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Entrepreneurial Finance and Private Equity UVA-MOD-0188Y Rev. Jan. 30, 2019 Entrepreneurial Finance and Private Equity Syllabus Course Description “Entrepreneurial Finance and Private Equity” (EFPE) focuses on the private equity (PE) industry and a broad range of About Darden School of Business issues that affect the valuation, pricing, and risk of privately held Course Syllabi firms. EFPE is designed to provide students with a The Darden School of Business is comprehensive set of skills that will allow them to understand regularly recognized as having one of the the financial situation faced by high-growth/high-risk world’s premier teaching faculties within enterprises and later-stage firms. The course examines the business education, and Darden’s investment strategy, valuation, and opportunities of early-stage programs are recognized as world class. (venture capital), middle-market (growth equity, mezzanine Darden Business Publishing is pleased to financing), and late-stage enterprises (buyouts). By design the provide current Darden course syllabi to course covers a range of enterprises to match the investment verified faculty members. These syllabi interests of PE investors in this vital area of investing. provide instructors with context as to how cases can be used in a particular In 2011, the world’s global net wealth stood at $231 trillion sequence to achieve the learning (Credit Suisse Global Wealth Report), of which $30 trillion outcomes of the teaching teams at the (13%) was estimated to be the value of private companies. Darden School. Use the modules in these Private equity is a relatively small part of total net wealth—yet it course syllabi as a reference for updating remains a huge market in and of itself. PE firms currently case materials within your school’s manage less than $4 trillion worldwide, which suggests vast programs. untapped investment opportunities. This is why students with a professional interest in finance increasingly seek to learn more about PE. In capitalizing on these opportunities, the industry has stabilized from the steep decline in the number and value of deals in the 2007–08 financial crisis. From 2016 to 2017, the value of deals increased as institutional investors continued to show strong interest in PE and VC investments due to the low-interest-rate environment. The proportion of global VC to PE investments also continues to rise with the persistence of large late-stage rounds to unicorns—start-up companies valued at or above $1 billion at the time of their initial public offering. This syllabus was prepared by members of the finance faculty of the Darden School of Business at the University of Virginia. Copyright 2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to [email protected]. Page 2 UVA-MOD-0188Y Total Global Private Equity Deal Value $1,000 $900 $800 $700 $600 $500 VC $400 Buyout $300 $200 TotalValue Deal billions) ($ $100 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1993 Why Study Private Equity? First, the PE market is growing and becoming increasingly institutionalized: the “back of the envelope” calculations that once sufficed are not likely to prevail in the future. The course critically explores some of the latest valuation methods and assesses their usefulness. Second, an important motivation to study PE is what it teaches us about finance in general. The situations encountered in PE often stretch the assumptions used in standard valuation methods, and thus the practice of PE investment requires good judgment to account for the lack of transparency and liquidity that characterizes these investments. The class is intended to both broaden and deepen students’ understanding of corporate finance. A final reason to study PE is that the companies on which PE investors focus often present extraordinary challenges and risks—early-stage companies often have unknown prospects, and late-stage companies often utilize extremely high leverage. In financial markets, there is a strong relationship between “challenge” and complexity. Professional managers must prepare to handle the complexity associated with these opportunities and, in so doing, understand the implications of their decisions for a wide range of constituents. Course Overview The PE cycle involves several steps: fundraising, investment, and exit. The terms and success at exit influence future fundraising, and hence facilitate the next round of investment, and so forth. To establish an understanding of the structure of PE partnerships, the course begins with a short module on partnership structure and performance. The partnership structure is critical to shaping the incentives and behavior of the parties involved in the deal. We