Hi fellow monkeys,
I'm working on an investment case study for a small cap PE fund that throws me off a little bit, and I'm curious if anyone has any advice. Here goes:
Company XYZ has a $12M enterprise value, $4M of net debt, and the fund wants to purchase a 30% stake in XYZ.
The goal is to model a way to invest $20M overall, generate a 35% IRR and capital gains of $100M. I don't understand how the fund can invest $20M if the company is worth 12M, especially if you only want to buy 40% of it...
I can only think of add-on acquisitions, but that seems super vague for a case study, doesn't it?
Thanks all!
Navigating through an investment case study with unconventional parameters can indeed be challenging, but it also presents a unique opportunity to showcase your analytical and creative problem-solving skills. Based on the most helpful WSO content, here are some strategies you might consider:
Leverage Buyouts (LBOs) and Add-on Acquisitions: As you've already identified, add-on acquisitions could be a viable strategy. The fund could use the initial investment to acquire Company XYZ and then leverage additional debt to finance subsequent acquisitions. These add-ons could help scale the business rapidly, contributing to achieving the targeted IRR and capital gains. Remember, the key here is to identify synergistic companies that can add value to Company XYZ, either through expanding the customer base, achieving cost efficiencies, or entering new markets.
Operational Improvements and Expansion: Another angle to consider is implementing operational improvements within Company XYZ to boost its profitability and, consequently, its valuation. This could involve optimizing the cost structure, enhancing revenue streams, or expanding into new markets or product lines. The $20M investment could partly fund these initiatives, with the expectation that these improvements significantly increase the company's value.
Financial Engineering: Consider the role of financial engineering in achieving the desired returns. This could involve restructuring the company's capital structure, refinancing existing debt at lower interest rates, or issuing new equity to fund growth initiatives. The goal would be to optimize the company's financial performance and valuation in a way that aligns with the fund's investment objectives.
Exit Strategy: Clearly define your exit strategy from the outset. Whether it's a sale to a strategic buyer, another PE fund, or an IPO, having a clear path to exit is crucial for achieving the targeted IRR and capital gains. Consider how the market conditions, industry trends, and the company's growth trajectory will impact your exit options.
Sensitivity Analysis: Given the uncertainties and assumptions involved in this case study, conducting a thorough sensitivity analysis is essential. This will help you understand how changes in key variables, such as the growth rate, cost of capital, and market conditions, could impact the investment's returns.
Remember, the key to tackling this case study is not just in the numbers but in crafting a compelling investment thesis that is backed by solid analysis and strategic thinking. Good luck!
Sources: How to learn to evaluate investment? (PE case study interview), How to prepare for an assessment center?, PE Case Study 48h, Citi Superday Sales and Trading Advice, CVC Capital Partners case study - Investment team
Firstly, can you invest primary shares vs secondary shares in order to give them cash on balance sheet to do M&A/Capex? Secondly can you derisk the investment by also buying a bit of the debt? Lowers the returns but you gain a bit of downside protection
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