New York University Summer 2008

Leonard N. Stern School of Business (May 19, 2008)

Prof. Robert Semmens

B40.3165 Private Equity Finance

Thursdays 6:00 to 9:00 pm

Robert F. Semmens
Office: KMC 9-197
Phone: 212-998-0300
Office Hours: By appointment only
Email: [email protected]
Website: http://www.stern.nyu.edu/~rsemmens

Introduction
This course examines the private equity marketplace. Private equity is a major source of
capital for both new ventures and established firms. Private equity is the investment of
capital in the equity of private companies to fund growth or in public companies to take
them private. Private equity is segregated into several sub-markets of which the principal
focus of this class is on the venture capital and leveraged buyout markets. Since its
origins after World War II, the size of the private equity market has grown substantially
and has become institutionalized. For example, annual capital commitments to private
equity funds have grown from $8 billion in 1991 to a peak of about $175 billion in 2000
before declining in 2001 and 2002. Since 2002 commitments have increased
substantially. In fact, market sources estimate that more than $500 billion was raised in
2007. It is widely expected that the private equity market will grow in the coming years.

The objective of this course is to provide an overview of the private equity market from
the differing perspectives of private equity investors (limited partners), private equity
fund sponsors (general partners) and the managers of portfolio companies by focusing on
the nature of the market and the strategies employed.

The “private equity cycle” will be explored and developed in the course. The private
equity cycle includes: 1. Private equity fundraising and structure; 2. Investment
origination, valuation, the investment decision, strategies for value creation and
investment management; and 3. Exit strategies. Topics expected to be covered include:

1. Fundraising and Structure

i. Private equity risk and return
ii. Private equity manager selection
iii. Asset allocation
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iv. Structure of private equity funds
v. Analyzing a fund investment opportunity
vi. Raising a fund of fund
vii. Raising a first time fund

2. Investment Origination, Valuation, Value Creation and Management

i. Structure of private equity investments
ii. Private equity valuation methodologies
iii. Venture capital investments
iv. Buyout investments
v. Value creation strategies
vi. Investment management

3. Investment Exit
i. Initial public offerings
ii. Sale of portfolio companies
iii. Distributions of portfolio investments

4. Other topics (as time permits)

i. Discerning and Developing Opportunities
ii. Portfolio Management
iii. Corporate venture capital
iv. Private Equity in Emerging Markets
v. Secondary trading of fund investments
vi. Monetization of general partnership interests

The teaching method will employ extensive reading, some lecture, and case studies.
Since this is a mini-course, we will cover topics quickly, touching on the highlights rather
than studying issues in depth. We will not discuss every topic or case in class but reading
will be assigned on every topic. Students will be expected to actively participate in
classroom discussion.

Class Prerequisites
B01.2311. Working knowledge of finance, including investments and investment
banking, and management policy. Students who have taken similar courses such as
Entrepreneurial Finance, Venture Capital Financing and Financing New Ventures should
only take this class with the Instructor’s permission.

Schedule
Class will be held every Thursday from May 22nd until and including June 26th. A
written assignment will be distributed on Thursday June 5th and will be due the following
Thursday at the beginning of class. The written analysis of a case, distributed on the last
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day of class, will be due no later than 9 pm on Thursday July 3rd. For every class,
including the first class and except for the class where the first major assignment is due,
students will prepare and hand in a short written analysis of a question the instructor
distributes the previous week tied to the current reading assignment. Students are
expected to work individually on all the weekly assignments and on the two major
written papers.

Primary Materials
Harvard Business School cases and notes will constitute the primary course
materials.

Course Outline

Class One: Topics

1. Introduction to Private Equity
2. Fundraising
i. Private equity risk and return
ii. Private equity investment strategies
iii. Private equity manager selection
iv. Asset allocation

Required Reading
Case Study:
Joshua Lerner, “The Yale University Investments Office:
August 2006”

Lerner, G. Felda Hardymon & Ann Leamon, “Acme

Investment Trust, January 2001”

Class Two: Topics

2. Fundraising (continued)
v. Analyzing a fund investment
vi. Raising a fund of funds
vii. Raising a first time fund

Required Reading
Case Studies:
Hardymon, Lerner, Leamon & Frank Angella, “Grove
Street Advisors”

