Valuation and Private Equity - Presentation

Transcription

1 Valuation and Private Equity - Presentation Gonçalo Faria QMUL MSc Finance Programmes November, 2015 Gonçalo Faria QMUL - School of Economics and Finance

2 Outline I - GF Background; II - Overview on the theme of Valuation; III - Overview on the theme of Private Equity; IV - Module description.

3 I - GF Background Education: 2010: Faculty of Economics of the University of Porto Ph.D in Financial Economics: Essays on Ambiguity about Stochastic Variance - Awarded with Distinction. 2004: CFA Institute, USA CFA Charterholder. Currently Member of the CFA Institute. 2004: Amsterdam Institute of Finance, Netherlands Advanced Valuation Course. 2000: Faculty of Economics of the University of Porto Degree in Economics

4 I - GF Background Academic Experience: Since 2015: Católica Porto Business School, Portugal Assistant Professor of Finance Since 2013: Queen Mary University of London, School of Economics & Finance, UK Visiting Professor (MSc Finance Programmes): Valuation (2013), Asset Management (2014, 2015), Valuation and Private Equity (2014, 2015) Since 2012: Imperial College Business School, UK Visiting Researcher in the Finance Department : Porto Business School - University of Porto, Portugal Invited Professor: Financial Risk Management (MBA and Executive Courses); Fixed Income Instruments (Post-graduate program in Financial Analysis); Capital Markets (Corporate Finance Executive Program); Equity and Debt Instruments (Corporate Finance Executive Program)

5 I - GF Background Private Sector Experience: Since 2012: Consultant for nancial sector institutions in Luxembourg, Portugal and UK (Asset Management, Family Oces and Private Equity) : Hedge fund manager Founder and Partner of Luxembourg based Douro Equity Fund : Portfolio manager Proprietary trading desk in BPI : Financial Analyst Equity Research Team in BPI : Auditor Arthur Andersen

6 II - An overview on the theme of Valuation Overview on the theme of Valuation. What is Value? Valuation Exercise: some key ideas. Valuation: key topic in Finance?

7 II - An overview on the theme of Valuation What is Value? A lot of executives apparently believe that if they can gure out a way to boost reported earnings, their stock prices will go up even if the higher earnings do not represent any underlying economic change. In other words, the executives think they are smart and the market is dumb...the market is smart. Apparently, the dumb one is the corporate executive caught up in the earnings-per-share mystique. (WSJ, Editorial October 1 st, 1974) CASH IS KING!

8 II - An overview on the theme of Valuation What is Value? Financial Value vs. Accounting Value cash ow vs. accounting ratios (example: Earnings Per Share). E.g: value destructive but accounting constructive M&A deals. Capital opportunity cost > return on invested/employed capital: Under-remunerated Cash should go back to shareholders. E.g.: Spanish company Zardoya Otis. Sustainable Value vs. One-o events Medium long term perspective: distinction between fundamentals and circumstantial drivers. Example: Sale of non-core assets, as real estate, by an Industrial company. 1 st Key idea: Valuation Analysis is always focused on cash generated and through an expected sustainable way.

9 II - An overview on the theme of Valuation Valuation Exercise Valuing an asset / company - from a set of arbitrary assumptions, using appropriate methods, project future cash ows and value embedded investment options. 2 nd Key idea: the valuation does not exist. Whoever makes the valuation exercise is building up her/his investment story. Critical Inputs - Value drivers: Company specic and/or from Industry organization and trends; Be critical about: sustainability, strategy. 3 rd Key idea: intrinsic connection between Valuation and Corporate Strategy.

10 II - An overview on the theme of Valuation Figure: BMW Value Drivers - Identication & Sensitivity Analysis

11 II - An overview on the theme of Valuation Valuation Exercise Critical Inputs - Working Tools: diagnosis and monitoring: accounting: nancial statements, accounting ratios; Market surveys; Direct contact with company management, physical visits to the companies; contacts with remaining stakeholders to cross-check info... valuation: appropriated method or methods: DCF, market multiples, Real Options, etc.. 4 th Key idea: in order to make an appropriate valuation exercise, a mix of Hard Skills and Soft Skills is required.

12 II - An overview on the theme of Valuation Valuation Exercise Brief Note about Methods: DCF vs Real Options Starting from standard DCF approach, real options contribute can strongly enhance the quality of valuation exercise. When? There exists high uncertainty about future CF. Sometimes it is binomial; There exists exibility in the execution of the investment projects; There are irreversible investment costs; 5 th Key idea: in most of the cases, assets/projects under valuation have an embedded option-nature dimension: standard valuation methods can and should be completed with a real options approach.

13 II - An overview on the theme of Valuation Valuation: key topic in Finance? Yes! Very dierent elds where mastering valuation concepts is a critical dierentiating factor. Some examples: Corporate Finance: M&A, Equity and Debt Primary Markets, Restructuring,... Asset Management; Private Equity (example next slides section III);

14 III - An overview on the theme of Private Equity Overview on the theme of Private Equity (PE). PE: The Universe of Investment; PE: The Process of Investment; An example of Valuation relevancy in Private Equity.

15 III - An overview on the theme of Private Equity PE: The Universe of Investment Private equity is a nancing solution designed for a specic need; Private Equity oers a nancing solution through equity or quasi-equity for three main purposes: plus creation of companies: Venture Capital; development of companies: Growth Capital; restructuring of companies: Leverage Buy-Out (LBO); special situations: including, Turn-around Capital and Distressed Debt among others.

