Private Equity

Course Director: Per Strömberg

Purpose

This course will use a mix of lecture and the case method to study private equity finance. The private equity market has grown significantly over the last two decades and is now one of the most important financial markets, not the least in Sweden. In addition, private equity is a perfect laboratory to discuss and analyze important topics in finance.

Content

The private equity market has grown significantly over the last decade and is now one of the most important financial markets, not the least in Sweden. The course focuses on two important topics in private equity: (1) financial and governance issues in the buyout market, which is the segment of the private equity sector that finances more mature companies (as opposed to start-ups); and (2) the relationship between investors in private equity funds and the managers of these funds.

We will start looking at PE from the “micro” perspective and spend a substantial part of the course studying various aspects of buyout transactions and deal-making in detail. We discuss how to evaluate a buyout opportunity from a quantitative as well as a qualitative perspective, and how buyout funds choose, value, structure, manage, and exit their investments.

After this, we switch to the perspective of an institutional investor in PE funds. Here we focus on the way funds are structured to align the incentives of PE fund managers and their investors. We will look at how institutional investors should evaluate and choose the PE funds in which to invest, as well as different strategies when it comes to PE investment and asset allocation. We will also consider strategy from the perspective of a manager of a PE firm, such as choice of investment focus for the fund, fundraising strategies, ESG issues, and organizational forms.

Teaching Format:

The course will not be available to take online. Note that class attendance is mandatory, and the classes will not be recorded.

Course Procedures and Case Assignments:

At least half of the course teaching will be through case discussions of real-world situations and cases. In order for this to be a rewarding learning experience, case preparation and regular class attendance is essential. Part of the course grade will therefore be based on class participation (including attendance). For each case, I will assign some study questions. For most of the class period, we will consider these questions and the material in the case. You are encouraged (but not required) to work in study groups of up to 4 students outside of class to discuss and analyze the cases. If possible, I recommend that you try to form heterogenous groups with respect to MSc-programs, backgrounds and experiences as both qualitative and quantitative skills are valuable for analyzing these cases.

Before each case discussion, each group should submit a two-page memorandum of analysis and recommendations at the beginning of class. You can add up to five additional pages of calculations and tables if you wish, which do not count towards the two-page limit. The memorandum should be submitted pdf-format through Canvas and any exhibits you choose to attach should be included in the same pdf-document.

Each of the case memoranda will be graded on a pass/fail basis and account for 10% of the grade. In addition, three of the case memoranda will be graded more carefully, and account for an additional 30% of the grade. This grade will be a group assignment grade, so the same grade will apply to each member of the team.

The readings assigned for each class are meant to serve as background material to the issues covered in the cases. You do not necessarily need to read them all to analyze the case.

I will invite guests from industry to class for several of the course meetings. These guest lectures are compulsory (as any other class) and will count towards the participation grade.

Waitlist

This course has a limited number of places. In the event of excess demand, MFIN year 2 students will be given priority before year 1; any remaining places will be allocated by lottery. The course administrator will place students on the waitlist if they so wish.

Course Administrator: Kirandeep.Saini@hhs.se

• To be able to analyze a buyout opportunity both qualitatively and quantitatively
• To understand the strategies by which private equity fund investors can add value to the companies they invest in and critically assess these strategies in different contexts.
• To understand how private equity funds are structured and the economic explanations for their structure.
• To be able to evaluate a private equity fund investment opportunity from the viewpoint of an institutional investor /” Limited Partner”.
• To be able to critically assess the role of private equity in the overall economy

These learning objectives will be tested through a combination of case hand-ins, class attendance and participation, and the final in-class case exam.

It is assumed that you have basic knowledge of corporate finance and valuation corresponding to “M04319 – Corporate Finance,” “M03304 – Corporate Valuation,” or “M06123 – Corporate Finance in Global Firms.” (This material corresponds roughly to Chapter 1-19 of Berk & DeMarzo or Chapter 1-19 of Brealey, Myers & Allen.)

The course “M04326 – Entrepreneurial Finance and Venture Capital” is highly complementary to this course. Together, these two courses provide a comprehensive overview of the private equity market.

The required readings are:

1. The cases that are discussed in class.
2. A number of hand-outs provided throughout the course.

In addition, I have posted a number of background readings and notes, which are meant to help you analyze and understand the cases. You are not required to read all background readings in detail and will not be tested on these readings on the final exam. The main background reading is Döskeland & Strömberg, 2018, “Evaluating investments in unlisted equity for the government pension fund global.” This report (originally written for the Norwegian ministry of finance) provides an overview of the private equity market as of 2018 and summarizes much of the recent research evidence in this field.

Recommended: This book is a very useful reference on corporate finance. I will assume you know most of this material already.

• Berk, Jonathan, and Peter DeMarzo: Corporate Finance, 2nd Edition (or later), Pearson. ISBN: 9780136089438

Optional: None of these books are required for the course but are recommendations for those of you who would like to dig deeper into private equity and/or valuation.

For background and further reading on private equity (links provided on Canvas):

• Leleux, Benoît, Hans van Sway, and Esmeralda Megally (2015): Private Equity 4.0: Reinventing Value Creation. Wiley. ISBN: 978-1-118-93973-4.
  Cornelius, Peter (2011): International Investments in Private Equity. Asset Allocation, Markets, and Industry Structure. Academic Press/Elsevier. ISBN: 978-0-12-375082-2.

For a simple, practitioner-oriented background on valuation:

• Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions, by Joshua Rosenbaum, Joshua Pearl, John Wiley & Sons, 2009 (ISBN 978-0470442203).

For more thorough treatments of valuation I recommend one of the following:

• Koller, Tim, Marc Goedhart, and David Wessels (2005): Valuation: Measuring and Managing the Value of Companies. 4th Edition. John Wiley and Sons. ISBN: 978-0-471-70221-4.
• Damodaran, Aswath (2013): Investment Valuation: Tools and Techniques for Determining the Value of Any Asset.Wiley. ISBN: 978-1118011522.

Damodaran’s website also has various useful materials.

Grading will be based on class participation, the short memoranda, and a final examination.

1. In-class participation 20%
2. Case memoranda (3 randomly picked cases) 30%
3. In-class case final exam 50% .

Find the course schedule in TimeEdit

Have you been granted educational support because of a documented disability? If so, please contact the course director as soon as possible so that adequate accommodations can be made.

Contact specialneeds@hhs.se if you have questions about being granted educational support or need a copy of your educational support certificate.

For more information, visit the Specific Educational Needs page on the Student Hub (login required).