Hardymon & Bill Wasik, “Columbia Capital Corporation:

Summer 1998”

Lerner & David Gallo, “Francisco Partners”

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Prof. Semmens

Notes:
Hardymon & Lerner, “A Note of Private Equity Partnership
Agreements”

Lerner, “A Note on the Private Equity Fundraising

Process”

Class Three: Topics

3. Investment Origination, Value Creation and Management
i. Venture Capital
ii. Valuation
iii. Structure of Securities

Required Reading
Case Studies:
Lerner, Hardymon & Leamon, “AIT Group, PLC”

Hardymon & Wasik, “Metapath Software: September 1997”

Lerner, Hardymon & Leamon, “Endeca Technologies (A & B)”

Notes:
Michael J. Roberts & Lauren Barley, “ How Venture Capitalists
Evaluate Potential Venture Opportunities”

Linda Cyr, “A Note on Pre-money and Post-money Valuations (A

& B)”

Lerner & John Willinge, “A Note on Valuation in Private Equity

Settings”

Hardymon & Lerner, “A Note on Private Equity Securities”

Class Four: Topics

3. Investment Origination, Value Creation and Management (cont.)
iii. Leveraged Investments
iv. Value Creation, Management and Restructuring

Required Reading
Case Studies:
Malcolm Baker, James Quinn “Berkshire Partners: Bidding for
Carter’s”
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Prof. Semmens
Malcolm S. Salter, “Regal Cinemas (A) and (B)”

Notes:
Carliss Baldwin, “A Technical Note on LBO Valuation (A)
and (B)”

Class Five: Topics

iv. Value Creation, Management and Restructuring (Cont.)
4. Investment Exit
i. Initial Public Offerings
ii. Sales of Portfolio Companies
iii. Distributions of public stocks

Required Reading
Case Studies:
Lerner, Hardymon & Leamon ”Apax Partners and Xerium
S.A.”

Lerner, Dino Cattaneo & Giampiero Mazza, “Investitori

Associati: Exiting the Savio LBO (A & B)”

Notes:
Lerner, Hardymon & Leamon, “Between a Rock and a
Hard Place: Valuation and Distribution in Private Equity”

Lerner, “ A Note on the Initial Public Offering Process”

Class Six: Topics

5. Other Issues (as time allows)
i. Discerning and Developing Opportunities
ii. Portfolio Management
iii. Private Equity in Emerging Markets
iv. Corporate venture capital
v. Secondary trading of fund investments
vi. Monetization of general partnership interests

Required Reading
Case Studies:
Hardymon, Leamon “Actis and CDC: A New Partnership”

Hardymon, Lerner, “Martin Smith: May 2000”

Hardymon, Lerner, “Martin Smith: May 2002”

Hardymon, “Venture Capital Case Vignettes”

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Prof. Semmens

Lerner, "Vignettes: The Rebar Dilemma"

John W. Mullins, “Good Money after Bad?”

Hardymon, Leamon, “The Perfect CEO”

Notes:
Lerner, “A Note on Corporate Venture Capital”

Leamon, Lerner, “A Note on Private Equity in Developing

Countries”

Unlike many finance courses this course is not an overly quantitative course. While the
section discussing valuation contains quantitative work, the main focus will be on
analytics, especially qualitative factors. This course places a strong emphasis on
presentation and discussion skills. Students will need to explain their thinking about an
issue to the class and the Instructor. Participation will be an important element of the
final grade as described below. Participation will be judged primarily on the quality of
the insight provided in the classroom comments rather than on the quantity of the
participation. Students will participate either by volunteering or by being selected to
participate by the Instructor. Relatively frequent contributions to the discussion that
demonstrate logical and complete analysis will be required to excel in the participation
portion of the grade. Name cards are highly recommended. If feasible, the Instructor
may utilize assigned seating. The Instructor cannot properly evaluate your classroom
participation if the Instructor does not know who you are.

Assessment
The instructor will follow the suggested grade distribution standards of the Stern
Department of Finance for upper division graduate courses. These guidelines suggest the
following grade distribution: “A” 10%, “A-” 10-15%, “B+” 10%, “B” 50-60% and “C”
10%. Grades will be based 35% on the first written major assignment, 45% on the
second written major assignment (case analysis), 10% on the five weekly assignments
and 10% on class participation.

