Private Equity

and
Entrepreneurial
Finance
Session 1
Professor Alexander Dyck
adyck@rotman.utoronto.ca
Agenda – Session 1, first half

INTRODUCTIONS AND DEFINITIONS BASIC FACTS ABOUT INITIAL EVALUATION CONCEPTUAL COURSE OVERVIEW
APPROACH PE OF ATTRACTIVENESS STRUCTURE OF
OF PE/VC COURSE
1. Introductions and Approach
1. Introductions and approach

Professor Alexander Dyck

• Professor of Finance, Economic Analysis and Policy
• Economist by Training
• PhD econ, Stanford. Previously taught at Harvard Business School for a decade.
• Teach Corporate Finance/ Investment Banking courses:
• PE and M&A to MBAs, Corporate Finance to PhDs and Corporate Governance to
Executives
• Ongoing research in area: private equity, activities of asset managers, corporate governance
• Advisory boards: CCGG, OSFI, German Institute for Economic Research
• Academic Director: Johnston Governance Innovation Centre, Capital Markets Institute,
Directors Education Program
 How the course will seek to increase your
understanding: case study and participatory

I have something to add… But, class depends on your input

You have something to add, based on your
experiences and perspective
You need to be prepared
You need to participate
Collectively we know a lot more than anyone
does individually…Really.
 Why are You
Taking This
Course? 1. Firm: Want to be a founder/work at entrepreneurial firm

What ‘bucket’ 2. Firm: Will work at corporate, that owned or could be

owned by PE
best fits your 3. Advisor: Want to work as an advisor (accounting,
consulting, law, investment banking) and will have PE as
reason for being client.
here? 4. GP: Want to work at a VC/LBO fund
What do you 5. LP: Want to direct investments, and imagine PE will be
important
hope to Take 6. Just interested. Seems important.
Away?
Knowledge of private equity helpful for a range of
careers
For entrepreneurs/founders
• Important source of financing.
Working in corporates
• More likely than ever, could be bought by PE
For I-bankers/consultants/lawyers and others that interact with PE-funded firms
• For many, PE is the largest client.
For investors/asset managers
• Private Assets ~50% portfolio for leading asset managers
For aspiring PE professionals (truth: few jobs)
For anyone else interested in major factors affecting firms and economies
 2. Definitions

What is private equity?

What is entrepreneurial finance?

What is private equity?
 Private Equity Firm
Simple Firm Publicly-Traded Firm
LPs (Limited Partners) – the Investors

Investors
GPs (General Partners). Also known as
Your own firm, Private Equity Partnerships
you invest your own money

Firms

Firms/Portfolio Companies
What is private equity?

• In private equity, there are financial intermediaries, that stand between investors
and firms. Lightly regulated.
• PE funds are run by General Partners (GPs) that invest in portfolio companies. They
are funded by special fund structure typically with limited life (normally 10 years).
Choose firms to invest in, often control firms, determine time of exit.
• VC funds, Growth equity funds, LBO funds, all are private equity.
• e.g. Torquest, Birch Hill, Brookfield, ONEX, Sierra Ventures, Warburg Pincus,
Blackstone Group, KKR, Carlyle
• [Teachers Private Capital, CPP direct investing, OMERS, PSP…]
• Investors/Limited Partners(LPs): Invest, but don’t manage, in a ‘closed end’ fund, so
illiquid investment that has limited liability. Mainly institutions.
• E.g. Yale Investment Office, family offices, sovereign wealth funds, pension plans.
what makes a firm entrepreneurial?

• Young
• Innovative
• Growth-oriented companies

• Not small and medium-sized enterprises

• Potentially valuable idea, but insufficient financial resources.

 What is Entrepreneurial Finance?

