PRIVATE EQUITY

Viney Sawhney
<[email protected]>

Introduction – Course Description

This course is the study of private equity money invested in companies that are not publicly
traded on a stock exchange or invested in as part of buyouts of publicly traded companies.
The objective of the course is to provide a comprehensive overview and in-depth understanding
of the private equity markets. Private equity finance will be explored from a number of
perspectives, beginning with the structure and objectives of private equity funds; followed by the
analysis and financing of investment opportunities; and finally crafting strategies for harvesting
investments.
There has been an increase in both the supply of and demand for private equity. On the supply
side, the amount of private equity under management - by partnerships investing in private
equity, growth investments, leveraged buyouts, distressed companies, real estate, etc. - has
increased dramatically in recent years. On the demand side, an increasing number of individuals
and companies are interested in starting and growing their respective businesses. Collectively,
small and medium businesses are focused in gaining access to Private Equity and understanding
the dynamics of this unique funding source.

Course objectives
The main objective of the course is to provide students with the necessary theoretical and
conceptual tools used in private equity deals. The course provides the intellectual framework
used in the private equity process, valuation in private equity settings, creating term sheets, the
process of due diligence and deal structuring. Other learning objectives include building an
understanding of harvesting through IPO or M&A, public-private partnerships and sovereign
wealth funds. The final objective of this course is to show how corporate governance, ethics and
legal considerations factor into private equity deals.

Appropriate for Students Pursuing:

This course is appropriate for students pursuing a career in private equity and for students who
wish to broaden their understanding of finance by applying financial concepts and techniques to
analyze activities and enterprises in the private equity market.

Main Topics
1) Private Equity Process
2) Valuation and Term Sheets
3) Deal Structuring
4) Harvesting
5) Due Diligence
6) Public-Private Partnerships
7) Sovereign Wealth Funds
8) Legal, Ethical and Governance Issues in Private Equity Settings
Evaluation of Course Grade
The grading of the course will be based on the following weighting scheme:
20% Class Participation
20% Homework and Quizzes
30% Mid-term Exam (in-class)
30% Final Project
The course will be taught in the form of lectures together with case studies intended for in class
discussion. Each week students shall be e-mailed three select articles from leading financial
publications, e.g., Financial Times, Wall Street Journal, New York Times.
Each student will be part of a study group made up of at least three members. Weighting for
class participation will be derived from individual assignments and class discussion on case
studies.

Teaching Method
This course will have a number of different dimensions including:
• Lectures
• Case analysis
• Discussion of financial articles
• Guest speakers from industry and academia

Required reading
In addition to the assigned Case Studies, Industry Notes and textbook chapters, reading of
leading financial articles is required for the interactive class discussions of current events.

Course Textbook and CoursePack

Cendrowski, Harry, Martin, James P., Petro, Louis W., and Wadecki, Adam A, Private Equity
Second Edition: History, Governance, and Operations (Wiley Finance © 2012)
CoursePack: MGMT E-2790: Private Equity
Professor V. Sawhney, Harvard University Spring 2017

Academic Integrity
You are responsible for understanding Harvard Extension School policies on academic integrity
(www.extension.harvard.edu/resources-policies/student-conduct/academic-integrity) and how to
use sources responsibly. Not knowing the rules, misunderstanding the rules, running out of time,
submitting the wrong draft, or being overwhelmed with multiple demands are not acceptable
excuses. There are no excuses for failure to uphold academic integrity. To support your learning
about academic citation rules, please visit the Harvard Extension School Tips to Avoid
Plagiarism (www.extension.harvard.edu/resources-policies/resources/tips-avoid-plagiarism),
where you'll find links to the Harvard Guide to Using Sources and two free online 15-minute
tutorials to test your knowledge of academic citation policy.
The tutorials are anonymous open-learning tools.
Disabilities Services
The Extension School is committed to providing an accessible academic community.
The Accessibility Office offers a variety of accommodations and services to students with
documented disabilities. Please visit www.extension.harvard.edu/resources-
policies/resources/disability-services-accessibility for more information.
Disability Services Coordinator
51 Brattle Street
Cambridge, MA 02138
voice: (617) 495-0977
TTY: (617) 495-9419
fax: (617) 495-3662
e-mail: [email protected]"
 SYLLABUS
Session 1: THE PRIVATE EQUITY PROCESS
This session introduces the private equity process, the terms and how value is created. This session
covers the private equity process from initially determining the size of the fund, through fund raising,
sourcing portfolio investments, acquiring the portfolio companies and converting equity value back to
cash by liquidating portfolio holdings. The means by which private equity firms create value and enhance
the valuation of their portfolio is also covered.
Required Reading:
Cendrowski, Harry, Martin, James P., Petro, Louis W., and Wadecki, Adam A, Private Equity, History,
Governance, and Operations, John Wiley & Sons (New York, NY, 2012), Chapter 1
Notes:
“The Basics of Private Equity Funds” Darden Business Publishing UV6986, Rev. Sept 15, 2015
“A Note on Private Equity Fund-Raising,” 2000, HBS Publication # 9-201-042
Case:
“Yale University Investments Office: February 2015,” 2015, HBS Case # 9-815-124
The Yale Investments Office must decide whether to continue to allocate the bulk of the university's
endowment to illiquid investments-hedge funds, private equity, real estate, and so forth. This case
considers the risks and benefits of a different asset allocation strategy and highlights the choice
between different subclasses, e.g., between venture capital and leveraged buyout funds.