Instructor
Robert Semmens was a Co-Founder and General Partner of the Beacon Group, a Private
Equity and M&A Advisory firm formed in 1993. At Beacon, he raised and managed the
$650 million Beacon Group Energy Investment Fund, L.P and the $950 million Beacon
Group Energy Investment Fund II, L.P. The Beacon Group Energy Investment Funds
were private equity funds focused on making investments in the global energy business.
In addition, he also managed a hedge fund of fund invested in a variety of market neutral
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Prof. Semmens
strategies. JP Morgan Chase acquired the Beacon Group in the summer of 2000 and until
2001 he was a consultant to JP Morgan Chase. Prior to co-founding Beacon, he was a
Vice-President at Goldman, Sachs & Co. in the Investment Banking Division where he
concentrated on corporate financings, mergers & acquisitions and private investments, all
in the energy area. He also worked at J. Aron, the commodity and currency trading
division of Goldman Sachs, in oil and gas derivatives. He has a BA from the University
of Arizona (Economics), a Masters of Business Administration (Finance) from the J.L.
Kellogg Graduate School of Management at Northwestern University and a Juris Doctor
from the Northwestern University School of Law. He is currently a private investor in
early stage companies and LBOs, serves on the Board of four companies and is a member
of NY Angels, an early stage-investing group.

Course Packet and Useful References

The course packet consists of the notes and the cases that will be discussed during the
course. The course packet is the only required text. However, students may find the
following books to be useful references at various times during the course.

General references:
Brealey, Richard A. and Stewart C. Myers, Principles of Corporate Finance (6th ed.),
(New York: McGraw-Hill, 2000).

Private equity references:

Fenn, Liang, and Prowse, “The Economics of the Private Equity Market”, Board of
Governors of the Federal Reserve System, Release 168, December 1995. Available for
download at:
http://www.federalreserve.gov/pubs/staffstudies/1990-99/default.htm

Bartlett, Joseph W., Equity Finance: Venture Capital, Buyouts, Restructurings, and
Reorganizations (2nd ed.), (Frederick, MD: Panel division of Aspen Law & Business,
1995).

Lake, Rick and Ronald A. Lake, Private Equity and Venture Capital: A Practical Guide
for Investors and Practitioners, (London: Euromoney Books, 2000)

Levin, Jack S., Structuring Venture Capital, Private Equity, and Entrepreneurial
Transactions, (Frederick, MD: Panel division of Aspen Law & Business, 2000).

Schell, James M., Private Equity Funds: Business Structure and Operations, (New York:
Law Journal Press, 1999)

Valuation references:
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Copeland, Tom, Tim Koller, and Jack Murrin, Valuation: Measuring and Managing the
Value of Companies (2nd ed.), (New York: John Wiley & Sons, 1994).

Damodaran, Aswath, Damodaran on Valuation, (New York: John Wiley & Sons, 1994).

Pratt, Shannon P., Robert F. Reilly, and Robert P. Schweihs, Valuing a Business: The
Analysis and Appraisal of Closely Held Companies (4th ed.), (Burr Ridge, IL: Richard D.
Irwin, 2000).

Other Comments
If you miss a class, you are responsible for any material that you miss, including any
weekly assignments and administrative announcements.

To be fair to other students, there will be no extra-credit assignments.

Your final grade will be determined solely by the system described above.

The written assignments and the written cases will be available from the instructor.

The Stern Default Policies shall be followed except as otherwise indicated.

Students shall adhere to the MBA Honor Code. Every student is obligated to report to
the Instructor any suspected violation of the code that he or she has observed.

Upon request, the Instructor will re-grade the student’s work but only at the end of the
term and only by reviewing each and every assignment of the term. The Instructor will
not re-grade single assignments. The student will then receive the grade arising from the
re-grade even if it is lower than the original grade.

Instructions for Preparing Written Case Analyses

1. Read the case carefully. Identify the significant points and relationships. Use the
exhibits to help you understand and/or interpret the text.

2. Analyze the data presented in the case and evaluate it in light of the situation. Try to
understand not only the present situation, but also its historical origin and how it
developed.

