1. SMU Finance Club
Cox School of Business

2. Club Purpose & Objectives
To inform and educate students about financial management
To bridge the gap between theoretical topics learned in class and the reality of the financial world
To introduce students to programs such as Alternative Assets, Boulevard Investment Group, Portfolio Practicum, and Spindletop Fund
To serve as a gateway for admittance to desired programs
To connect members with firms and guide internship placement
To empower members to pursue their desired career path
The purpose of the club is to meet the needs of the members. Therefore, we will be flexible in structure and direction, staying receptive to help individual members meet their goals. There’s a communication gap between the specialized programs and the general undergrad Cox curriculum.

3. Speaker: RE Private Equity
Progress
Meeting 1
Introduction
Meeting 4
Speaker: RE Private Equity
Meeting 3
Investment Banking
Meeting 2
Industry Overviews
Meeting 5
Private Equity
Meeting 6
Hedge Funds

4. Background
Private equity: equity that is not publicly traded or listed; encompasses traditional PE strategies and venture capital firms
PE firm: invests directly in private companies or performs buyouts of
public companies with intention to take them private
shop: buy to sell

5. Private Equity Two common investments:
Leveraged Buyout (LBO): act as intermediary for entities that need capital (companies) and entities that supply capital (investors); the bank underwrites debt and equity offerings to fill this role
Venture Capital: act as advisor to corporations performing M&A, restructuring, hostile takeover defense, among other strategic actions

6. Alternative Investing Market
Alternative assets: not one of the traditional three asset classes (stocks, bonds, cash) that are complex, relatively illiquid and not tightly regulated; eg: hedge funds, real estate, cars, PE funds

7. Alternative Investing Market

8. Partnership Setup
Limited partners: investors in the fund who do not participate in active
management of fund; typically institutional investors or wealthy individuals
General partners: the PE partners manage the investments for a management
fee and a percentage of the profits (carry); 2-and-20 fee structure

9. The Private Equity Market
LPs
GPs
Investment Types
Pension Funds
Endowments
Foundations
Bank Holding Companies
High-Net-Worth Individuals
Insurance Companies
Corporations
Other Investors
Investing in PE funds
Direct Investments
Seed
Early/Mid/Late
Venture
Growth Capital
PIPEs
MBO/LBO
Special
Situation
Distressed
Secondary
PE Fund
M&A, LevFIn work similar to Private Equity
Equity product offerings: IPOs, secondary offerings, futures, swaps, options

10. Growth Capital
an investment in quickly growing companies with proven ideas/business model to support further growth or entrance to new markets, or to finance acquisitions
can be control or non-control (more common)
PE firm can offer strategic guidance and operational support

11. Leveraged Buyout
Takeover of a company at a high premium financed through debt
The remaining portion of purchase is financial sponsor’s equity (from fund)
Company is typically taken private
5-7 years later, PE firm exits
Very simple conceptually; complicated technically
PE firms expect return of 20-35%
Management Buyout (MBO): an LBO undertaken by the management to take ownership control and take company private
Dell in 2013
RJR Nabisco in 1988 (failed attempt)
Analyst: you are human capital; firm expects a certain amount of work from you
- Despite rigid hierarchy, your responsibilities don’t change suddenly; roles are not narrowly defined; change is gradual

12. LBO: Target Company publicly-traded, mature company
strong, steady stream of cash flows
efficiency enhancement opportunities: potential for value extraction or creation
strong asset base
strong management
Hours tend to be worse at independent advisory firms because more of hour glass structure

13. Purchase - Exit
Huge debt obligation is added to the balance sheet; often junk bonds
Target company’s own assets are used as collateral for the debt
Assets can be sold off or cash flows can pay down debt over investment horizon
As debt it paid off, equity portion is increasing on dollar-for-dollar basis
Company is restructured and made more efficient; costs are cut significantly
Exit: 1) sold to another PE firm
2) taken public in IPO
3) sold through M&A to a strategic

14. Capital Structure M&A, LevFIn work similar to Private Equity
Equity product offerings: IPOs, secondary offerings, futures, swaps, options

15. Incentives for Sponsor
Can make large acquisitions by putting up minimal capital
Equity investment is highly leveraged (60-90% debt)
Enterprise value remains constant or is growing
Returns will dwarf interest payments on debt, achieve high exit
multiple or IRR
Value creation vs. financial engineering (wealth transfer)

16. Cultural Landscape RJR Nabisco LBO LBOs are often hostile takeovers
Michael Milken and Drexel, Burnham, Lambert
Corporate raiders in 80’s and 90’s

17. Cultural Landscape

18. PE Landscape Today
often said to be overcrowded space; too many shops chasing too few deals
cheap credit and easy money have driven up valuations
a lot of money on the sideline with many GP’s anxious to put it to work
aggressive strategic buyers compensating for weak organic growth
buyouts are slowing; those active may be buying at the peak
Risks today:
American recession fear
China economic slowdown
Rising interest rates; rising default rates

19. Private Equity Associate
recruited from investment banks
most PE professionals are ex-bankers
at junior level, work is similar
analysts are poached during first year or two through headhunters
M&A, LevFin groups are most sought-after
“two-and-two:” two years at bank, two at PE firm, then out
better compensation, better hours
ideal route: start at megafund, move to smaller niche shop
or, run one of portfolio companies

20. Breakdown of Private Equity Firms
Big six: Apollo, KKR, Bain Capital, TPG, Blackstone, Carlyle Group
Other megafunds: Ares Management, Oaktree Capital, CVC Capital Partners, General Atlantic, Cerberus, Warburg Pincus, Riverstone, Silver Lake
Most of capital is owned by original partners and families of partners
You can have prosperous career at a MF, but not like old partners

21. Day-to-Day Operations
Deal-related
Non-Deal-related
Source
Deal Execution:
Due Diligence
Valuation
Financial Modeling
Financing
Negotiating and Deal Structuring
Manage and Oversight
Exit Strategies
Marketing / Networking
LPs, Operators, Companies, Bankers & Brokers
Fundraising
Recruiting
Employees
Management
HR / Office Management
Annual Reviews
Begins as early as September

22. Day-to-Day Operations
DEAL RELATED ACTIVITIES
NON-DEAL RELATED ACTIVITIES

23. Deal Process Initial Deal Review Post-Close Transaction Diligence
Assess fit and interest
Indication of Interest (IOI)
Diligence Process
Letter of Intent (LOI) / Term Sheet
Financing
Equity
Key Underwriting Questions
Underwriting
Legal
Incentive Plans
Management
Refinancing/Capital
Growth
Execution

24. Selected Reading Barbarians at the Gate – Borrough, Helyar
Memos from Howard Marks, Oaktree Capital
Any from ‘Strategy, Lifestyle, Growth’ section

25. Alternative Assets Management Program
Two courses
Spring Junior year: investment banking
Fall Senior year: hedge fund theory
Resume book
Strong alumni network
see Spring 2016 FC Guide for details

26. Q&A