Private Equity: Teaching Manual

Author(s): Amit Shrivastava

Source: The Journal of Private Equity , SPRING 2014, Vol. 17, No. 2 (SPRING 2014), pp.
84-92
Published by: Euromoney Institutional Investor PLC

Stable URL: http://www.jstor.com/stable/43503799

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 Prívate Equity: Teaching Manual
Amit Shrivastava

Amit Shrivastava participants the chance to re-examine cases

is an assistant professor been introduced and experienced with the decision sheets that they had pre-
of finance & accounting at
Adani Institute
by many premier business schools pared for assigned cases.
of Infrastructure The been by in India. Private manyin Iinditroduced
a. Professorpremi
VinayerB.Professor
Nair Equity and business (PE) Vinay experienced course B. schools Nair has The purpose of this note is to introduce
from Wharton Business School introduced and explain private equity teaching techniques
Management (AHM) in
Ahmedabad (Gujarat), this course in 2004 at Indian School of Busi-
for better course delivery. This note focuses
India.
ness (ISB) Hyderabad for the post-graduate on teaching pedagogy, content of the course,
amit.shrivastava@aiim.ac.in
program in management. Thereafter it wasand the way it can be delivered. Eleven steps
dramitiima@gmail.com
shared and co-taught by few other visitingare suggested for the better delivery of the
and full-time faculties at ISB. Professor course in post-graduate programs and execu-
Thomas Hellmann from Sauder School of tive programs of management.
Business, Professor Amit Bubna (ISB), and
many others faculties contributed to develop
STEPI
and strengthen the PE course.
Indian Institute of Management, Instructor may offer a course in part
Ahmedabad (IIMA) introduced the PE nership with the Centre for Incubation In
course during 20071 in its post-graduate vation and Entrepreneurship (CUE) or wi
program (PGP-2) [Trimester VI] for second- any department or cell related with incu
year students (academic years 2006-2008). tion related activities (see Exhibit 1).
It got approved as a fully credited course (25 The first requirement of the course is t
sessions) at IIMA in 2007. Course and fac- assess how entrepreneurs manage their bu
ulty feedback was highly appreciative, with nesses and finances. Participants in the cours
a course rating of 9.48 on a 10-point scale. may be encouraged to visit incubation cent
Course contents, teaching pedagogy, and before starting the sessions.
delivery of the topics contributed to its suc-
cess. The instructor of the course, Professor STEP 2
Ramesh Bhat,2 delivered sessions effectively
and also brought experts from industry with The fundamental aim of the course is
15 unique interaction sessions.3 He had expe- to understand investments.
rienced success earlier during interaction The core issue highlighted in class is
sessions in other courses, including Strategic "nature of investments." Normally PGP-2
Financial Management (SFM).The objective participants are familiar with this kind of
of the Interaction sessions was to give course

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Exhibit 1 The methods used may cause some confusion, as
it is difficult to adopt normal finance terminology that
has been taught and with which participants are familiar,
The maini.e., CAPM model, discounted cash flow, and so on.
objective of
technological
Perhaps both instructor andand kno
participants face difficulties
from professionals be
Specific
in this sector due to significantly
areas of
reduced or no informa-
activ
tion. Often there is a huge information gap between the
• Project planning: F
provided various stakeholders, beginning with the person plan
project who is
design, willing to invest, and intermediaries who
strategy are form
transfer-
• Businessring moneyplanning
to enterprises. This complicates the situation
planning and develop
with reference to looking at valuation issues, examining
plan, a marketing pla

