Financing Private Equity Deals

Prof. Ian Giddy, New York University

About the Session
This 1-day intensive session aims to improve participants' understanding of leveraged private equity finance. The session covers the specific challenges in private equity transactions, including the use of leveraged finance for buyouts and other purposes, and the various techniques of PE leveraged financing.
Typically, the target company's assets and cash flow serve as support for the funding taken out by the acquirer, which repays the debt out of cash flow and asset disposals of the acquired company. Working in teams, we will employ analytical methods including spreadsheet development, lectures and case studies.

Background Readings
These articles will help you prepare for the course. 

Course Outline



Financing Private Equity Deals  
  • Private Equity Deals: Basic Economics for Late-stage Buyouts
    • The PE investor
    • What makes a business suitable for a PE buyout?
    • Leverage and required returns on equity
    • The equity instruments: examples
  • Deal Logic for PE Leveraged Acquisitions
    • The keys to LBO value: valuation of the company, valuation of the LBO gains, assessment of debt capacity
    • The special situation of LBO valuation (financing-driven valuation)
    • Structuring sponsor and management incentives and gains - envy factor
    • Adding value -- post-LBO restructuring
    • Illustration: the acquisition of TDC
  • Group Assignment: The LBO of AGI
  • Funding Instruments: Senior Loans, Mezzanine, and High Yield Bonds
    • Senior-sub structure in leveraged finance
    • Second lien notes
    • Mezzanine instruments: PIKs and warrant notes
    • High yield bonds
    • Seller notes and earnouts
  • Modelling the Deal
    • Debt capacity analysis and computations for leveraged finance
    • The 12-step method
    • Focus: synthetic ratings and debt pricing
    • Modelling the LBO cash flows
    • Focus: private equity exit strategies
  • Group Assignment: debt capacity for ISS
    • Cash flow analysis: LBO entry and exit valuation
    • Cash flow analysis: key corporate numbers
    • Cash flow analysis: key predictions
    • Cash flow analysis: financing assumptions
    • Cash flow analysis: sponsor and management IRR
  • Summary and Conclusions
Case studies
The LBO of AGI
Reykjavik Fleet Leasing
Madras Appliances
Nukem Security
Cognis Refinancing

PE Alchemy




Additional Resources

Articles and Books
Notes on cost of capital and capital structure
The Syndicated Leveraged Loan Market
Second Lien Loans
Mezzanine Finance 1
Mezzanine Finance 2

Useful Links (bond ratings) (corporate bond spreads) (industry ratios) (corporate financial ratios)
Corporate Finance and Debt Capacity Tables

About the Instructor
Dr. Ian Giddy, born in South Africa, has taught finance at NYU, Columbia, Wharton, Chicago and in over 40 countries worldwide for the past three decades. He was Director of International Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on international finance, he has served at the International Monetary Fund and the U.S. Treasury and has been a consultant with numerous corporations and financial institutions in North and South America, Europe, Asia, the Middle East and Africa. As a banker and consultant he has been involved in the growth of the structured finance market in the USA, Europe and Asia. He is the author or co-author of The International Money Market, The Handbook of International Finance, Cases in International Finance, Global Financial Markets, Asset Securitization in Asia and The Hudson River Watertrail Guide. He and his wife are the founders of Cloudbridge, a nature reserve in Costa Rica. | | | | contact
Copyright ©2007 Ian Giddy. All rights reserved.