Analysis & DD - A Private Equity Blog. When monitoring a business, we want to know if it is solvent; that is, whether the business can cover its liabilities.
Cash is important in this monitoring because it makes up for any shortfall between assets and liabilities as they fluctuate somewhat independently. If working capital turns negative, we immediately know more cash must be injected to make up the shortfall, otherwise the business is at serious risk of bankruptcy. However, when conducting financial analysis (rather than monitoring), we’re interested in understanding how much cash a business needs to support its operations on an apples-vs-apples basis.
That means, we must exclude cash when looking at movements in historical working capital because we want to gauge how much cash would have been needed, not how much was actually in the bank. Just imagine, a company could borrow money, raise equity, sell assets, or any other number of things that can move cash and skew historic analysis of working capital. Working for a mega-fund vs. mid-market fund - A Private Equity Blog. A reader recently asked me to contrast the human elements of working for a mega fund versus a middle market fund.
The reader specifically asked about differences in learning curves, working hours, compensation, quality of life and hierarchy. It’s a great question because larger funds mean larger deals, and larger deals mean a completely different set of competitors, vendors, deal sources and processes. Learning Curve Compensation Quality of Life Hierarchy Clearly my experience with mega fund vs. middle market firms is limited to a sample that’s nowhere near the entire population of private equity firms. Working in Private Equity: Mega Fund vs. Read ALL of this and much more in the 200+ page eBook (see below) Do You Know the Secrets of Private Equity?
A 200+ page PDF eBook exploring the formulas, tricks and trade secrets of private equity. Banks & Debt - A Private Equity Blog. A reader, Nicolas, recently asked the following question: While the use of the fixed charge ratio seems to be quite straightforward (FCF / Debt Service), I was wondering why didn’t we also use FCF / Interests Expense (instead of EBITDA / Interest Expense) when calculating interest coverage in debt covenant calculation.It seems more natural to use FCF and more logical to be homogeneous in the numerator used.
I might be mistaken on that but these are my thoughts. Do you have any explanation on that? This could also be applied to EBITDA / Net Debt no? In calculating interest cover (in debt covenant calculation), we must make sure we’re not double counting interest by using a numerator that has had interest taken out already. Say my interest expense is $10 and I have $15 spare to pay the interest. With that said, FCF can mean different things. Now back to your question: what about the debt service ratio? Debt Covenant Calculation: EBITDA or FCF. Equity returns for debt risk… please - A Private Equity Blog. The mantra of private equity is maximum return for minimum risk.
However, I can’t stress enough that the empahsis is on minimum risk. If we achieve a 10x return on our fund, LPs other PEs will say “they were lucky”. If we achieve a negative return on our fund, everyone will say “they are poor investors”. Both terms are pejorative (hey, life’s unfair), and they’re both typically the result of swinging for the fences. The art of private equity is achieving relatively good returns without fail. In public markets, you can achieve this by buying put options against a portfolio or through investing in call options.
To achieve the same in private equity, we invest via preferred stock, demand preferred coupons, have veto rights over many business decisions, take a board majority, have the right to fire senior executives, demand that managers invest, sometimes even demand redeemable preferred stock, etc. Equity Returns for Debt Risk.