Private Equity Modeling Mastery: Analysis and Modeling in PE

Learn what private equity means, its structure and returns, including leveraged buyouts, venture capital, and funds of funds, plus long holding periods and key investors.

Explore weighted average anti-dilution protection, drag-along and tag-along rights, right of first refusal, exit terms, and indemnities in private equity term sheets under Indian law.

We map top private equity firms as of 2015, detailing assets under management, offices, and specialties in leveraged buyouts and distressed securities, with notable portfolio holdings.

Private equity funds earn management fees on assets under management and a performance fee, typically 2% and 20%, with carried interest tied to a hurdle rate and IRR.

Allocate the hurdle rate, then split profits 80% to limited partners and 20% of that amount to the general partner. Note IRR calculations, carry, escrow, clawback, and regional carry differences.

Explore the basic private equity fund structure, including limited partners and a general partner, the limited partner agreement, capital contributions and commitments, and how exits return proceeds to LPs.

Explore deal structuring in private equity, from common and preferred stock with anti-dilution to debt-financed equity, convertible notes, and reverse mergers with shell public companies.

Explore deal structuring in private equity by examining participating and convertible preferred stock, liquidation preferences, warrants, options, anti-dilution provisions and ratchets, and the crucial role of pre-money value.

Understand pre-money and post-money valuations in a startup funding example with an investment and stake. See three post-money calculation methods and the step up, plus convertible and preferred stock effects.

Learn how participating preferences, multiple liquidation preferences, and ratchet mechanisms determine sale proceeds for private equity investors and founders, with conversion decisions and outside investor effects.

Calculate the effective share price under ratchet and weighted-average protections, and see how pre-money and post-money valuations, dilution, and conversion price affect founders and the PE investor.

venture capital funds identify startups with growth potential, provide seed and early-stage financing, support product development and market entry, and pursue profitable exits.

Learn growth capital strategies for mature companies and private equity, including minority investments, expansion into new markets, restructuring, and mezzanine finance with debt-and-equity features.

Private equity firms execute leveraged buyouts by financing about 90% of the cost with debt to acquire assets and exit with value in turnarounds, spin-offs, or distressed opportunities.

Explain private equity real estate strategies: core, core plus, value added, and opportunistic, outlining risk and returns, development and redevelopment activities, leasing, asset turnaround, and the funds of funds option.

Banks support private equity by providing fund accounting and transaction services, safeguarding cash, and financing deals with senior and mezzanine debt, plus M&A advisory.

Understand primary, secondary, and co-investments in private equity, including due diligence, fund structure, capital calls during a 4 to 6 year investment period, and benefits of secondaries and co-investments.

Explore how private equity performance is measured via the j-curve of cumulative net cash flows. Show how IRR captures timing and how investment multiples express value relative to cost.

Learn how private equity performance uses tvpi and dpi, with nav-based valuations and irr, combined with investment multiples to reflect timing and return.

Explore the private equity fund structure, including limited and general partners, capital-raising during a 12–18 month period, and the roles of the investment fund, advisor, and related fund entities.

Private equity funds are closed-ended vehicles that raise capital over 12–18 months, with on-demand calls and offshore structures, typically Delaware LPs or LLCs offering pass-through taxation and limited liability.

Explain how the general partner creates an SPV to control the fund and insulate the sponsor from liabilities, with an investment advisory arrangement and related fund vehicles.

Explore how alternative investment vehicles—formed as special purpose investment vehicles—allow investors to hold specific assets when the main fund isn’t optimal due to tax or regulatory reasons.

Explore feeder funds as SPVs formed by a private equity fund to facilitate tax-optimized investment and act as blockers for US taxes for non-US and tax-exempt investors.

Co-investment vehicles are sponsor-formed entities that co-invest with the main or parallel fund, may differ in terms and fees, and enable outside investments on a deal-by-deal basis.

Understand capital commitments in private equity, including staged funding, sponsor commitments, and capital calls, and learn how fund agreements govern investors' contributions and distributions.

Analyze recycling of capital commitments in private equity fund structures, adding returned capital to undrawn commitments for reinvestment during the investment period. Also covers allocation and the distribution waterfall.

Explain how private equity distribution waterfalls allocate proceeds in tiered priority between investors and sponsors, covering common approaches, first-tranche return of capital, catch-up, and the 7–9% hurdle rate.

Learn how private equity carried interest and catch-up work within the distribution waterfall, including investor capital, preferred return, sponsor share, deal-by-deal and European styles, and clawbacks.

Clawback provisions require the sponsor to reverse excess carried interest at the fund's end or designated times, after post-distribution calculations, ensuring investor returns meet the hurdle rate and overall profits.

Analyze how portfolio company fees and management fee offsets interact, including dollar-for-dollar adjustments against sponsor fees and specialized services in real estate and infrastructure funds, and tax implications.

Understand private equity fund expenses, including organizational and operating costs, who bears them from capital commitments, with organizational costs capped and sponsor covering excess while operating costs remain uncapped.