Session 2: SOURCING PRIVATE EQUITY DEALS AND THE PROCESS OF INVESTMENT

Provides a broad overview of the evolution of the private equity industry. Introduces the objectives and
perspectives of institutional investors in private equity funds and highlights the incentive and information
problems that private investors in private equity funds face and their responses to these problems.
Required Reading:
Note / Article:
“Evaluating a General Partner’s Deal Flow – Considerations for gauging this important determinant of
success,” Megrue, John F., Jr. This Note covers the types of deals, the models for finding deals and that
the factors that lead to deals with high returns. Sourcing, and evaluation, firm reputation, specialization
and competitive advantage are addressed.
Case:
“Venita Fields: What Private Equity Professionals Really Do,” 2010, Kellogg Case # KEL500
This case enables students to understand the business activities and actual day-to-day work private
equity professionals perform. Students will gain a broader perspective on the human aspect of private
equity, beyond the analytical and financial aspects. The case covers not only the investment process
but also the importance of having a network and hiring adept managers for the portfolio companies.

Session 3: COMPENSATION IN PRIVATE EQUITY PARTNERSHIPS

Required Reading:
“A Note on Private Equity Partnership Agreements,” 1994, HBS publication 9-294-084
“A Note on Limited Partner Advisory Boards,” 2008, HBS publication 9-808-169
Case:
“Pawson Foundation August: 2006,” 2008 HBS Case # 9-806-042
This case introduces the interactions between the two major players in the private equity universe:
General Partners and Limited Partners. It also introduces fees, carried interest and hurdle rate and the
concept of clawback.
Session 4: STRUCTURING TERM SHEETS
This session covers the elements and characteristics of term sheets. Also seeks to sharpen students'
understanding of how to compare term sheets and how to select the best term sheet given the likely
evolution of a venture.
Required Reading:
Note / Industry Article
“A Note on Private Equity Securities,” 1999, HBS Publication # 9-200-027
“Note on Private Equity Deal Structures,” Tuck School of Business at Dartmouth, 2005, Case # 5-0006
“Term Sheet Negotiations: A “Rich-vs-King” Approach,” 2011, HBS Publication # 9-812-028
This background note gives students and entrepreneurs a framework to guide term-sheet negotiations
Case:
“Term Sheet Negotiations for Trendsetter, Inc.,” 2004, HBS Case #9-801-358
Describes two aspiring entrepreneurs who have just received offering documents for venture funding
(known as term sheets) from two venture capital firms. Neither of the entrepreneurs have experience
raising capital, and they are wondering how to compare the two proposals and which one to choose. They
need to make a decision fast. The documents contain two complete term sheets which are similar in
structure but different in important ways. Both term sheets have advantages and disadvantages for the
entrepreneurs. Choosing one over the other requires a careful analysis as well as a certain set of
assumptions about the growth of Trendsetter, Inc.

Session 5: ANALYZING BUYOUT DEALS

This session covers the mechanics of how a sponsoring private equity buyout firm acquires a company
using a significant amount of debt and a small amount of equity while using the assets of the company
being acquired as collateral. Students' will evaluate a LBO through the use of comparable company
multiples, comparable transactional multiples and discounted cash flow analysis.
Required Reading:
Cendrowski, Harry, Martin, James P., Petro, Louis W., and Wadecki, Adam A, Private Equity
Second Edition: History, Governance, and Operations; Chapter 9 pages 163 to 166
Background Note:
“A Note on Valuation in Private Equity Settings,” HBS Publication # 9-297-050, Rev. Date: 2011
Case:
“Dollar General Going Private,” HBS Case # 9- 108-015, Rev Date: Jan 2008. Private equity sponsor
KKR took Dollar General in 2007. Although the buyout generated a 30% premium over the stock price at
the time, and the enterprise value to EBITDA multiple was significantly higher than comparable
transaction multiples in the retail industry, some shareholders claimed that the price was "grossly
inadequate.

