PE for beginners
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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.
Equity returns for debt risk… please | 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.
Banks & debt
Common debt convenants
As we all know, senior debt is at the head of the line when we talk about subordination. That is, if a company is wound up, senior debt lenders receive their money before most other lenders, and certainly before equity holders. Inherent in this concept, is that providers of debt are mostly concerned with risk.
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.
Due DIligence
Working Capital Series: Introduction | A Private Equity Blog
This is the first post in a series that discusses working capital. The purpose of the series is to deliver a congruent and clear theory on how working capital fits into a private equiteer’s analyses. I plan to make practicable and thoughtful points that (hopefully) don’t regurgitate finance textbooks. So, if deep down, working capital is still a little bit of a mystery to you, stay tuned.
In a perfect world, the best way to calculate CAPEX (Capital Expenditure) is by gaining full access to a company’s financial accounts, its financial staff and its executives. With this combination, you’ll be able to paint a good picture of the CAPEX necessary to keep the business running at its current levels of cash flow. However, often we must value companies prior to conducting formal due diligence and in these cases, we typically only have access to standard financial statements. This post discusses calculating CAPEX (Capital Expenditure) with access only to these statements. The first place you may think of looking for data to calculate CAPEX (Capital Expenditure) is the cash flow statement (within the investment section). There may be a line item for Investments in Equipment (or similar), which defines cash flow related to investments in assets.
Capex
In it for more than the carry | A Private Equity Blog
Private equity teams live for the carry (carried interest). We get overly qualified at college, leave our own profitable ventures, accept meagre salaries, work our glutes off trying to close deals… all for the carry. Some equiteers (admittedly lower in the hierarchy), do it even for just the potential of carry (that is, they’re not yet signed up to carry, but one day hope to be).
“A” round – a financing event whereby angel groups and / or venture capitalists become involved in a fast growth company that was previously financed by founders and their friends and families.