Weekly Digests Archive

June 26, 2023: What's the deal with PE right now?

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Precendent Transactions Analysis

 Precedent Transaction Analysis: Similar to Public Comps, but instead of comparing the company with what similar companies are currently trading for on the stock market, you are comparing the company with what similar companies have been acquired for in historical M&A transactions Useful in valuing companies that lack good Public Comps or have unpredictable cash flows Same problems as comps Additional problems: Hard to find actual data Every deal has slightly different circumstances surrounding them Why do Precedent Transactions often result in more "random data" than Public Comps? Circumstances surrounding each deal might be very different e.g. one company might have sold itself because it was distressed and about to enter bankruptcy, but another company might have sold itself because the acquirer desperately needed it for strategic reasons and was willing to pay a high price Steps: Determine historical comparable transactions and screen for seller's financial metric...
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Intro to Private Credit

Intro: TLDR: private credit is any loan that isn't a bond (not publicly traded) and not issued by a bank The non-investment grade credit markets in the US and Europe have expanded threefold in size since the Global Financial Crisis (GFC), growing from $1.7 trillion to $5.1 trillion. Companies in need of debt financing can either turn to banks for a loan—which would then either hold the loan on its balance sheet or syndicate it to a group of similar investors—or they can turn to private credit.  Private Credit: loans provided by lenders other than banks. Private credit funds lend directly to companies, often without using investment banks as an intermediary. They hold the debt and collect interest, rather than sell it off in pieces to other investors like a bank would. While a PE firm buys all or some of a company, private credit firms lend money to a company directly. AKA: In private equity, you are the owner of the business, and when it comes to private credit, you should operate ...
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Valuation Summary + Questions

3 Main Valuation Methods: DCF Public Comps Precedent Transactions A common interview question will ask you to rank the 3 valuation methods in terms of the highest to lowest valuation yielded. A response to this would be: Generally, precedent transactions would yield the highest valuation because of the control premium and potential synergies that go into an M&A transaction Depending on one's assumptions and the market environment, DCF and Public Comps can be either high or low * Unrelated to the 3 main ones, but LBO is usually the lowest because it is a floor valuation where PE firms can earn their target IRR How to value a private company DCF: FCF projection and Terminal Value calculations are same for public companies But for WACC, private companies don't have an observed equity beta, so you have to use the equity beta from comparable companies in an unlever-relever calculation Public Comps: Apply a discount for the comparable valuation if using publicly traded comps, bec...
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