Venture Investment

VENTURE INVESTMENT

KEY POINTS

· Estimating Market & Revenue

o Delphi or Jury Methods

o Expert or Market Research Reports (Gartner etc.,)

o Comparable Companies

o Use Probabilistic modeling such as Monte Carlo Analysis

o Decision Tree analysis

o Apply Porter’s 5 forces model to review qualitatively

· Rsik Mitigation

o Use of High Discount Rates (around 50%)

o Portfolio of products ( Not all the eggs in one basket)

o Staggering of Investment

· Management of the Investment

o To be more constructive

· Anti dilution rights & drag along rights

· Exit Strategy

o GREED IS GOD

VC PROCESS

· Business Plans

· Initial Price Indication

· Term Sheet

o Basic conditions & exclusivity

· Due diligence

o Projections

o Detailed Business plans

o Pricing

o All other terms

· Documentation

o Negotiation of documents

STRUCTURING

· Equity

· Convertible Debuntures

o Rate of Interest

o Conversion period

o Basis of conversion

· Convertible preference

o Rate of Interest – Tax implications

o Conversion period

o Basis of conversion

· Equity with performance linked warrants

· Issues

o Legal

o Effect of structure on exit options

o Structuring of the fund

LBO

LBO Methodologies

For LBO Kind of candidate:

1. Companies that are low levered, that is, heavy assets, but cash flow is a constraint.

2. It usually goes for mature industry.

3. Exits usually happens either by merging or relisting

Key Points

• Eliminate Expenses that reduces EBITDA of the company
• Use High leverage to inject the capital
• Pay out the debt & exit

QUALITITATIVE

· Low Leverage

· Mature Industry

· Mature Company

· Asset Heavy

· Stable Cash Flow

· Strong Management team

· Low Capex Requirements

· Good Exit Options

QUANTITATIVE

· Using Leverage , inject the Capital

· 5x EBITD Entry Multiple

· Exit Multiple also around the same (while calculating theoretical returns)

· Typical exit could be around 6.5X

· Use of Junk Bonds & Liquid Credit Measures

· Merging & Acquirer Target

· Taking the company to pvt by de listing & exiting through relisting

LBO VALUATION METHODOLOGY

Valuing LBOs - In LBO Analysis: -

- Junk bonds have critical role to play in debt financing of the acquisition

- Mezzanine financing is very prevalent

- Creditors seek more than credit return in financing LBO

- Empirical evidence on Value creation

o Financial leverage: -41%,

o Operating Improvements: -34%,

o Multiple Expansion: -14%,

o Multiple arbitrage: -11%

- Adjustments

o Adjusted EBIDTA: -EBIDTA less Maintenance CAPEX

o Debt coverage: -Adjusted EBIDTA to Cash interest expense and other fixed charges

- The LBO analysis is done for period of 5-7 years and the conservative multiple to be paid is 5 times EV/EBIDTA

In Nutshell:

Qualitative	Quantitative
Low levered	Using Leverage
Asset Heavy	5 times EBITDA
Stable Industry and cash flow	Exit within entry multiple
Good management	Use of Junk bond
No capex	Merging
	Taking it exiting through relisting

Methodologies for Vulture

1.Vultures are so named because they have a predilection for businesses that are dead or dying.
2. Whether a company is in bankruptcy, close to bankruptcy or heading down a road towards liquidation, it has a potential appeal for vultures.

Vulture’s Philosphy: Seek value at every stage of a company life cycle

• at one point, a company may be an under-valued growth stock using the “sale by appartment/split/spezzattino” approach.

• at one point a company can be an arbitrage opportunity.

Vulture’s Risks:

• If the company dies, vis can lose big.

• in order to reduce the risk you have to create a pre-packaged bankruptcy in which a creditors company agree on a reorganisation plan before the company files for bankruptcy.

• you basically limit your downside by putting a synthetic stop loss tool in place: the reorganization plan used during the “agreement” phase.

Vulture Investment Methodology:

• VI'S either invest in stocks or in other instruments that can be paid off first rank with the limited down side created by the rescue plan.

• Or invest only when the debtor is ready to file its reorganisation plan with the court (plan which identifies clearly defined recovery routes for bond holders and creditors of all sorts).

PHILOSOPHY

· Seek value at every stage of the Lifecycle

o At one point the company may be under valued growth stock

o AT one point, the company can be an arbitrage opportunity

QUALITATIVE

· Over leveraged

· Bakrupt or near the brink of Bakruptcy

· Sever crisis or downturn

· Asset (both tangible & intangible) is not a constraint but CF is a constraint

· Buy the asset at the discounted value & sell the CF Multiple

· Growth financed by external funds

QUANTITATIVE

· Write down Assets & Liabilities

· Issue of Convertibles

· Seeking credit

· Make EBITDA positive by cutting costs & improve efficiency

· Exit EBITDA Multiple

VULTURE VALUATION

· Valuing recap method

· APV method

In Nutshell:

Qualitative	Quantitative
Over leverage	Writing down assets and liability
Bankrupt or near bankruptcy	Issue of convertibles
Severe crisis down turn	Seeking credit concession
Cash flow constraint	Make EBITDA positive by cutting cost and improving efficiency.
Buy Asset at discounted value and sell on cash flow multiple