• Venture fundraisin
the business and proposals, and so on. Consequently, the
various participants have to look for some alternativeinclu
sources, methods
and other funding
of assessment to figure out the suitability of the business a
• Acceleration:
proposal for the investor. IC als
through partner dev
Ultimately, the class would comprehend the com-
plexities of different businesses through case studies
investment and are able to differentiate it from direct
while orienting themselves to face such different situ-
investment.
ations. Please see Exhibit 2 for a comprehensive list of
The focus is on business investments or ventures,the cases to be selected for the course.
which are indirect investments through certain interme-
diaries. The general mobilization of resources from theSTEP 4
investors collectively investing in ventures is called the
fund investing process and is different from direct invest- Normally, finance courses have primarily depended
ment. This particular form of capital is very significanton market and market information or valuation given
for new businesses as well as for established companies.by the market, which guided the risk assessment process
India is an upcoming favored destination for PE (please see Exhibit 3 for finance courses and contents).
funds which accept global finance for operations in India Such support is not available in this instance; therefore,
and abroad.
it requires a different approach.
It is essential to observe the foreign and domestic
funds in India, which are being routed toward newLACK OF LIQUIDITY
investment opportunities.
In India, the focus of PE is on return on equity, The projects under consideration are highly liquid,
which is generated in approximate percentages and canbecause it is not possible to find out values or ideas from
be compared with PE funds generation in the U.S. the market, as no market is available. Investment in this
The instructor may consider deals concerned withtype of business faces a very high level of intangibles.
IT, which is a popular sector, along with services. How- Example: The private equity person interacts with
ever, there is a lot of interest in health care, pharmaceu- the IIT (Indian Institute of Technology) student having
ticals, travel, biotechnology, and infrastructure. some awareness of PE. The person initially puts a value
of $2 million, but later reduces it to $1 million, noticing
STEP 3 the student's lack of knowledge even while preparing for
exam. In another instance, he puts a value of $5 million
The unique characteristics of this private equity for a person from IIMA, but later deducts $1 million
finance course must be deliberated upon. It is totally dif-
as the person was perhaps sleeping while attending the
ferent from what participants have experienced in class.other
finance courses, including Corporate Finance, FinancialConsequently, the valuation of such intangibles is
Management, Strategic Financial Management (SFM), very difficult.
or other finance courses.

Spring 2014 The Journal of Private Equity 85

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Exhibit 2

A: Comprehensive List of the Cases to be Selected for the Private Equity Cou
1 . Martin Smith: January 2002 (HBS-298076)
2. The Venture Capital Method: Valuation Problem Set (HBS-802 1 62)
3. Term Sheet Negotiation for Trendsetter Inc. (HBS-801358)
4. Spiñy Term Ine: January 2000 (SM 86, March 2001, Graduate School of Busi
5. Asia Renal Care (HBS-800243)
6. Iron Gate Technology (Chicago GSB 2003)
7. Orchid Partners: A Venture Capital Startup (HBS-804 138)
8. Yale University Investments Office, June 2003 (HBS-204055)
9. Acme Investment Trust (HBS-296042)
10. Grove Street Advisors (HBS-804050)
1 1 . Gold Hill Venture Lending (HBS-804083)
12. Adam Capital Management, March 2002 (HBS-803 1 43)
1 3 . AIT Group Pic (HBS-803 1 04) or Brazos Partners: The CoMark LBO (HBS-202090)
1 4. Endeca Technologies (HBS-802 141)
1 5 . Apax Partners and Xerium SA (HBS-804084)
1 6. Between a Rock and a Hard Place: Valuation and Distribution in Private Equity (HBS-803 161)
1 7. Chengwei Ventures and the HDTInvestment (HBS-802089)

B: Comprehensive List of the Topics to be Covered for the Private Equity Course
Module 1: Private Equity Context (2 sessions)
1 session Overview and Introduction
1 session Understanding Dynamics of PE Markets
Module 2: Venture Valuation and Term Sheet Analysis (7 sessions)
1 session Venture Valuation
2 sessions Term Sheet Analysis and Negotiations
1 session Term Sheet and Venture Valuation Issues
1 session Evaluating a Business Plan
2 sessions Due Diligence and Term Sheet
Module 3: Dynamics of Private Equity Finance: Fundraising (5 sessions)
1 session A Venture Capital Startup
1 session Perspective of Institutional Investor
1 session Limited Partners in PE Industry
1 session Intermediaries in Private Equity Industry
1 session Alternative to Equity Financing
Module 4: Investing and Managing Portfolio Companies (6 sessions)
s2 sessions Assessing and Managing Portfolio Companies & Deal Evaluation Process
s2 sessions Due Diligence and Valuation
2 sessions Financing in Down Cycle
Module §: Investment Exit (3 sessions)
2 sessions Evaluation Exit Options
1 session Perspectives on Valuation and Distribution
Module 6: Private Equity in Emerging Economies (2 sessions)
1 session PE in Emerging Markets
1 session PEVF Investment Regime and Future of PE in India
(Last session)