spend several days on this topic—to understand the differences between general partners and limited partners, the types of compensation arrangements used in PE funds, and how performance is assessed. Page 3 UVA-MOD-0188Y Thereafter, EFPE focuses primarily on the investment phase of the PE cycle and examines the investment strategy, management, valuation, and structure of enterprises at various stages of development before they become public companies. The classes are sequenced to reflect the progression of investments from early to late stage. The sequencing of the course material is intended to provide perspective on how financing and valuation change over the life cycle of a firm. Many judgments in finance rely on an intuitive sense of the capability and maturity of an organization. It is intended that this sequence and the class discussions will help identify the factors that are most influential in managing the development of enterprises and facilitating funding for these firms. Course Materials and Requirements “Valuation in Financial Markets” (UVA-MOD-0162Y) is a prerequisite for the course. Darden Course Instructors Darden Teaching Faculty Cases by This Author Susan Chaplinsky Chaplinsky cases Elena Loutskina Loutskina cases Course Outline Class Materials Topic “Partnership Structure and Performance” (UVA-MOD-0188) 1 “Investure, LLC, and Smith College” (UVA-F-1537) Partnership Structure and Performance Supplemental Spreadsheet Available Technical Note: “The Basics of Private Equity Funds” (UVA-F-1731) 2 “Oregon Public Employees Retirement Fund: Push GP/LP Relationships in Private Equity and Pull Over GP/LP Compensation” (UVA-F-1628) Supplemental Spreadsheet Available 3 “Illinois Teachers’ Retirement System: Private Equity Assessing Private Equity Performance Performance” (UVA-F-1712) Page 4 UVA-MOD-0188Y Supplemental Spreadsheet Available Alternative Case: “CalPERS versus Mercury News: Public Disclosure and Private Equity Disclosure Comes to Private Equity” (UVA-F-1438) Returns Supplemental Spreadsheet Available “Early Stage” (UVA-MOD-0189) 4 “OutReach Networks: First Venture Round” (UVA- Valuing the Early-Stage Company F-1683) Supplemental Spreadsheet Available Technical Note: “Valuing the Early-Stage Company” (UVA-F-1471) “The Liquidity Discount in Valuing Privately Owned Companies,” Journal of Applied Finance 17 (Fall/Winter 2007) 5 “HemoShear, LLC: Series C Round Financing” Multiple Rounds of Venture Financing (UVA-F-1703) Supplemental Spreadsheet Available Technical Note: “Valuing the Early-Stage Company” (UVA-F-1471) “PluroGen Therapeutics” (UVA-F-1469) Supplemental Spreadsheet Available 6 “OptiGuard, Inc.: Series A-Round Term Sheet” Term Sheets (UVA-F-1798) Supplemental Spreadsheet Available Technical Note: “The Early-Stage Term Sheet” (UVA- F-1444) Alternative Case: “SecureNet, Inc.: Series A Round” (UVA-F-1396) Supplemental Spreadsheet Available “Middle Expansion” (UVA-MOD-0190) 7 “MedMetric, LLC: Seed Round Convertible Note Convertible Notes Financing” (Pending Publication 2019) Alternative Case: “Elephant Bar Restaurant: Mezzanine Mezzanine Financing: Growth Financing” (UVA-F-1542) Supplemental Spreadsheet Available 8 “Street Shares, Inc.: FinTech Platform Lending Growth Equity Business” (Pending Publication 2019) Alternative Case: “AtHomeCare, Inc.: Health Care Services Rollup” (UVA-F-1679) Supplemental Spreadsheet Available “Late Stage & Exit” (UVA-MOD-0191) 9 “DuPont Corporation: Sale of Performance Valuing Late-Stage Deals Coatings” (UVA-F-1709) Supplemental Spreadsheet Available Technical Note: “Valuation of Late-Stage Companies The LBO Market and Buyouts” (UVA-F-1639) 10 “AtHomeCare, Inc.: Health Care Services Rollup” Add-on or Platform Investments (UVA-F-1679) Supplemental Spreadsheet Available Page 5 UVA-MOD-0188Y Alternative Case: “The Buyout of AMC Entertainment” Leveraged Buyouts (UVA-F-1508) Supplemental Spreadsheet Available 11 “Cengage Learning: Can Apax Partners Salvage This Distressed Investing in Debt Buyout?” (UVA-F-1727) Supplemental Spreadsheet Available Alternative Case: “Paul Capital and Project U: Secondary Sales in Private Equity Secondary Sales of Private Equity Stakes” (UVA-F- 1626) Supplemental Spreadsheet Available 12 “Summit Partners and RoboSoft, LLC: Mezzanine Mezzanine and Buyout Investing Debt Investment” (UVA-F-1845) Supplemental Spreadsheet Available Alternative Case: “Polaris Management: The Løgstør Evaluating Exit Strategies Rør A/S Journey” (UVA-F-1586) Supplemental Spreadsheet Available 13 “The Carlyle Group: IPO of a Publicly Traded Private Future of PE: PE Firms Going Public Equity Firm” (UVA-F-1689) Supplemental Spreadsheet Available 14 Exam Review Session Review and Class Wrap-Up .
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