Session 6: VALUATION AND CAPITAL STRUCTURE

This session covers valuation techniques in a highly leveraged setting, including a discussion of how
private equity firms create value through financial engineering and how deals are structured to realize
such value.
Required Reading:
Note:
“A Note on Valuing Equity Cash Flows,” 2009, HBS Publication # 9-295-085
Case:
“Hertz Corporation (A) and (B),” 2007, HBS Cases #9-208-030 and #9-208-031. Examines the leveraged
buyout of Hertz in 2005, a complex, high-profile deal and a good example of cutting-edge practice in
private equity. The first of a two-part series on the Hertz LBO, adopts the perspective of Clayton, Dubilier
& Rice, the leader of a private equity consortium bidding to buy Hertz from Ford in an auction. Set at the
final round of the auction, the immediate problem for the consortium is how much to raise its previous
bid. A reasonable bid must be based upon how much value the private equity consortium can create
through improvements in Hertz's global operations on the one hand, and a more efficient capital structure
on the other.

Session 7: PRIVATE EQUITY FIRMS IN IPO TRANSACTIONS

This session introduces the variety of factors to consider when exiting an investment. Students will study
the concept of multiple stakeholders in a company who do not necessarily share the same attitude
towards the exit, but whose concerns need to be satisfied. A variety of exit options are introduced and the
pros and cons of each are considered.
Required Reading:
Textbook:
Cendrowski, Harry, Martin, James P., Petro, Louis W., and Wadecki, Adam A, Private Equity, History,
Governance, and Operations, John Wiley & Sons (New York, NY, 2012), Chapter 4
Notes:
“Private Equity Exits,” HBS Publication # 9-213-112, Rev. Date: 2014
“Note on the Initial Public Offering Process,” 1999, HBS Publication # 9-200-018
Case:
“Workbrain Corp. - A Case in Exit Strategy,” 2007, Publication 907N07. The chief financial officer
(CFO) of Workbrain Corporation must prepare a memo for the upcoming board of directors meeting.
Workbrain, a venture-backed company, has grown substantially since its founding in November 1999.
Now the CFO must communicate to the board whether it is time to consider an initial public offering
(IPO) and, if so, in which exchange market the stock should be offered. The company must also consider
what financing alternatives are available (including maintaining the current venture financing
arrangement) and whether the company needs to raise money at all.

Session 8: PRIVATE EQUITY FIRMS IN MERGER TRANSACTIONS

Session explores the importance of private equity firms in merger and acquisitions activity around the
globe. Shows how the general partners of the fund financing the acquisition; the limited partners of the
fund financing the acquisition; and the management team running the acquired firm for the private equity
sponsor share the shareholder value creation sponsored by a private equity firm.
Required Reading:
Textbook:
Cendrowski, Harry, Martin, James P., Petro, Louis W., and Wadecki, Adam A, Private Equity, History,
Governance, and Operations, John Wiley & Sons (New York, NY, 2012), Chapter 6
Note:
“The Role of Private Equity in Merger and Acquisition Transactions,” Rev. 2012, HBS Publication # 9-
206-101; Rev. Date: Apr 17, 2012
Case:
“Private Equity Case: Merger Consolidation,” 2008, NA0030
A mid-size private equity fund, must determine if it should acquire two physical therapy companies in
order to develop them for subsequent sale to a larger private equity firm. This situation represented an
opportunity for the general partners to implement their "merger consolidation" investment strategy for
their fund investors or limited partners. This investment strategy was to buy several private firms in the
same industry, develop them for three to five years with revenue growth and cost saving synergies and,
then, sell this larger consolidated company.
Session 9: MID-TERM
The mid-term will be an in-class exam giving the students the opportunity to demonstrate their
understanding of the techniques and key issues of private equity investments. The exam will be based on
the assigned textbook chapters, cases studies, financial articles and lecture notes.

Session 10: EXIT STRATEGIES FOR MULTIPLE STAKEHOLDERS

This session solidifies the lessons in exiting an investment. The questions of when to exit an investment
and why are raised, and students are given the opportunity to analyze market conditions as they relate to
exit alternatives and to consider timing of the exit and valuation in different scenarios.
Required Reading:
Case:
“Apax Partners and Xerium S.A.,” HBS Case # 9-804-084, Rev. Sept 2006
Apax Partners has to decide whether to accept a less-than-perfect offer for one of its portfolio companies
or to refinance it. Student are challenged to select the better choice between an early exit at a good
multiple vis-à-vis refinancing to allow Apax to take some money off the table and share in future upsides.

