The third lecture of the Private Equity and Venture Capital syllabus at TalTech university focused on Buyout and Growth Strategies and Life Cycle. Lecturers of the topic were absolute top players in the field - Martin Kõdar, the Managing Partner of BaltCap and Hendrik Reimand, the Investment Associate from Livonia Partners.
We were taken on a journey from industry role and basics to different strategies, fund structuring and life cycle, enterprise value calculations, value growth strategies and much more. The overview was illustrated with a lot of exciting data and case studies from the Baltics as well as from the global scale. A special block of the lecture concentrated on responsible investment, ESG & impact investing, and its measurements.
Here's our selection of 10 picks from the lecture:
1) What is Private Equity?
Private Equity is a form of equity investment into private companies not listed on the stock exchange.
Medium to long-term investment in the form of equity or quasi-equity. Usually involves active ownership and some sort of value-adding activity in addition to capital:
The overall goal is to:
- Strengthening management expertise
- Operational improvements
- Help in accessing new markets
2) PE role in the economy
- Invest in promising companies
- Help them grow
- Exit the companies at a profit
Amongst many aspects, it can help pensions and savings to grow and create stable jobs. Furthermore, active engagement creates companies that are more competitive, productive and innovative.3) PE investors are usually quite picky
Private equity investors have invested in roughly 22,000 SMEs (small and medium-sized companies - <3,000 employees) in Europe. It sounds like a lot, but there are over 20 million SMEs in Europe.
Out of 100 potential deal opportunities >> 30 make it to the investment committee >> 13 go to final committee >> 7 result in bids >> 1-2 deals close4) Growth capital examples
5) Buyout deal types
- Succession – private individual exiting
- Corporate orphans – spin-off, sale of non-core assets
- Exit by financial investor
- Take private
- MBO–Management buy-out
- MBI–Management buy-in
- LBO–Leveraged buy-out
6) Buy-and-build: hands-on fingers-off 7) PE investors’ role - having a say on significant matters
Meaning funds’ active participation in strategic vision setting but leaving operational work to the portfolio company.
8) Keywords that may make a buyout deal attractive:
- Annual operating and investment budget
- Purchase or sale of any real estate, business, shares or other securities
- Major investments or divestments
- Changes of business focus and significant organizational changes
- Employment or discharge of top management and terms of service
- Important environmental, health and safety matters
- Any lawsuits and arbitration cases – Changes in credit arrangements
- Publication of important information – Engaging external advisors
- Any significant activity that is outside of the ordinary course of business
– Asset light/services
– Well established and leading in its market
– ‘Corporate orphan’, proprietary sourcing
– Buy & build, roll-out, cross-border expansion
– Identified opportunities to add value
– Exit opportunities
9) The investment Horizon Depends on Strategy
10) The terminology used to measure PE performance
- Venture Capital: 5-10 years
- Growth Capital: 4-6 years
- Buyout: 4-6 years
- Infrastructure: 10 years
- Real Estate: depends on strategy, from a few years up to evergreen
- Annual return – IRR (internal rate of return)
- Money multiple – TVPI (Total Value to Paid-in)
- MOIC (Multiple of Invested Capital)
Both can be calculated for net and gross level >> Good hint! Have a look at Coller Capital IRR calculation app Some numbers & examples
During the past 4 years, PE/VC funds have raised around $1 trillion of capital each year.
Currently, funds hold around $3 trillion of uninvested capital.