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Exhibit 3 outflow of money, as well as the financial and opera-
tional strategy of the key players.

STEP 6

Financial Analytics/Corporate Fi
The venture capital method is one way to deal
in the first year of the two-year
being Financialwith the issue of this sector, i.e., pre- and post-money
Management (Fi
The Finance 1 valuation and the
course required
starts rate of returnwith
from the
from the venture. Refer to "A Note
perspective ofon Valuation of Venture
firms. T
concepts useful in mapping and
Capital Deals" by Thomas Hellmann (E-95 Date:
It covers: Time Value of Money
Valuation:
03/14/01, Revised Discount
Dividend
04/20/06). M
FCF Approach; RiskAn in-depth understanding
Return of the term struc-An
Markets: Yield and Conventions
ture is in some sense the beginning of the partner-
Structure of Interest Rates and R
Exchange Rate ship between a PE firm and
Parity the new venture. It is
Condition
Put-Call Parity; desirable
Bounds to comprehend how theandPE would like to
Bino
Finance 2 see the company
covers some managing its
of business.the ba
accounting and Finance 1. This co
The relationship between PE and the new
corporate context. It covers key
Liquidity and enterprise is at the core. The term
Working structure relates to
Capital M
Follow-up the term sheet, which
Methods; focuses on various rights
Cash Manag given
Assets and Risk in Capital Budg
to different parties, including cash flow right, con-
Dividend Decisions; Long-term F
i trol right, liquidation right, anti-dilution protection,
Source: Course outlines, Indian Insti ute of Management, Ahmedabad, Indian and governance issues. The association of a person
Institute of Management, Bangalore, fand Indian Institute of Management, from the CIIE/incubation center for the purpose of
Calcutta.
a real-life term sheet would be preferable.

STEP 5
STEP 7

Attention must be paid to evolving regulatory pro-

Negotiation is another important part of the treaty
visions governing how the government is going to treat
process. The PE firm proposes a term sheet and entre-
the proposal for the foreign PE fund.
preneurs reflect on it. Often, entrepreneurs seek help
There are numerous investors who cannot invest
from financial experts or lawyers to discuss and under-
directly in real estate or in infrastructure. The treatment
stand the implications for further detailed negotiations.
for domestic and foreign investors differs.
An important component of the discussion would be to
The regulatory scenario is making things moresee whether the interests of the different stakeholders
complex.
are aligned properly, as sometimes all provisions made
Some ventures have neither history nor any infor-
in the term sheet may not correctly give proper incen-
mation about their performance.
tives to the entrepreneur or to the investor or partner
Countries in which PE has been popular for a long
in the process.
time have the advantage of a database. Such an experi-
ence is missing in India, so it is difficult to structure
STEP 8
the deal and to deal with this kind of higher-risk situ-
ation. Again, it is very difficult to find a standard text
The fundraising initiative is another important
that actually provides information for the Indian PE
aspect of the structure where information is required
scenario.
about the people who provide the money and their per-
So, sufficient time must be given to understand
spectives. Basically, it is the intermediaries who pro-
the dynamics of the industry in terms of the players, key
vide money to the enterprises. It is important to know
stakeholders, industry structure, participants, inflow and

