
2. Establish debt capacity
3. Deduct debt from overall requirement to establish requirement from
management and VC/PE firm
4. Assume (estimate) exit valuation
5. Deduct outstanding debt from exit value if any
6. Calculate minimum value required on exit by VC/PE
7. Deduce maximum balance available to management on exit
8. Deduce equity split between management and VC/PE (maximizing the
amount the VC/PE invests in preference shares or loan stock)
These are the suggested steps to structure this deal.
So, I hope you had a go at this before our Learning Engagement session today…
1 to 7 are fairly straight forward. Please also try step 8.
We will work through these together on Wednesday.
1.The first step is to establish the funding requirement – all of the information you require is in
the case.
2.Establish the debt capacity – how much debt can the business support? How much debt will
the bank lend the business?
3.Think about the exit valuation and the role of the debt. Normally we deduct the debt from the
exit valuation before apportioning the remains to equity shareholders.
4.Do the exit valuation. You have the criteria in the case. Think about which year to apply it to.
5.Ask yourself, is there any debt at the point of exit? Is there any bank debt left? You have hints
in the case as to whether there is or not.
6.Calculate the minimum value required on exit by yourself, the VC. You should know how much
money you are going to put in, how much money the management team will put in, what is
the minimum value you require upon exit in order to achieve your portfolio aims and your
IRR?
7.Deduce how much will the management team get back on exit. If we’ve done the previous
steps correctly, we’ll know if there’s any debt to pay back, we’ll know how much the VC gets
back, the remainder must be what the management team get.
8.The final step is to structure the deal. So, how do we split the deal between management and
the VC. Is there also a VC loan element in order to achieve all of the objectives we have
highlighted here, and if so, how much?
Deal Structuring Steps
Group Work, 10 Minutes
These are the suggested steps to structure this deal.
So, I hope you had a go at this before our Learning Engagement session today…
1 to 7 are fairly straight forward. Please also try step 8.
We will work through these together on Wednesday.
1.The first step is to establish the funding requirement – all of the information you require is in
the case.
2.Establish the debt capacity – how much debt can the business support? How much debt will
the bank lend the business?
3.Think about the exit valuation and the role of the debt. Normally we deduct the debt from the
exit valuation before apportioning the remains to equity shareholders.
4.Do the exit valuation. You have the criteria in the case. Think about which year to apply it to.
5.Ask yourself, is there any debt at the point of exit? Is there any bank debt left? You have hints
in the case as to whether there is or not.
6.Calculate the minimum value required on exit by yourself, the VC. You should know how much
money you are going to put in, how much money the management team will put in, what is
the minimum value you require upon exit in order to achieve your portfolio aims and your
IRR?
7.Deduce how much will the management team get back on exit. If we’ve done the previous
steps correctly, we’ll know if there’s any debt to pay back, we’ll know how much the VC gets
back, the remainder must be what the management team get.
8.The final step is to structure the deal. So, how do we split the deal between management and
the VC. Is there also a VC loan element in order to achieve all of the objectives we have
highlighted here, and if so, how much?
18/19 Feb 2019 MSc
Hoots – 1 Funding requirement
1 Funding requirement
£m
Purchase price
2.5
Fees & costs
0.1
TOTAL
2.6
“We’d like to make a bid for a management
buy-out – if you’ll lend us the money.”
In addition the bank provides an overdraft facility of £300,000
Fees and costs: DD by external parties, changes to the article of association, changes to
the shareholder agreement, covernance, guarantees
Cant use the overdraft – that’s for working capital
18/19 Feb 2019 MSc
Hoots – 2 Debt Capacity
Debt capacity
Maximum interest payments the bank willing to accept is £200,000
At 10% interest rate, 200,000 / 0.1 = £2m
or
4 * £500,000 = £2m
Why not 2m + 300k overdraft – remember the money in the box
This includes the interest/principle
Working in nominal values (so no need for discount, time value of money)
18/19 Feb 2019 MSc
Hoots – 3 Requirement from Management and VC
£m
Total Requirement
2.6
Less
Senior Debt
(2.0)
Requirement
£0.6
from:
Management
0.1
Venture capital
0.5
£0.6
Anyone work it out?
