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Investment Banking

Summary

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What does the above formula mean? After our course you will know!..as well as many more typical calculations used in structured finance and investment banking.  Would you like to understand how investment banks value companies? How project financiers decide how much they can lend in a project financing? (And what is a project financing versus a “vanilla” corporate credit?)  How bankers decide how much they can lend to an LBO (leveraged buy out)? Or what criteria Private Equity firms use to analyse targets, how much they will pay, and at what point they will sell?  We’ll show you!  You will build a financial model for a multinational listed (public) company, and then look at the business/project from different perspectives, adding all the typical calculations that bankers and PE (Private Equity) firms would.

This course is suitable for anyone in any industry who wants to learn more about the Investment Banking activities of Valuations, Project Finance, Leveraged Finance and Private Equity.   This course is suitable for those wanting to move into Investment Banking (IB), or maybe you are in industry and want to better understand what your bankers are saying!  ..Or in a management team and planning an MBO (management buyout).  Come to our course and learn how the numbers stack up.  We cover:

  • Valuations:  DCF versus Multiples: what are they and and when to use either, and typical issues :  Real or nominal cashflows? Pre or post tax? Geared or ungeared? What is “terminal value”?  What is the Gordon Growth model?  What is CAPM?  What is WACC?
  • Project Finance: based on stipulated debt covenants (ratios) and repayment profile, what is the maximum this company could borrow to finance a new, stand-alone /”ringfenced” project?
  • Leveraged Finance: What is the maximum you would lend to a Private Equity firm to buy this company i.e. an LBO (Leveraged Buyout) or lend to a management team for an MBO (Management Buyout)?
  • Private Equity: What is the maximum a Private Equity house should pay for this company based on their own targets (IRR, entry and exit multiples, etc)
    You will leave the course knowing how to start with a blank Excel sheet, build a model for a business, and then analyse it from these various perspectives.

 

Part A: Best Practice Financial Modelling

It will make your work easier (and more accurate), if you learn to follow certain best practice modelling tenets, and thus we cover some of the topics from our course “Financial Modelling” i.e.:

  • How is Financial Modelling different from Advanced Excel? And what makes a good financial model?
  • Planning / logic flow / auditing / error minimisation and other key tenets that should be followed to create a robust model
  • Excel’s more advanced functions that we will be employing to build the model, particularly the financial functions

We will be constructing a simple model in this course, but some businesses can be complex i.e. you could be asked to model all of Coca-Cola’s global sales for one country:  a monthly model over 20 years covering 45,879 distributors who each handle 27 different products….thus the more you can start using best practice modelling, the easier your job will be.

Part B: Building the model / Arriving at the cashflows

  • Planning / Logic flow / Model set-up / Cover and Log sheets / Model Maps / Creation of error checks as we go along (the more we have, the less chance of error).
  • Dates : get them right, as the model quite often hinges on dates – particularly when there are different phases.
  • Assumptions: Entry of, and correct notation re validation
  • Outputs (Quarterly): Construction versus Operations phases / Creating the calculations to arrive at business cashflow / Working Capital/ Basic profitability outputs: EBITDA, Depreciation, EBIT, NPAT, Breakeven Analysis.
  • Outputs (Annual) : the same data shown annually- and how to do this in just a few keystrokes (Issues to look out for: balances versus flows, % outputs, tax schedule).

Part C: Analysing the Cashflows

Once we have built the model and arrived at the correct cashflows, we can go in different directions / analyse the business from different perspectives, as we do below:

Valuation:

  • How to value a business: DCF or multiples? What do they mean, and which is appropriate to different types of businesses.
  • Terminal value: what is it and how to calculate it? When do we need a terminal value and when don’t we? Which growth factor to use? What is the Gordon growth model?
  • Which cash flows to use? Pre or post tax? Nominal or real? The Fisher Equation.
  • Which discount rate to use? i.e. matching the discount rate to the cashflows. How to calculate it? (We look at WACC, CAPM, Beta, Rf, Rm).
  • Are payments received start of year, mid-year, or end of year, and how to adjust for this? It can have a substantial effect on the NPV (particularly when cashflows are in the millions)
  • IRR : We determine the ungeared IRR (assume project 100% equity funded) and then see how that changes at different levels of debt.
  • Calculate NPV using Excel’s inbuilt functions, (and discuss when to use NPV, XNPV XIRR) . Then calculate NPV from first principles (i.e. mathematics) as a check- and the two should be close- and reason why they don’t always equal.