16 III - An overview on the theme of Private Equity PE: The Process of Investment Whatever the type of PE operation to be developed, the process of investment follows a common path: Figure: Steps of a private equity investment

17 III - An overview on the theme of Private Equity An example of Valuation relevancy in Private Equity. Consolidation Fund to buy Distress Companies; In the Roadmap to obtain a successful investment case it is critical: understand the potential target company: auditing, due diligence and valuation; understand stance of the current shareholders; understand stance of the current debt holders; bring all parts involved towards a common agenda... Recall the relevance of joining Hard-Skills and Soft-Skills!

18 III - An overview on the theme of Private Equity An example of Valuation relevancy in Private Equity. As in this Fund the target are distressed companies, normally we obtain: very low or even negative equity value current shareholders will have to make substantial write-o of their stakes... debt restructuring: Haircut? Yes or No, and if yes with what dimension? renegotiation of price (interest rate) and the reimbursements calendar - how to adjust? Debt-to-equity swap? By how much - implied valuation?

19 III - An overview on the theme of Private Equity An example of Valuation relevancy in Private Equity. In order to bring current shareholders to the negotiation table you need strong soft skills... To address debt topics a deep valuation exercise has to be made: Start from the target company as it is, in a stand-alone basis; Eventually evaluate the company as if it was already integrated in the PE fund (beneting from potential synergies with remaining portfolio and from the new active management); Build a base case scenario and then, considering (i) company value drivers and (ii) mains sources of concerns, this base case scenario is stressed.

20 III - An overview on the theme of Private Equity An example of Valuation relevancy in Private Equity. Note that Valuation exercise plays a critical role in this process: denes if equity value is positive or negative; from the estimated cash ow statement and related assumptions, the terms of debt restructuring are dened; this denes the type of shares of the Fund to be issued and to be acquired by whom. We'll see in Class a concrete example from the beginning until the end: motivation, valuation and deal making.

21 III - Module: Overview Explore, rigorously, the theoretical basis and practical applications of frontier valuation concepts and techniques. Explore, rigorously, the private equity cycle: (i) fund raising and structure, (ii) investing and (iii) exit. Module strongly emphasizes practical applications, with case studies, empirical evidence and examples. Some of them come directly from my concrete experience in equity markets, asset management and private equity activities. Students are expected to acquire autonomy and critical sense about the use of studied valuation techniques and clear understanding of conceptual tools used in private equity deals.

22 III - Module: General Guidelines Module code: ECOM077 Credit value: 15 Module convenor: Gonçalo Faria (g.faria@qmul.ac.uk) Oce location and hours: individually scheduled Formal assessment: 20% mid-term test 1 hour (week 29 th February 4 th March) 80% 2-hour nal exam (during scheduled exam period: 3 rd May - 10 th June)

23 IV - Module: Teaching Arrangements Lectures (2 hours, weekly). 1 introductory lecture, 9 full lectures (plus 1 reading week and 1 revision lecture). Support classes (1 hour, weekly). Support classes will be of 1 hour on a weekly basis, covering problem-solving and applications from the Lecture materials slots to be notied at class or via QM+ page Schedule timetable: Lectures: Wednesday 9:00-11:00; (Bancroft Building: Mason LT) Support classes: Wednesday 12:00-13:00. (Bancroft Building: Mason LT) The semester runs from 11 th January to 1 st April Reading week: 22 nd 26 th February.

24 IV - Module Structure Three blocks 1 Course Introduction: Lecture 1; 2 Valuation Foundations (Lectures 2-5); 3 Private Equity: Complete Investment Cycle (Lectures 6-10).

25 IV - Module Structure Block 2 (Valuation Foundations) structure: (i) Valuation - Preliminary Ideas; (ii) DCF Valuation Approach: Examples and exercises will be given to illustrate topics; Main focus will be the valuation exercise of a listed/target company, making use of available information. A simple DCF valuation model will be built, step-by-step, in the class. A M&A case will be illustrated. A hands-on approach will be adopted. (iii) Real Options Valuation Approach: real-world examples and exercises will be given to illustrate topics.

26 IV - Module Structure Block 3 (Private Equity: Complete Investment Cycle) structure: (i) What is Private Equity? (ii) Fund raising and structure; (iii) Investing; (iv) Exiting. Throughout this block: 1 a real-world example of a Private Equity Fund set-up process will be given; 2 a specic investment deal process of that PE will be presented as illustration - motivation, value creation and deal making process; 3 case studies will be given regarding other real-world examples, especially for exit strategies. Further detail of the module structure: Syllabus.

27 IV Course - Reading List Teaching Materials In-class: session slides, examples and case-studies. Reference books (Valuation): [main book] Hillier, D., Ross, S., Westereld, R., Jae, J., and B. Jordan, (2013), Corporate Finance, McGraw-Hill. (2 nd European Edition) [only for the real options topic] Dixit, A. and R. Pindyck, (1994), Investment under uncertainty, Princeton University Press. Reference books (Private Equity): Demaria, Cyril, Introduction to Private Equity: Venture, Growth, LBO and Turn-Around Capital (The Wiley Finance Series) (New York, NY, 2013) 2 nd edition. Complementary (in Syllabus): only for students interested in exploring more deeply the topics under study.

28 Conclusion Q & A!!