18/19 Feb 2019 MSc
Hoots – 4 Assume exit valuation
2023 Forecast PAT x pe =
£650,000 x 6 = £3.9m
Exit year 4 – PAT
18/19 Feb 2019 MSc
Hoots – 5 Deduct debt (if any)
£m
Exit Valuation
3.9
Less Senior Debt
Nil
Management & VC Value
£3.9
All debt has been repaid
prior to exit
18/19 Feb 2019 MSc
Hoots – 6 Calculate MINIMUM VC return requirement
Future value of £0.5m at 40% pa over 4 years = £1.92m.
£500k * (1+0.40) 4 =
£500k * 3.84 = £1.92m
x1.4
£0.5m
x1.4
x1.4
x1.4
£1.92m
18/19 Feb 2019 MSc
Hoots – 7 Deduce balance available to management
£m
Value net of debt
3.9
Less
Required minimum VC return
1.92
Available to management
1.98
How much did management put in?
Exit
£3.9m
Man.
V.C.
1.98m 1.92m
50.8%
49.2%
Deal Structuring Steps
1. Establish funding requirement
2. Establish debt capacity
3. Deduct debt from overall requirement to establish requirement from
management and VC/PE firm
4. Assume (estimate) exit valuation
5. Deduct outstanding debt from exit value if any
6. Calculate minimum value required on exit by VC/PE
7. Deduce maximum balance available to management on exit
8. Deduce equity split between management and VC/PE (maximizing the
amount the VC/PE invests in preference shares or loan stock)
18/19 Feb 2019 MSc
Hoots – Deduce equity split giving the optimum structure for the VC
Investments excl. bank debt
£0.6m
Exit
£3.9m
16.7% Man.
0.1m V.C.
0.5m
83.3%
Man. V.C.
1.98m 1.92m
50.8%
49.2%
18/19 Feb 2019 MSc
Hoots – 8a Deduce equity split giving the optimum structure for the VC
Exit
£3.9m
Man.
V.C.
1.98m 1.92m
50.8%
Scenario 1: Straight Ordinaries in Proportion to Investment Amount
Management’s £0.1m = 16.7% of equity x £3.9m = £0.65m < £1.98m VC’s £0.5 m = 83.3% of equity x £3.9m = £3.25m > £1.92m
49.2%
Scenario 2: 60: 40 split in favour of management plus a VC loan element
Management’s 60% = £0.1m of ordinaries
For VC, 40% = 40/60 x £0.1m = £0.067m of ordinaries
Therefore, balance of VC investment = 0.5m – 0.067m = 0.433m loan/prefs
Total required for VC = £1.92m
Therefore, 1.92m – 0.433m = 1.49m from ordinaries
But £3.9m – £0.433m = £3.467m
Total return for VC = (3.467 x0.4) + 0.433 = 1.388 + 0.433 = £1.82m < £1.92m VC stake slightly too low Therefore, iterative this scenario... There are two unknowns We are going to work it out 3 ways 18/19 Feb 2019 MSc Hoots - 8a Deduce equity split giving the optimum structure for the VC Exit £3.9m Man. 1.98m V.C. 1.92m Exit Price = Management + VC Loan + VC Equity 3.9 = 1.98 + VL + (VE / (VE+0.1)) * (3.9 - VL) VL + VE + 0.1 = 0.6 VL + VE = 0.5 VL = 0.5 - VE 1.92 = VL + ((3.9VE - VEVL) / (VE + 0.1)) £0.6m Replace VL with 0.5-VE 1.92 = 0.5 – VE + (((3.9VE – VE (0.5-VE)) / (VE + 0.1)) 1.92 = 0.5 – VE + ((3.9VE – 0.5VE + VE²) / (VE + 0.1)) 1.42VE + 0.142 = -VE² - 0.1VE + 3.9VE – 0.5VE + VE² 1.42VE + 0.142 = 3.3VE 0.142 = 1.88VE VE = 0.0755 Man. 0.1m V.C. 0.5m Equity? Loan? 18/19 Feb 2019 MSc Hoots - 8b Deduce equity split giving the optimum structure for the VC A split in the equity of 57:43 in favour of the management would give the venture capital fund an IRR of 40% with the following structure: £k Equity% Management Ords 100 57 VC Fund Ords 75 43 VC Fund Debt or Prefs 425 - total 600 100 Hoots - 57:43 split • Management 57% = £0.1m of ords • For VC, 43% = 43/57 x £0.1 m = £0.075m of ords • Therefore, balance of their investment = 0.5 – 0.075 = 0.425 loan/prefs • Total required for VC = £1.92 • Therefore, 1.92 – 0.425 = 1.495 from ords • £3.9m - £0.425m = £3.475m • Total return for VC = (3.475 x0.43) + 0.425 = 1.495 + 0.425 = £1.92m 18/19 Feb 2019 MSc Hoots - Investment returns would be as follows: Investment £m Exit Value £m IRR % Management 0.1 1.98 110% VC Fund 0.5 1.92 40% 18/19 Feb 2019 MSc Takeaways • This calculation provides a basis for further sensitivity analysis/negotiation between management, VC/PE and vendor • Note: Flat pricing (same price per share) of shares for management and PE/VC in buyouts • Use of ords and pref shares/unsecured loans gives management a larger equity stake for their investment which reflects their contribution 18/19 Feb 2019 MSc Takeaways • The structure depends on the nature of the assumptions made about: • Price to be paid • Interest rate on debt and debt coverage • Target rate of return for VC/PE • Estimated exit value – hence future multiple, earnings and time of exit – probably most important Schedule & Moodle 24 QR Code Any Final Questions? ☺ 25 Management Buy-outs Prof David Falzani, MBE lizdf1@exmail.nottingham.ac.uk 8th March 2022 Welcome to Management