Project Finance (PF)

  • Investment Banking 101: What’s the difference between Project Finance / Leveraged Finance / “Vanilla” Corporate Banking / Originations / Syndications /DCM / ECM?
  • Project Finance 101: Which industries typically use it? What are its benefits? What are its negatives?
  • This company wants to build a greenfields coal-fired power plant, thus we start by looking at the cashflows from the proposed project (not from the company as a whole).
  • Debt Schedules: How to calculate (and treat capitalised interest & fees)
  • How to sculpt the repayment profile to achieve a certain DSCR (and what does the average DSCR tell us?)
  • Cash Waterfall: from CFADS (Cash Flow Available for Debt Service) to DSRA (Debt Service Reserve Accounts), additional prepayments based on covenants, lock-up accounts, and releases to Equity. Time does not permit us to fully explore Project Finance here- for a more detailed course on this please refer to our other course: Project Finance.  In particular in that course we explain how to create complete cash waterfall tables : from CFADS to distributions to equity.
  • Debt Ratios: How to calculate common Project Finance ratios : DSCR, ICR, LLCR, PLCR, and what do they all mean?
  • Breakeven Analysis: What assumptions will deliver a DSCR of 1.00?
  • Payback/cash sweep analysis: We construct a table to answer the question: “ How long would it take to repay debt if a cash sweep commences in year x?”

Leveraged Finance

  • How it differs from Project Finance: the different ratios that are used to assess debt capacity
  • The market barometer: Debt / EBITDA: how has it changed over the past 10 years? And why? What happened in 2007 / 2008 and how has the market recovered?
  • Typical deal structuring : Differing tranches from senior debt to sub debt to mezz. debt, and hybrid.
  • The Leveraged Finance client i.e. Private Equity firms

Private Equity

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  • Terminology: Private Equity / Fund of Funds / LP vs GP / Entry & Exit Multiples / Angels / Trade Buyer vs Strategic Buyer / Carried Interest / A-round / ESOP / Flipping / Incubator / MBO vs LBO/ OID … and more
  • Do PE firms deserve their sometimes negative reputation? Our view is no- they are merely applying a disciplined approach to buying and selling businesses-we will elaborate further…
  • PE 101: The numbers behind a buyout : a text-book PE purchase and exit
  • Takeovers 101 /the basic rules / Scheme of Arrangement versus a Bid, etc
  • Having discussed the theory- we then look at some real life examples  of LBO’s where some of the largest global PE firms have been involved.  They are some of the largest PE transactions that have occurred globally, some of which your trainer was involved in, many with EV> USD$1billion, (and if you don’t know what “EV”  and other valuation terminology means, you will after the course!).  We discuss why some (most) succeeded and some have failed.

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  • Finally, we look at a business, Company X, and assess if it could be a good candidate for an LBO or MBO.   At this point we close the computer : the quantitative stops and the qualitative begins.   We look at company X’s position in its market, market saturation, up and downstream integration possibilities, client and supplier concentration, working capital issues, technology risks/obsolesence,  potential synergies, and the proposed road to profitability : top line increased, bottom line ”fat” to be cut, or both ? Has this company forsaken profitability for market share/ to be Number 1 ?
  • Having discussed the qualitative aspects, we create the model for the acquisition, in order to ascertain the maximum a Private Equity firm should pay for this company based on various criteria : IRR target and exit multiple assumptions.