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how the partnership is formed and how money is raised
from the different investors for investing in the enter-
prises. The investors can be institutional investors like
banks, pension funds, investment banks, or large insur-
ance companies.
These are some of the institutions which provide
money to a firm investing in new enterprises.
Further, there are some ordinary investors without
institutional backgrounds, known as limited partners,
whose limited role is giving money to general partners
for investing in enterprises.
STEP 9
Suggested steps for the participants for case study:
A. Participants can select any case based on their
understanding. For a comprehensive list, they
may refer to (a) a list of key PE firms that have
invested in India during the period, or (b) a list
of a few PE Firms that have raised - or are in the
process of raising - funds for investing in India.4
Basically, they are supposed to refer a list of com-
panies which have been financed earlier by PE
companies.
B. Certain key issues should be covered by the case
study:

1. PE company which is making the proposal

Investing and managing a portfolio is another 2. The source of the idea
important area. In private equity, to ensure the reli-
3. What were the key choice decisions faced by
ability of an investment, PE firms would handle the
the PE company?
portfolio creation, management, assessment of the deal,
4. What was the environment at that point in
and in-depth detailing such as due diligence. time?
For a structured discussion, refer to "How Venture
5. What were the total finance requirements?
Capitalists Evaluate Potential Venture Opportunities"
6. How did PE companies try to fund these
by Michael J. Roberts, Lauren Barley (HBS-805019), ventures?
and reading note "Towards a Global Model of Venture
7. Why did they enter that industry (overall
Capital" by William L. Megginson, Journal of Applied
philosophy)?
Corporate Finance , 2004.
8. What are the outcomes and performance?
9. What is the way to go forward?
STEP 10

Thus main writing can be for 8-10 pages, excluding

Case studies should highlight the possible strategiesexhibits.
in the down cycle along with the implications. When the
enterprises are not doing well, they need more money
STEP 11
from PE firms. Such a situation can be experienced by
a large number of companies. The class may look for a
The last, and very important, step is feedback on
possible solution through case studies.
the course. A comprehensive feedback on the PE course
Private equity would not be interested in remaining
enables improvement/modification for the benefit of
invested in perpetuity; it would like to get out from its
future participants. Participants may be requested to take
investment at some point in time. And in most cases, the
some time and give their views. The best approach is
time horizon for getting out may be 5 to 7 years or, at
one in which all associated faculty members interact
the most, 10 years. Therefore, looking for exit options,
with the participants for their input on the course. A
issues, and preparations is important.
questionnaire could be prepared for feedback (please see
The last session can be designed for PE in emerging
Exhibit 4 for suggested questionnaire).
economies, particularly India and China, with special
The questionnaire can be divided into six parts:
reference to regulatory perspectives, and so on.
course objective, course contents, pedagogy, self and
Participants may undertake case writing related to
peer evaluation, instructor evaluation, and overall
PE deals. With reference to case structure, there should
assessment.
not be any problem with last-trimester students, as they
are well conversant with learning through case.

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COURSE REQUIREMENTS Post-lunch learning and teaching is a very cha
lenging experience. If food is available, this pro
The course structure should be adequately sup- can be resolved; otherwise, involvement in the case
ported by case studies. For each case assignment, ques-
should be maximized. Most of the second-year courses
tions can be provided. These questions are expected toin post-graduate programs start after lunch and are
guide participants in preparing for the class and leadleast productive for participants. The facilitator or
discussion. This process attaches significant importance
instructor should concentrate on what is uncovered, and
to team effort in the process of evaluating options and
participants should concentrate on what is unlearned.
arriving at decisions. Each group may submit a one- To create decision-making skill in participants, some
page report of their analysis, application, and learning
portion should be uncovered. This leads to resolving
at the end of the case discussion or before the start of
problems related with the campus placements. Partici-
the next session.
pants should be informed about multitasking in terms
Term sheet analysis and valuation forms are impor- of placement in PE firms.5 Most of the participants from
tant tools in this course. Participants may be instructed premier business schools have high expectations. PE
to formally prepare and submit a term sheet for a new firms do not expect 20 PowerPoints, but they do expect
venture.
a one-page note on problems and recommendations
As far as case writing is concerned, eachwith
group can
a note on why the recommendations should be
be instructed to submit a brief write-up onfollowed.
their case-
writing proposal.