Buyouts. Last week we looked at how to structure a deal, and we continue on a related theme with buyouts. The case is really important so please ensure you read X3. Schedule & Moodle GreenCo 2 Largest PE Deals 2022 When we think about large companies we often think about publicly listed companies. These companies have their share traded on stock exchanges. But, there’s been an interesting trend recently where the number of publicly listed companies has reduced. We can see this on the slide where the number of companies listed on the AIM and main market on the London Stock Exchange has reduced from over 3,000 to just over 2,000 in 11 years. This reduction is due to many of them being taken back into private hand through buyouts. An interesting question we will discuss is why this is happening. 24/25 Feb 2020 MSc Some VC Backed Businesses Here are some VC backed businesses. Many of them are very well known companies. There’s a famous Nottingham business here which was subject to a £12bn buyout. It is of course Boots. All the businesses on this slide have been through a buyout. Number of LSE Listed Companies (AIM & Main Mkt) • 2007 3305 • 2018 2160 • Decline of one third! When we think about large companies we often think about publicly listed companies. These companies have their share traded on stock exchanges. But, there’s been an interesting trend recently where the number of publicly listed companies has reduced. We can see this on the slide where the number of companies listed on the AIM and main market on the London Stock Exchange has reduced from over 3,000 to just over 2,000 in 11 years. This reduction is due to many of them being taken back into private hand through buyouts. An interesting question we will discuss is why this is happening. Why Study Buyouts? • Buy-outs: Half of all M&A transactions • Buyouts can improve efficiency and foster entrepreneurship • Buyouts can create new firms and rescue ailing ones • Interaction between principals (owners) and agents (managers) is an interesting phenomenon (Agency Theory) Why do we bother to study buyouts? Buyouts are half of all merger and acquisition (M&A) transactions. Buyouts are important because they encourage companies to become more efficient and more entrepreneurial, and there is significant evidence of this through research. Buyouts can create new companies and, perhaps more interestingly, they can turnaround companies that are struggling, companies that are not performing to their full potential, or not doing very well. One of the key principles in buyouts is that of agency theory, which is the relationship between the owners (who we would normally call shareholders) and the agents (who we would normally call managers). Owners generally work harder than employees, and owners are less likely to waste money, so turning management into owners gives them a far greater incentive. This can align their interests with investors. 24/25 Feb 2020 MSc Main Buyout Types MBO Management Buyout Existing management main non-venture capital owners MBI Management Buy In Outside individuals main non-venture capital owners MEBO Management Employee Buyout Existing management and employees significant owners LBO Leveraged Buyout Outside LBO association (PE) main owners; generally high level of debt IBO Investor-led Buyout Venture capital firm initiates transaction; management some equity LBU Leveraged Build-up Initial buyout used as a platform to develop larger group by acquisitions BIMBO Buy-in Management Buyout Hybrid buy-in/buyout What types of buyouts are there? There are many types. You can see them here. The top 3 are in red. A management buy-out is where the existing management are closely involved in the deal and are the future owners, along with the VC providers. A management buy-in is where outside management come in to take control of the management of the company, so they replace the current management of the company. They are often less successful than a buy out, because coming in from the outside is more risky – you often don’t know what you’re really buying until you complete a deal. All the due diligence you may do, doesn’t give the same information as being in the company for 6-12 months. So MBOs tend to be more successful than MBIs. A MEBO is similar, but employees are also involved. A leveraged buyout uses a lot of debt – increasing it, so there is 4 or 5 times more debt than equity on the balance sheet, hence the word ‘leveraged’. Private Equity is a big provider of