Explore fund marketing for private equity, including US capital raising via private placements, targeted institutional and high-net-worth outreach, private placement memoranda, fund structure details, and strict no general solicitation compliance.

Market private equity funds by connecting sponsors with investors and verifying investor qualifications under securities laws. Define engagement terms covering compensation, scope, exclusivity, and broker-dealer registration under US securities laws.

Identify investors to commit capital and complete the initial closing after minimum. Hold closings in rounds within 12–18 months or until the fundraising cap, with subscription agreements and required materials.

Explore fund terms in private equity, including investment and disinvestment periods, capital calls, and the commitment period. Learn how extensions and liquidation timing shape long-lived funds.

Explain how private equity funds call capital, end the investment period, and trigger early termination with key person events, removal for cause, and first-look conflict provisions guiding sponsor opportunities.

Explore the private placement memorandum for private equity funds, detailing disclosure requirements, risk factors, and the structure of offering terms and subscription procedures.

The fund partnership or operating agreement governs the sponsor-investor relationship, detailing investment objectives and restrictions, economic terms including carried interest and management fee, capital calls, distributions, reporting, and default provisions.

Learn how the subscription agreement records a fund investor’s capital commitment and grants rights. Review the investor qualification questionnaire to confirm eligibility and collect sponsor required information.

This lecture explains how to approach private equity from the borrower's side, outlining four steps: prepare a detailed business plan, select the right PE firm, and negotiate with an advisor.

Develop a funding-ready business plan for a seed-funded mental health app in India that connects psychiatrists and psychologists with users for counseling, with revenue from registrations, ads, and corporate clients.

Analyze the market research-backed assumptions behind a mental health app business model, including downloads, active users, referrals, and revenue sharing, with projections for psychiatrists, psychologists, and corporate clients.

Estimate organic and ad-driven downloads, project active users, and model revenue from consultations, subscriptions, medication, and online pharmacy for a mental health app.

Revenue part 4 models a private equity firm's income from online pharmacy fees, psychologist subscriptions, workshops, and Edu Connect, totaling $91k monthly, with Mumbai-led expansion and download-driven growth.

Develop a private equity revenue model by outlining enrollment assumptions for psychiatrists and psychologists, patient uptake, corporate clients, downloads, and subscription and consultation charges to project yearly revenue.

Develop a cost sheet by detailing manpower, professional fees, outsourcing for accounting, office expenses, marketing, and app maintenance as the client base grows.

Develop a cash flow statement using quarter and year groupings to determine break-even timing, working capital needs, and how initial investment interacts with sales and costs.

Develop an equity schedule to calculate pre‑money and post‑money valuations, align costs, revenues, and depreciation to the income statement and cash flow, and project capital needs.

Describe building the cap table and depreciation schedules, then prepare the income statement and balance sheet for a not-yet-existent company, including accounts receivable/payable, preferred stock vs debt, and WACC.

Compute pre-money and post-money valuations from share price and post-funding shares, illustrating how private equity investors secure their investment through liquidation preference and how founders retain 49 percent ownership.

Calculate the weighted average cost of capital by combining equity cost from the equity risk premium with a 2% risk-free rate and after-tax debt costs at 34.3%.

Calculate the weighted average cost of capital for a private equity project, integrating risk-free rate, market risk premium, taxes, and unlevered cash flows to compute net present value.

Value the firm with the discounted cash flow method, using revenues minus expenses for net revenue and a chosen discount rate to compute cash flows, yielding 7.5 million.

Draft a private equity term sheet detailing common equity and convertible preference shares, post-money valuation with cap and floor, and a 49:51 investor to company share split.

Summarizes a private equity term sheet with weighted average anti-dilution, first refusal and tag-along rights, drag-along terms, exit strategies and 50/50 due diligence costs, plus indemnities under Indian law.

Explore private equity modelling by comparing private and traded firms, valuing private companies through discounted cash flows and the accounting approach, with an Infosoft example in Excel.

Analyze historical earnings data for the S&P 500 and Infosoft from 2004 to 2010 to illustrate an accounting-based approach to valuing Infosoft.

Regress Infosoft's changes in accounting earnings against S&P 500 changes with a linear model, deriving slope and constant to value private firms via the accounting approach.

Input annual earnings data for Infosoft and the S&P 500 from 1992 to 2010, compute year-over-year changes, and regress Infosoft changes on S&P 500 changes to value a private firm.

Compare traded and private firms using the fundamental approach to estimate private firm risk with variables like return on equity, assets, debt, and earnings growth; illustrated with Infosoft.

Apply a regression linking ROE, fixed assets to total assets, debt coverage, growth in net income, and tax rate to firm risk, using January GAAP data; 9.3% r-squared, standard errors.

Apply a bottom-up approach to estimate levered risk for private firms using unlevered risk, tax rate, and industry or optimal debt-to-equity inputs, via a worked Excel illustration.