Exhibit 4
Questionnaire

Course Objective
Not at all Very Well
How well did the course on
the whole achieve the 0 1 2 3 4 5
objectives?
Do you think the objectives
of the course need to be YES NO
changed?
If YES, what changes would
you suggest, and why?

Course Content

Sessions were organized in terms of modules. Do you think the time allotted to various mod
adequate?
Modules Sessions Devoted Desired Sessions Remarks

1-

2.

3.

4.

5.

Total

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 Please mention which cases in your opinion offered you the most/least learning in the course (indicate name
of case or cases).

Cases Most Learning Least Learning Remarks

~7. ~ ~
_2.

3.

4.

5.

_6.

7.

8.

_9.

JO.

Read

Pedagogy

The class sessions primarily consisted of case discussions supported by reading materials. To what extent did
the pedagogy achieve the stated objectives of the course? (Circle appropriate number.)

Not at all Well Very Well

Case Discussion 0 1 2 3 4 5

Group Presentations (in class) 0 1 2 3 4 5

Group Submissions 0 1 2 3 4 5
Decisions Sheet Submission 0 1 2 3 4 5

The class sessions were grouped into 6 m

priate number.)

Modules Not at all Well Very Well

~ Õ Ī 2 3 4

9 0 12 3 4
_

0 12 3 4

0 12 3 4
4 5
0 12 3 4

0 12 3 4

J*

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 Self and Peer Evaluation

An important part of learning occurs through the contribution of participants before, during, and after the clas
How would you rate the contribution of the following toward your overall learning? (Circle appropriate num

Very Poor Substantial

Peer contribution through participation in classes 0 1 2 3 4 5
Peer contribution through before/after class discussion 0 1 2 3 4 5
Peer contribution to assignments 0 1 2 3 4 5
Your own contribution through participation in classes

Your own contribution through before and after class 0 1 2 3 4 5

discussion

Your own contribution to assignments 0 1 2 3 4 5

Suggest ways to further improve the peer learning.

Decision Sheet

Post-reflection and preparation of discussion sheet were made an integral part of the pedagogy.

To what extent do you think the decision sheet will be useful in reflecting on?

Very Low Very High

Major decisions
Ongoing learning

Instructor Effectiveness

Please evaluate the instructor's handling of the course with respect to the following (circle appropriate
number).

Very Poor Very Good

Preparation 0 1 2 3 4 5
Control over class discussion 0 1 2 3 4 5

Interest in course and teaching 0 1 2 3 4 5

Ability to clarify concepts 0 1 2 3 4 5
Effectiveness in class 0

Effectiveness in non-class interaction 0

Overall evaluation

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 Overall Assessment of the Course

Very Low Very High

Intrinsic usefulness of course 0 1 2 3 4 5

Overall effectiveness of course 0 1 2 3 4 5

Usefulness of cases and teaching materials 0 1 2 3 4 5

Overall learning 0 1 2 3 4 5

Any other constructive commen

Source:
Feedback structure isbased on the feedb
Ahmedabad, by Professor Ramesh Bhat (Marc

ENDNOTES

before 2007, PE-related learning was restricted to two

sessions, which were covered in the Management of Finan-
cial Institutions (MFI) course. MFI is a 25-session course at
IIMA and includes 2 sessions on PE. These two sessions are
delivered by PE consult ants, and industry experts.
2 An alumnus of Harvard University and the University
of Delhi with more than 30 years of professional and academic
experience.
3These sessions were apart from mainstream sessions
of 25.
4You may suggest that participants refer to "The Pri-
vate Equity Market in India" (Appendix A & B) by Dr. Alok
Aggarwal, Chairman, Evalueserve Inc., and Private Equity
Annual Roundup 2012-India, Ernst & Young, February 12,
2013.

5Most of the PE firms are relatively small, often with

fewer than 14 professionals. Staff members are expected to
be expert in multiple dimensions.
6One session is equivalent to 70 minutes (one full credit
course requires 30 hours of classroom learning).

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