this kind of debt in order to create these types of buyout. Boots was a LBO, an investor put in £1bn, a VC put in £1bn and £9bn of debt was put in by Barclays. You can also see an IBO, where a VC starts the transaction, a LBU is a platform to purchase more companies, and a BIMBO is a combined buy-in buy-out. 24/25 Feb 2020 MSc The Nature of Private Equity Private equity (PE)/Venture Capital (VC) used interchangeably In the UK VC tends to refer to seed/early stage/expansion, PE to late stage i.e. buyout Medium to long-term financing provided in return for an equity stake Major role in the development of industries/ companies PEs = KKR, LDC, Carlyle Group VCs = Catapult, Albion & Mercia A note about the nature of private equity. The terms PE and VC are often interchanged, as they both provide risk capital – which is to say, they both can lose all of their money. In general VCs are smaller transactions with earlier stage loss-making businesses, whilst PE tends to be larger amounts in larger profitable cash generative businesses. In the UK a VC/PE investment is held for an average of 6 years. It’s therefore not short term. Sometimes, 12 years or more is required for an exit. Recently, VCs and PEs have had a higher profile and famous deals are covered in the broad media. Private Equity (PE), Venture Capital (VC) and Buy-outs (L/MBO’s) • PE/VC and buy-outs initially in Anglo-American markets, then elsewhere, which address governance problems • LBO’s and MBO’s are corporate restructuring transactions (CRTs) which involve simultaneous changes in the ownership, financial structure and incentive systems of firms • Can be controversial All buyouts are a form of corporate restructuring – they change the incentives for the mangers, the financing of the company and the ownership of the company. Managers can go from owning zero shares, to owning perhaps 10-50% of the business. In fact, to increase manger incentives, sometimes investors will give positive incentives via rewards to managers for extra performance, so that they are disproportionately rewarded for over-achieving against the plan, as we discussed in our ‘What If’ analysis of Hoots in our last session. PE/VC can be controversial. Terms such as “asset stripping” are used in the media – vulture capital is a term sometimes also used - and some businesses are bought and then closed. The local media will report the loss of local jobs, but advocates would say that often this is a business that should have been closed or restructured earlier, and the overall influence is a positive one. 24/25 Feb 2020 MSc Buy-out Deal Structure • A (NEWCO) is established (using existing assets) • Often high leverage (debt) • Management and VC investors (both having equity) Equity Debt • Senior debt • Junior debt • Investor NewCo (mezzanine, high yield bonds) • Management • Vendor (may take a minority stake) Acquires Target’s assets How do you do a buyout? You start by buying or initiating a new limited company ‘New Co’. It takes a few minutes in the UK and costs a few pounds. This new company is going to make the purchase of the Target company’s assets – the money will come from a bank in the form of a loan, and from investors/management (and possibly vendors) in the form of equity. If the Target company is profitable and cash generative then you would use more bank debt, because the business is able to service the debt interest payment. If the Target is an earlier stage business, which is less cash generative, then the debt will be lower or zero. Nature of Leveraged Buy-Outs • LBO - a public co. is acquired by P/E firm. • Equity divided between PE firm and management • Usually agreed, BUT can be hostile • Equity holders have significant ownership with 6090% of deal price met by borrowing – high leverage • Resulting private company (de-listed) controlled by small BoD of P/E firm and CEO/FD • Also referred to as public to private transaction (PTP) i.e Boots KKR Here’s an example. Boots was listed on the stock market. It was notorious for having too many staff and being wasteful. Despite this, it had very attractive financial results. A group of individuals decided to buy it. They did this by making an offer to share holders that was significantly higher than the stock market price at the time. When investors agreed, they were able to buy all the shares and remove it from the stock market. Often the management will support the deal, but if they do not, then it is termed a hostile takeover. The shareholders own the company, so managers don’t have to agree. For Boots it was roughly £2bn equity and £9bn of debt. The higher level of debt denotes a leveraged buyout, the proportion of debt to equity ‘levering up’ the balance sheet. The resulting company is a private limited company and is controlled by a small board of directors. Taking a public company into private hands is sometime is called a public-to-private transaction. 