3. Decide what the major problems are and, if appropriate, prioritize them.

4. With the problems in mind, identify the feasible alternative courses of action.
Determine what additional information is necessary to evaluate the alternative courses of
action. Obtain that additional information if possible. If the information is not possible to
obtain, note the information you would like to obtain.
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Prof. Semmens

5. Decide what your specific recommendation is to be. In doing so, use your
understanding of the alternatives to frame a solution to the problem(s), and predict and
evaluate the probable consequences of your solution.

6. Decide how you will organize the presentation of your solution to the case.

Document Organization
1. Problem Statement: Identify the problem(s) concisely, using whatever case facts are
necessary to show significance and/or priority.

2. Analysis: Avoid generalities. Be as specific as possible. Express your ideas clearly,

supporting them adequately with evidence, explanation, and references to appropriate
exhibits. The strengths and weaknesses of alternative courses of action should be
developed. The analysis should build to support your recommendation. Reasons for
accepting or rejecting alternatives should be stated and, if necessary, defended.

3. Recommendation: State your recommendation clearly and in detail sufficient to guide

implementation. Discuss both the positive and negative results of following your
recommendation and why you think that it is the appropriate course of action. Make sure
that the recommendation follows logically from your analysis.

Document Format
The written analyses will be written as reports to senior management. The first page
should provide a short executive summary that is no more than one paragraph long. The
detailed analysis should be presented on the following pages. The written text should not
exceed 5 pages. All pages should be numbered and the document typed with one-inch
margins and double spacing. Use a 12 point font or larger. Tables, charts, spreadsheets, or
any other supporting materials may be attached as exhibits. Each exhibit must be referred
to in the text and clearly labeled. The weekly assignments can be written in whatever
format the student finds most useful but cannot exceed one written page (although
analytics may comprise additional pages.) The Instructor recommends an outline format
for the weekly assignments.
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Prof. Semmens

CASE PACKET
1. Yale University Investments Office: August 2006, HBS # 9-807-073
2. Acme Investment Trust, January 2001, HBS # 9-202-055
3. Grove Street Advisors, HBS #9-804-050
4. Columbia Capital Corporation: Summer 1998, HBS # 9-899-255
5. Francisco Partners, HBS # 9-200-063
6. A Note on Private Equity Partnership Agreements, HBS # 9-294-084
7. A Note on the Private Equity Fundraising Process, HBS # 9-201-042
8. AIT Group, PLC, HBS #9-803-104
9. Metapath Software, HBS #9-899-160
10. Endeca Technologies (A), (B) HBS # 9-802-141 & #9-802-142
11. How Venture Capitalists Evaluate Potential Opportunities, HBS 9-085-019
12. A Note on Pre-money and Post-money Valuation (A & B), HBS # 9-801-446
13. A Note on Valuation in a Private Equity Setting, HBS # 9-297-050
14. A Note on Private Equity Securities, HBS # 9-200-027
15. Berkshire Partners: Bidding for Carter’s, HBS # 9-205-058
16. Regal Cinemas (A) and (B), HBS # 9-902-019 & HBS # 9-902-020
17. A Technical Note on LBO Valuations (A) & (B), HBS # 9-902-004 & HBS # 9-902-
005
18. Apax Partners and Xerium S.A., HBS # 9-804-084
19. Investitori Associati: Exiting the Savio LBO (A) and (B), HBS # 9-299-048 & HBS #
9-299-106
20. Between a Rock and a Hard Place: Valuation and Distribution in Private Equity, HBS
# 9-803-161
21. A Note on the Initial Public Offering Process, HBS # 9-200-018
22. Martin Smith, May 2000, HBS # 9-200-046
23. Martin Smith: May 2002, HBS # 9-802-160
24. Venture Capital Case Vignettes, HBS # 9-801-408
25. Actis and CDC: A New Partnership, HBS#9-805-122
26. Vignette: The Rebar Dilemma, HBS #9-803-091
27. Good Money after Bad? HBR Reprint # R0703A
28. The Perfect CEO, HBS #9-805-156
29. A Note on Corporate Venture Capital, HBS # 9-201-036
30. A Note on Private Equity in Developing Countries, HBS #9-208-307