Investment Banking Lecture 7

Investment Banking Lecture 7 - FPN1: INVESTMENTBANKING...

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FPN 1: INVESTMENT BANKING Lecture 7 – May 11 th 1
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Chapter 4 Leveraged Buyouts 2
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Basic Idea An LBO is an acquisition of a business, company, or division using DEBT to finance a large portion of the purchase price Investments are in both private and public companies In an LBO o equity contribution is roughly 30 – 40 % o Debt makes for 60 – 70 % Goal is to make high returns at exit (usually 5 years) 3
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Basic Idea Leveraging means adding Debt Use of leverage gives higher returns on investment Debt is put on TARGET Target’s cash flows service and repay debt Use of debt provides benefits such as tax savings o Interest expense is tax deductible 4
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Key Participants Financial Sponsors Investment vehicles such as PE firms, merchant banks, Hedge Funds, Venture Capital Funds Investors in Sponsors are government and corporate pension funds, insurance companies, endowments and foundations, wealthy individuals Fund Managers are Limited Partners (LPs) Fund Investors are General Partners (GPs) Funds vary in size, focus, investment strategy Some funds diversify, some specify 5
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Key Participants Financial Sponsors Examples: o Private Equity : The Carlyle Group ($40.5 B), KKR ($40.2 B), Blackstone ($36.4 B), Silver Lake Partners o Hedge Funds : Bridgewater Associates ($58.9 B), JP Morgan Asset Management($45.5 B), Paulson & Co. ($36.6 B), DE Shaw Group ($15 B) o Venture Capital : Andreessen Horowitz, Google Ventures, Lightspeed Venture Partners 6
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Key Participants Financial Sponsors Investment Banks Finance and advice LBO Transactions Help sponsors develop and market deals Perform due diligence on targets Provide sponsors with in-house DCM and credit expertise to validate business plan Provide financing commitment on deals 7
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Key Participants Financial Sponsors Investment Banks Bank and Institutional Lenders Capital providers of bank debt (revolvers, term loans)
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Investment Banking Lecture 7 - FPN1: INVESTMENTBANKING...

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