Session 11: DUE DILIGENCE

This session covers the intellectual framework necessary to perform due diligence in private equity
settings. All potential issues must be uncovered because they affect the price investors will pay for the
company. This session discusses the challenges to due diligence in the private equity environment and
provides the framework and guidance to conduct private equity investment due diligence.
Required Reading:
Background Note / Article:
“When to Walk Away from a Deal,” 2004, HBS Review publication R0404F. This article covers real-
world examples of companies that have had varying levels of success with their due diligence processes,
including Safeway, Odeon, American Seafoods, and Kellogg's. Effective due diligence requires
answering four basic questions: What are we really buying? What is the target's standalone value? Where
are the synergies--and the skeletons? And what's our walk-away price? Each of these questions will
prompt an even deeper level of querying that puts the broader, strategic rationale for acquisitions under a
microscope.
Case:
“AIT Group Plc.,” 2003, HBS Case # 9-803-104. A U.S. venture capital firm has just learned that the deal
structure for purchasing an illiquid U.K. software firm is unacceptable to institutional investors. The
group must decide if it still wants to go through with the deal. This decision hinges on whether the
investors are confident that their due diligence has uncovered all the issues that affect the price investors
will pay for the company.

Session 12: PRIVATE EQUITY IN EMERGING MARKETS

This session provides a basis for discussing what private equity is, how a private equity firm operates and
how private equity investments in developing markets differ from those in developed markets.
Required Reading:
Notes:
“A Note on Private Equity in Developing Countries,” 2015, HBS Publication # 9-811-102
“Private Equity Valuation in Emerging Markets,” 2012 HBS Publication # 2-913-043
Case:
“Capital Alliance Private Equity: Creating a Private Equity Leader in Nigeria,” 1999, HBS Case #
800104. This case describes the creation of the first private equity fund in Nigeria and the fund's potential
first investment in GS Telecom, a Nigerian telecommunication service company. The fund's managers are
keenly aware that a bad first investment could create a vicious circle for the fund. Thus, whether to invest
and under what terms is of crucial importance.

Session 13: PRIVTE EQUITY, CORPORATE GOVERNANCE AND ETHICS

This session is devoted to cultural, legal, ethical and moral issues surrounding the use of private equity.
Matters of confidentiality, transparency, corporate governance, self-regulation and legislative acts are
addressed. Also examined are the legal and ethical responsibilities of corporate directors and officers,
executives, managers and employees at all levels.
Required Reading:
“Corporate social responsibility, corporate governance, and financial performance: Lessons from
finance,” 2008, HBS Publication # BH304.
Case:
“Governance Failure at Satyam,” 2011, Publication # W11095. This case illustrate types of corporate
governance problems; examine how related party transactions can be used as a tool for committing fraud;
examine ethical standards and obligations of the board of directors with regard to its monitoring and
supervision role; explore the issues related to directors' remuneration; examine the role of internal as well
as external auditors; examine the effectiveness of the presence and composition of various board
committees; explore the possibilities of how to improve the existing legal system; suggest what steps
should be taken to prevent such fraud.

Session 14: NEGOTIATION SESSION

In a team environment and students will participate in a mock negotiation session. Roles will be assigned
and a format shall be distributed in advance describing the framework of negotiations.
Learning objective:
The negotiation session presents several business and ethical dilemmas for students to debate. Among the
business decisions, students are asked to consider whether it makes sense to make special exceptions for
the right investor, how much information to provide investors and how to best sequence the process of
raising funds. The ethical decisions arise as the CEO must choose between risking the loss of a funding
commitment and reneging his promise to a strategic investor to provide him sufficient time to conduct due
diligence.
Case:
“Traction Ventures,” 2011, Publication # E428A-PDF-ENG. The CEO of LightSpeed Computers, is
seeking $10 million in venture capital financing to get his company off the ground after its initial seed
funding. The CEO faces a number of challenging scenarios, starting with the request from a prestigious
Silicon Valley VC to hold off on closing a deal for four weeks to give him time to conduct due diligence.
Later the CEO receives term sheets from other, smaller VCs and must decide whether to move forward or
stand by his original commitment. Later, he must choose between two attractive but economically
different deals.

Session 15: FINAL PROJECT

The final exam comprises a case study project for which the deliverable is a written responses to a series
of questions covering information from the assigned case study, relevant text book chapter readings, the
session lecture notes and other cases covered in the course sessions.