Creating value by providing funds to someone with ideas, and lacks internal funds
• Potential Sources of External Funds?
• Family, Friends
• Social-sourced funds – eg. Kickstarter Entrepreneurs are
• Governments interested in all sources
• Traditional Finance sources – Banks of funds
• Financial Intermediaries that make investments
• Angel investors
Our
Focus • Private Equity Funds (e.g. Venture Funds)
• Public markets – debt and equity offerings
3. Basic Facts about PE
More than$1 trillion
USD/year flowing into
PE funds.

Looking at AUM,
Buyouts most important.
But many types of
investments use PE fund
structures to invest.

Source: Global Private Equity Report 2023, Bain

 A global
phenomena,
dominated by
developed
countries, but
going East

Source: Global Private Equity Report 2022, Bain

 Venture Capital and
• VC on flow basis ~ $80bn/year, volatile.
Growth Equity becoming • An area of growing importance to investors
increasingly important

Sources: Lerner and Nanda

(2020), NVCA (2022), Bain (2022)
 VC particularly important in some geographies

Sources: OECD, Metrick and Yasuda

 PE across industries.
Buyouts, many industries
VC investing, Tech hugely important

Metrick and Yasuda

Overall, PE important, and
growing part of capital
markets. Look at AUM.

• Public equity markets in US and Canada

in 2022 ~ 48 trillion

• AUM in private equity in US and Canada

in 2022 ~ 4 trillion (~ 8%)
4. Your (initial) PE Assessment
Grab 2 friends

reporter is student with LBO funds good

birth date closest to for the economy?
today. Give answer to
these 2 questions
VC funds good for
Yes, or No, explain the economy?
Good for the economy?

• VC
• VC backed, 1/5th of Stock Market Cap, 44% of R&D spending of traded
firms [Gornall and Strebulaev (2015)]
• Entrepreneurial firms are an engine of growth. High growth firms
<=2yrs account for 12% net job creation. [Decker, Haltiwanger, Jarmin,
Miranda (2005)]
• VC portfolio firms are ‘better’ and associated with greater
improvements in performance. [Chemmanur, Krishnan and Nandy
(2011), Review of Financial Studies]
Lots of concerns about LBOs social impact
• “The private equity firms are like vampires – bleeding the company
dry and walking away enriched even as the company succumbs.”
Elizabeth Warren, July 18, 2019

• In Europe, term is LOCUSTS

 But…strong theoretical argument for why PE can
add value (best associated with Mike Jensen)

• 1989, Harvard Business Review, Mike Jensen,

• “By resolving the central weakness of the large public
corporation—the conflict between owners and managers over
the control and use of corporate resources—these new
organizations are making remarkable gains in operating
efficiency, employee productivity, and shareholder value.”
And… indications of value creation and
Returns to investors (and GPs)
• IRR for PE greater than public markets over long periods.
• + if diversification benefits, - because more leverage.
• Positive impact on labor productivity (~7.5% in two years), while
employment impact is mixed – (employment increases ~ 13% with
purchase of private firm,~ 13% decline if buy publicly-traded)
• Steven J. Davis, John C. Haltiwanger, Kyle Handley, Ben Lipsius, Josh Lerner, Javier Miranda,
“THE (HETEROGENOUS) ECONOMIC EFFECTS OF PRIVATE EQUITY BUYOUTS,” NBER
Working paper, 2021. (see link to paper in syllabus)
5. Conceptual Structure and Course
Administration Overview

After we discuss the Case

The course will improve your ability to understand the
concepts and institutions involved in entrepreneurial
finance and private equity by looking through 3 Lenses
• Firm Perspective – potential portfolio company
• What are the challenges entrepreneurs/managers face in attracting finance to
fund their ideas? And in structuring relationships with GPs?
• Private equity partnerships (GPs) perspective
• What are the issues private equity partnerships face in evaluating, choosing,
and managing which firms to invest in, how do they manage themselves, and
how do they manage relationship with LPs?
• Investors in private equity partnerships perspective (LPs)
• What are the issues LPs (limited partners) face in evaluating and structuring
private equity partnerships?
 First Half of Course
Investors – Limited Partners
e.g. Family Office, Illinois Pension Legal Terms
Institutional Detail Fund, CPPIB