Estimate Infosoft's levered risk using a bottom-up approach from small-cap software data, set unlevered risk at 1.60 and levered risk equal to 1.60 due to no debt, with non-diversification adjustments.

Adjust for non diversification to reflect private firm owners' exposure to index risk; use an illustration and Excel to compute unlevered risk via index risk over stock and index correlation.

Learn to estimate risk using a bottom-up approach in private equity. Compute unlevered risk from comparable firms, then adjust for tax rate, debt-to-equity, and non diversification.

Explore alternative adjustments for private firm risk, including venture capital returns, the build-up approach, and implied private cost of equity, shaping non diversification premiums.

Illustrates estimating cost of capital using Infosoft’s leverage assumptions, with a 3.5% treasury rate and 5% market risk premium to derive 17.65% cost of equity and 15.27% cost of capital.

Analyze cash flows to equity and to the firm, incorporate after-tax cash flows, debt payments, and reinvestment needs, and distinguish salaries from dividends in private and traded firms.

Demonstrates adjusting operating and net income by capitalizing lease commitments, deriving imputed interest and depreciation, and adding a chef salary, using the present value of lease commitments at 8.5%.

Illustrates how operating income is adjusted for imputed depreciation and imputed interest to derive taxable income and net income, using Infosoft’s IPO prep income statement.

Explore growth estimation in private equity modeling by linking reinvestment rate and return on capital to project growth, with illustrations on growth, closure, and terminal value.

Analyze closure and terminal values via a 12-year lease, liquidation at book value, 3% growth, ROIC drop after year ten, 25% reinvestment, debt at 10%, and 8.9% cost of capital.

Apply the key person effect to private equity valuations by comparing status-quo value with and without key personnel, illustrating losses and mitigations like non-compete agreements.

The lecture explains illiquidity discounts in private equity modeling, using Silber's regression to relate restricted stock discounts to firm revenues, size, and liquidity, and demonstrates an illustration estimating discounts.

Explore illiquidity discount with restricted stock price and risk premium approaches, noting a base discount of about 28.75% (adjusted to 25%) and a liquidity discount around 12.9%.

Learn how valuation motives differ for private equity, traded firms, and IPOs, and estimate value using cost of equity and debt, after-tax operating income, illiquidity discount, and discounted cash flows.

Illustrates valuing equity through present value of liquidation proceeds minus lease commitments and operating cash flows, and an ipo valuation for Infosoft with cost of capital and growth assumptions.

Illustrate value estimates in private equity modeling by projecting ten years of free cash flow to the firm, including terminal value, with growth and capital costs, then discount to equity.

Compute the value of equity and equity per share for an ipo using cost of capital and terminal value. Show how reinvestment and growth influence the final equity value.

Explore how private equity funds raise capital from LPs via a limited partnership agreement, structure with GP teams, and model fund flows, returns, and exits.

Build the private equity model by selecting the vintage, naming the data range, and using data validation for inputs; model committed capital, 10% slabs, and investment timing to output.

Feed the inputs vintage, terme, committed capital, and yearly calling into an Excel model, using cell referencing to auto populate years and compute capital called in and cumulative capital.

Model EBIT across the pre- and post-break-even years, applying growth after break-even. Compute management fees on cumulative called-in capital and NAV; trigger 20% carried interest when NAV exceeds committed capital.

Learn to model cumulative carried interest in private equity by tracking nav versus committed capital, applying a carried interest rate, and determining gp distributions and lp callbacks across years.

Analyze nav post distributions and the dynamics of adjusted nav before distributions, capital calls, and fees, then interpret DPI, RBI, and PPI to gauge LP returns and fund performance.

Learn to calculate tvpi and related private equity measures, and use excel goal seek and what-if analysis to forecast exit multiples under best, base, and worst scenarios.

Explore Excel data-table and goal-seek driven scenario analysis for private equity revenue modeling, testing third-year revenue, exit multiples, TVPI, and DPI, while learning LPA clauses and carried interest.

Study private equity fund structures and remuneration schemes, including management fees and carried interest, within LP and GP roles. Learn due diligence and startup valuation to target high-multiple exits.

Calculate post-money by discounting the $25 million exit over four years at 50%, then derive pre-money from post-money minus investment and compute ownership as investment divided by post-money.

Compute the vc firm's shares from the founders' shares using the ownership fraction and post-money valuation, via the formula y = x * f/(1 - f).

Compute price per share and VC vs founder stakes, derive pre-money and post-money valuations, then estimate exit value and a fivefold exit multiple from 25 million.

Build scenarios from the base case by freezing cells and adjusting inputs like exit value and time horizon, revealing post-money valuation, vc stake, and founders stake changes.

Compare best, base, and worst-case scenarios to show how post-money valuation and exit multiples shift with investment in private equity modeling.

Understand how limited partners protect returns and align incentives through key man clauses, clawback provisions, no fault divorce, carried interest, and management fees in a private equity structure.