24/25 Feb 2020 MSc Agency Theory and Buy-outs • The relationship between owners and managers • Principals (owners) and agents (managers) have different objectives • In buy-outs VCs are principals, managers are agents pre MBO but principals post MBO • Leads to agency costs • Cost of aligning objectives - getting agent to do what principal wants One of the important underlying ideas here is that of agency theory. In agency theory, owners are the principals (the VC is this case), and mangers are the agents tasked with running the company on behalf of the owners. Owners (or principles) are unwilling or unable to run the business, so they task agents (or managers) to do this on their behalf. Agency risk is where the mangers run the business for their own benefit (higher salaries, perks, company cars, jets, expensive meals, expensive travel, parties etc) rather than running it for the owners’ benefit. In a buy out, the managers become owners, fixing this conflict. A key feature of buyouts is therefore that they align managers’ interests with those of the investors, thus creating better outcomes than many other traditional management models. 24/25 Feb 2020 MSc Agency Theory: Buy-outs help with agency problems • Equity Ownership By Managers • Aligns ownership/control • Maximises incentive • Significant External Funding/High Leverage • Debt covenants prevents wasteful use of cash • Active Investors • VC on board, NED chairman, active monitoring • Articles of Association • Contractual obligations/ratchets How does the VC align these interests? The give a big equity stake to the managers. For example, post buyout, the management of Boots had a big stake, so they were well motivated to do well. Because there is a lot of debt to service, to pay the loan interest charges, it means that managers do not waste cash because they know they have to make the debt payments. Every pound of debt that’s paid off transfers value directly to equity – so if you are an equity holder you know this goes to you. Also, you have some active investors on the board of directors – an experienced VC who can help run the business, a non executive chairman has a similar role, and active monitoring of key performance indicators. The nature of the buyout provides great focus on the key metrics for success. The rules of the buyout and exit are defined in the Shareholder’s Agreement, which is between the investors, and also the Articles of Association which govern the internal rules of a company. Debt bonding: obligation to service the debt, ‘bonds’ managers to meet financial plans stipulated in buyout deal. Dividend is interest + any realized capital appreciation Debt covenants, also called banking covenants or financial covenants, are agreements between a company and its creditors that the company should operate within certain limits. A company may, for example, agree to limit other borrowing or to maintain a certain level of gearing. Other common limits include levels of interest cover, working capital and debt service cover. Nature of MBO’s: Debt Funded MBO • Acquisition of a divested division or subsidiary [or a family owned firm] by a new company • Typically low leverage (debt) • Management takes substantial proportion of equity (incumbent = MBO, outside = MBI) • In smaller transactions, Purchase answer to see full attachment

We offer the bestcustom writing paper services. We have done this question before, we can also do it for you.

Why Choose Us

  • 100% non-plagiarized Papers
  • 24/7 /365 Service Available
  • Affordable Prices
  • Any Paper, Urgency, and Subject
  • Will complete your papers in 6 hours
  • On-time Delivery
  • Money-back and Privacy guarantees
  • Unlimited Amendments upon request
  • Satisfaction guarantee

How it Works

  • Click on the “Place Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
  • Fill in your paper’s requirements in the "PAPER DETAILS" section.
  • Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
  • Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
  • From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.