Fees Limited
Carry Partnership
Committed Capital Private Equity Partnerships – General Agreement
Vintage year Partners
e.g. KKR, Blackstone, Torquest,
ONEX, Birch Hill, Sequoia,
Convertible preferred Andreesen Horowitz, OTP, CPPIB
Liquidation preference
Drag-along rights Term Sheet
Term Loan B
Cash-on-cash yield

Firms/Portfolio Companies
Seed Stage, Early Stage, Late Stage
Established firms
 Second Half of Course
Investors – Limited Partners
e.g. Family Office, Illinois Pension Legal Terms
Institutional Detail Fund, CPPIB

Fees Limited
Carry Partnership
Committed Capital Private Equity Partnerships – General Agreement
Vintage year Partners
e.g. KKR, Blackstone, Torquest,
ONEX, Birch Hill, Sequoia,
Convertible preferred Andreesen Horowitz, OTP, CPPIB
Liquidation preference
Drag-along rights Term Sheet
Term Loan B
Cash-on-cash yield

Firms/Portfolio Companies
Seed Stage, Early Stage, Late Stage
Established firms
Some learning objectives
• Understand concepts and institutions involved in entrepreneurial finance and
private equity.
• Development of technical skills to value a portfolio company (e.g. LBO
valuation), a PE fund (performance measurement), and to structure deals with
portfolio companies (term sheets), and between LPs and GPs in a PE fund (i.e.
Limited Partnership Agreement)
• Understand value drivers in PE transactions, by looking at specific deals, and the
evidence.
• Understand the qualities of a compelling candidate for PE, including industry
selection, and investment thesis generation.
• Understand alternatives for capital structure and debt financing.
• Improve communication skills, both oral and written.
• Develop insight into the opportunities and challenges facing private equity now
and in the future.
And another learning objective… prepare you
for this (from a PE firm case interview)
Course Administration
• Key Dates and Materials
• How will you be evaluated?
• Key dates
• Course expectations
 Class # Date Topics Readings Deliverables
1 Sept. Introduction and Overview of PE Yale Investment Office: none
13th Nov 2020, MY Ch. 1

2 I – Seeking Private Equity Class write-up

Sept.
20th Frameworks for Screening and Ovinto, MY 7.2
Financial Tools - VC
3 Frameworks for Screening and To Buy or Not to Buy? The Prepare for role
Sept 27th Financial Tools - LBO Agony of Choice play

Arrows indicate important dates.

4 Term Sheets LBO, Negotiation, Birch Hill and Case write-up
Oct. 4th Due Diligence Mastermind-(Quercus)

5 Term Sheets VC, Non-priced VC Term Sheets Case write-up,

Put in your schedule now. Oct. 11 th funding (Convertible Notes),

Capitalization Table, Convertible
MY 5
Preferred

6 II – GP Perspective Brazos Partners and Tri- Case write-up

Northern.
Value Creation, LBO Investment
Oct. 18th Framework, Management Valuation readings screening (indiv.)
Incentives, Leverage as Source of Oct 20th
Value, Exit Timing

7 Oct. 25th Debt and Debt Modeling, exits, Berkshire Case write-up

Midterm Oct 27, Midterm Click here to enter text. 9am

2023

8 III– LP/Investor Perspective Illinois Teachers’ Case write-up

Nov. 1st Performance Measurement and Retirement System 2019
PE returns

9 PE Investment Strategies for CPPIB (CPP Case write-up

Nov. 8th Large Investors Investments): April 2021
Financial Model
(group) Nov 6th

10 PE Investment Strategies for retail See Quercus Case write-up

Nov. 15th investors in 2022

11 Nov. Presentations in class session See Quercus Nov 19th, midnight,

22nd submit deck + video

12 Emerging Issues, Overview US Private Equity Firms: Lessons learned

Nov. 29th ESG and Impact (A) memo.

