ROBERTO IPPOLITO is Managing Partner of a leading Italian Hybrid Capital (private equity and private debt) fund and Professor of Principal Investing at Università degli Studi Guglielmo Marconi. He has 20 years' private capital experience in sourcing, structuring and investing in all parts of the capital structure (senior debt, junior debt and private equity) of Italian SMEs across several industries and three years' management consulting experience (with a focus on business due diligence and performance improvement).

Former Head of Leverage Finance at General Electric Capital Italy, Roberto has held managerial roles at European Bank for Reconstruction and Development, DAM Capital (Anschutz Group), Bain & Co. and junior positions at Goldman Sachs (Merchant and Investment Banking) and Istituto Mobiliare Italiano (Merchant Banking). He is a Fulbright scholar and a British Chevening scholar.

Roberto received a MBA from the University of Chicago, a MSc in Economics from the University of Warwick and a Summa Cum Laude BSc in Business from LUISS University. He is a CFA and CPA in Italy and FSA registered in the UK.

About the Author xi

Acknowledgements xiii

About the Companion Site xv

Introduction 1

The Rise of Private Markets (Alternative Assets) in the Investors' Allocation 2

The Rise of Private Markets as a Favoured Alternative Source of Company Financing 4

Private Equity 6

Private Debt 8

Deal Phases and Book Organisation 10

Chapter 1 Closed End Funds 13

A Close Up on Private Equity and Private Debt Partnerships 13

Cash Flows, J Curve, and Returns 16

Financial Returns 19

References and Further Reading 22

Suggested Cases 22

Chapter 2 Debt Products 23

Introduction 23

Definition and Some Useful Classifications 24

Pure Debt Instruments 29

High-yield Bonds 37

Mezzanine 39

Unitranche 43

A Close Up on Syndicated Lending 50

References and Further Reading 52

Suggested Cases 52

Chapter 3 Equity Products 53

Introduction 53

Ordinary Shares 54

Preference Shares 55

Convertibles 57

Other Equity Instruments 64

References and Further Reading 70

Suggested Cases 70

Chapter 4 Business Due Diligence 71

Introduction 71

Macro Factors 71

Industry Risk Analysis 73

Company Analysis 83

Summary Steps for a Strategic Analysis of a Business Plan 90

References and Further Reading 91

Suggested Cases 91

Chapter 5 Accounting Due Diligence 93

Introduction 93

Quality of Earnings 93

Ratio Analysis 101

Cash Flow Analysis 106

Creative Accounting 115

References and Further Reading 123

Suggested Cases 123

Chapter 6 Business Plan 125

Introduction 125

Pro-forma Financials 125

Profit and Loss Projections 126

Balance Sheet Projections 127

Putting it all Together: Modelling Cash, Short-term Debt, Net Income, and Shareholders' Equity 128

Sensitivity Analysis 128

Consistency Checks 129

References and Further Reading 133

Suggested Cases 133

Chapter 7 Valuation 135

Introduction 135

Fundamentals #1: Price and Value 135

Fundamentals #2: Enterprise Value and Equity Value 136

Fundamentals #3: Market Values vs. Book Values 140

Discounted Cash Valuation Method 140

Discounted Cash Valuation: WACC Approach 140

Discounted Cash Flow Valuation: Adjuster Present Value Method 144

Comparables Valuation Method 147

References and Further Reading 156

Suggested Cases 156

Chapter 8 Growth Equity 157

Introduction 157

Differences between Venture Capital, Growth Equity, and LBO 157

Instruments 159

Fundamentals #1: Pre-money and Post-money Valuation 160

Fundamentals #2: Capitalisation Table 165

Fundamentals #3: Dilution and Equity Stake Calculation 165

Fundamentals #4: Anti-dilution Provisions 167

Fundamentals #5: Structuring for Exit (Ordinary Shares vs. Other Instruments) 169

Fundamentals #6: Redemption 172

Fundamentals #7: The Growth Capital Method (Adapted from the Venture Capital Method) 173

Fundamentals #8: Calculation of the Price per Share 176

Fundamentals #9: Put and Call Options 176

References and Further Reading 184

Suggested Cases 184

Chapter 9 Leveraged Buyout 185

Introduction 185

LBO: Key Concepts 187

LBO Analysis 199

References and Further Reading 215

Suggested Cases 215

Chapter 10 Management of the Portfolio Companies and Exit 217

Introduction 217

Reporting 217

Monitoring 218

Value Creation 218

Exit 220

IPO 222

Trade Sale 223

Secondary/Tertiary Sale to Financial Buyers 223

Other Exit Routes (Share Buyback, Options, Recap) 224

References and Further Reading 225

Suggested Cases 225

Chapter 11 Private Debt 227

Introduction 227

Structuring a Credit Facility 227

Sanity Checks 240

Structuring a Loan Facility: A Modelling Example 246

References and Further Reading 246

Suggested Cases 246

Chapter 12 Legal Documentation 247

Introduction 247

Private Debt Legal Documentation 249

Private Equity Legal Documentation 256

References and Further Reading 264

Appendix 12.1: Example of an Equity Term Sheet 265

Appendix 12.2: Example of a Debt Term Sheet 277

Chapter 13 Distress Symptoms and Remedies 287

Early Warning Signals 287

Causes 288

Restructuring Options 290

Financing Solutions 291

Legal Alternatives 294

References and Further Reading 297

Suggested Cases 298

Index 299