Final
Exam Monday Dec 4th, 9:30-11:30am
 (a) in the course packet
Almost everything you
(b) in course textbook,
need is:
(c) On Quercus;

Case is absolutely required. Readings

Materials provide useful context but don’t need
to be read with the same care

Textbook good reference and

support.
 Overview of Grading

Item Wt % Due Date /Time Delivery

Class Participation 20% Ongoing In-class
Case Write Ups (Group) 10% Ongoing Quercus
Screening investment 5% Oct 20th Quercus
opportunities
Midterm 10% Fri October 27th, In-class
9am
Presentation (Group) 25% Nov 19 draft, Nov Quercus, In-Class
22 in class
Final Exam 30% Dec 4, 9:30 am – In-class
11:30 am
Class Participation (20% of grade)
• In business judged not only by quality of thinking, but by your ability to
communicate and convince others. Low-stakes environment to practice.
• “based on the quality and the frequency of comments. You thus need to make
comments in class, and these comments need to contribute to classroom
discussion and understanding. The most effective comments involve listening to
what others have said and making efforts to connect your comments to the flow
of discussion and to the more important issues in the case. “
• Examples: brought out new ideas, pushed thinking of others, demonstrates
analytical tools effectively, builds significantly on other comments adding depth.
• Most outstanding contributors not necessarily those that speak the most. But…If
you don’t speak you can’t contribute. You can lose participation grades if you
aren’t prepared.
• Scoring each class ~ ‘2’ is impactful, ‘1’ if regular, ‘0’ for none, ‘-1’ for unprepared
Case Write-Ups– 10%
• Easy grades. Low stakes. Credit/no-credit.
• For ~ 10 classes in the course, I require a group case write-up as a two-
page memorandum of analysis and recommendations due before class.
• The memos may be done individually or as a group of up to 5 students. I will
accept one memorandum from the group and count it for credit for all students
involved. Two-page limit for text only.
• You don’t need to overinvest in these. These submissions will only be used as tie
breaker if you are on border between one grade category and another.
• On Quercus, setup your groups before next week. Remember have to be
in same section. If trying to find a group, use the discussion board.
Screening Investment Opportunities– 5%
• This individual assignment, focuses on developing skills in screening
investment opportunities.
• Essentially, exercise in identifying industry and firm attractiveness, for a
going private transaction, with a focus on non-financial aspects of
investment screening.
Midterm quiz – 10%
• October 27th. 9am.
• Covers materials in classes 1-7.
• Focus on technical skills of financial analysis for investment screening
and legal structuring of deals (i.e. term sheets)
Investment Committee Assignment-25%
• In second to last week of classes. Submit Deck and Recorded Presentation
Nov 19th. Present to panel including PE professionals, in class, Nov 22nd.
• If you ever want a job in PE, this exercise is very similar to what would be
expected in a job interview; what done in case competition.
• Pick a company for a PE purchase (going private transaction).
• Put together a deck conveying
(a) your investment thesis logic (why this deal can create value, and the potential
value);
(b) Key considerations for and against deal, and if risks can be mitigated;
(c) financial calculations to show whether PE partner should invest at this point,
(d) next steps
• More on this later.
Final Exam – 30%
• Will include combination of short answer, medium answer and long
answer questions.
• More emphasis on second half topics.
Course expectations
• Professionalism - Treat each class like a business meeting
• You will attend class
• You will come on time
• For each class, you will come prepared
• Identify yourself online by name, and with video on. I cannot give you class
participation grades if I do not know who you are.

• I will try hard to engage you in your learning, so hopefully little desire to start
surfing the web or checking your emails.

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Course procedures
• I will start on time. I will end on time.
• I will (normally) incorporate a break.
• I do not provide case solutions. Lessons from the course accumulate
over time. Cases rarely have simple solutions. And makes it hard to
repeat class year to year.
• I will post slides after class. Done with a purpose. Avoids giving away
the resolution to the case. Helps to keep your attention. etc.
• I do record more technical material and post that for your review. I do
not record case discussions.

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