CASS BUSINESS SCHOOL MSc Programme PRIVATE EQUITY ELECTIVE 2012 Term 3

Instructor: Mr Edgar Miller, Senior Visiting Fellow - em@palladian.co.uk EDUCATIONAL AIM The objective of this course module is to provide a broad appreciation of private equity for students who may take up careers in financial sectors where an understanding of private equity may be useful. It is not intended to prepare students for becoming practitioners in the private equity sector or teaching detailed technical aspects of private equity practice (eg, performing due diligence). However, it will provide a useful introduction for students with future career interests in the private equity sector. LEARNING OUTCOMES On completion of the course, students should understand: How private equity has evolved over time, its global structure and importance The distinctive characteristics of the two primary forms of private equity Venture Capital and Buyouts the role they play in the economy, their investment economics, returns, risks, skill requirements, and similarities and differences The key phases and disciplines of the private equity investment life-cycle, as well as the time scale for investing and realising value from private equity investments How prospective private equity deals are sourced, evaluated, negotiated; as well as an introduction to modelling and valuing private equity deals The role played by private equity fund managers, how they do their job, and how they interact with portfolio company entrepreneurs in adding value to their investments How value is realised from investments, the primary exit options, and important considerations in choosing an exit How private equity funds work, their economics, investment returns, and how returns are measured and benchmarked The role played by private equity in the overall investment portfolio, the distinctive characteristics of private equity as an important asset class, and the practical considerations important to institutional investors when investing in private equity funds

COURSE ORGANISATION The course is practically oriented and aimed at providing a broad-gauged, real-world understanding of the private equity investment process. Lectures concentrate on providing an overall framework for understanding private equity, as well as teaching specific concepts and technical skills important to private equity, such as company valuation techniques and modelling. The technical content of lectures is reinforced by problem sets assigned as homework with the correct solutions presented and discussed in class. A practical understanding of evaluating, valuing, and negotiating deals is gained through the analysis and class-room discussion of case studies based on actual situations, as well as interaction with guest lecturers from the private equity sector. The problem sets will be keyed to the discussion of case studies. The course comprises six three-hour sessions. In addition, for every hour spent in class, students will need to devote 1-2 hours of serious preparation time in advance of class each week reviewing lecture notes, reading and understanding background material, solving assigned problem sets, and reading/analysing assigned case studies and preparing solutions for presentation in class. Case Studies. Preparation of case studies and participation in class discussion of the cases is an important part of the learning process (See Learning by the Case Method in your package of course materials). In addition to providing a real-world picture of how private equity works in practise, the case studies will give you an opportunity to integrate and employ knowledge gained in previous MSc courses. Students will be expected to have read, analysed, and to be prepared to present their solutions to the cases orally in class. You are encouraged to discuss the cases before class in groups in order to profit from the experience and insights of others. Students will be asked to provide their analysis of and solutions for the case orally in class. To facilitate this process and help me know you better, you will be provided with nametags to bring to class. In addition, you will be provided with online Study Guides for each case that will assist you in analysing the case and developing your solution. The Course Office will hand out nametags, cases and background reading materials to you at the beginning of the course. Problem Sets. Five problem sets will be assigned at least one week before the class session for which they are due and will be an essential input to the discussion of cases. The answers to certain questions in Problem Sets 2, 3, and 5 will be submitted online the day before class, as they will provide important inputs to the discussion of cases in class. The correct problem set solutions will be discussed during the following class when there will be ample opportunity to ask questions to ensure you understand how to solve the problems. Although the problem sets will not be marked, it is essential you master the concepts and problem-solving approaches underlying the problem sets. Experience shows students who do not take a serious and disciplined approach to completing and understanding the problem sets thoroughly usually fail the course. Class Sessions. Class sessions will begin at 12.10 sharp, except Session 6, whch will begin at 1510 sharp! Classes will begin with discussion of the Problem Set solutions. Thus, missing the first part of the class session may be dangerous to your course grade! Lecture Notes. Lecture notes are provided to assist you in preparing for lectures. However, please note that additional information will be discussed and provided during lectures, most particularly the solutions to problem sets and information associated with

the class discussion of cases. In addition, lecture notes are likely to be updated to stay abreast of current events or modified for teaching purposes. Therefore, please consider the lecture notes only as a guide and regard the PowerPoint slide presentations used in class as the default study source for reviewing the course and preparing for the exam. They will be posted in Moodle after each lecture. Pre-Class Readings. There is no single book that covers the course content adequately. Therefore, pre-class readings will be made available to assist your learning for certain aspects of the course. These will be distributed at the same time as the cases. These readings (listed in the Course Syllabus below), together with the class notes, problem sets/solutions, and lecture presentation slides, should allow you to master the course content. Assistance. As a Senior Visiting Fellow, I do not maintain an office or office hours at Cass. However, I will be pleased for you to contact me by email (see top of page one) if you have any questions or need help with the problem sets. I try very hard to respond quickly. ASSESSMENT The final exam will account for 100% of the grade for the private equity module. The exam will be comprehensive covering key points from lectures, problem-solving homework assignments, key lessons learned from case studies, and insights gained from guest lecturers. COURSE SYLLABUS Session 1 (1210 Wednesday 9 May): Overview of Private Equity Class Session Outline 1. Overview of Global Private Equity 2. Introduction to Venture Capital 3. Introduction to Buyouts 4. The Private Equity Investment Lifecycle 5. Valuing and Structuring Venture Capital Deals Pre-Class Reading Course Outline - read carefully Learning by the Case Method How VCs Evaluate Potential Venture Opportunities Session 2 (1210 Wednesday 23 May): Doing Venture Capital Deals Class Session Outline 1. In-Class Explanation and Discussion of Problem Set 1 Solutions - Valuing and Structuring Venture Capital Deals 2. Valuing Buyout Deals The Adjusted Present Value Method 3. Class Case Discussion - Centex Telemanagement, Inc 4. Guest Lecturer: Mr Simon Clark - Managing Partner, Fidelity Growth Partners; Vice-Chairman, British Private Equity & Venture Capital Association

Pre-Class Reading A Note on Pre-Money and Post-Money Valuation (A&B) (will assist in completing Problem Set 1) Case Preparation Prepare your analysis of Centex Telemanagement, Inc and be prepared to discuss your conclusions in class. What should Jeff Drazen and Sierra Ventures do? Problem Set Assignment Complete Problem Set 1 (Valuing and Structuring Venture Capital Deals) before attending class Session 3 (1210 Wednesday 30 May): Doing Buyout Deals Class Session Outline 1. In-Class Explanation and Discussion of Problem Set 2 Solutions - Valuing Buyout Deals 2. Modelling and Structuring Buyout deals 3. Class Case Discussion Berkshire Partners: Bidding for Carters Pre-Class Reading The Adjusted Present Value Method for Capital Assets (will assist in the solutions to Problem Set 2) Case Preparation Prepare your analysis of Berkshire Partners: Bidding for Carters and be prepared to discuss your conclusions in class. Should Berkshire Partners make a bid for Carters? If so, how much should they pay? Problem Set Assignment Complete Problem Set 2 (Valuing Buyout Deals) and submit the answers for Questions 11-13 to Moodle by 1200 (Noon) Tuesday 29 May Session 4 (1210 Wednesday 6 June): Realising Value From Private Equity Investments Class Outline 1. Class Case Discussion Xeikon SA (A) 2. Guest Lecturer: Mr Jon Moulton - Founder and Chairman, Better Capital; Founder and Former Managing Partner, Alchemy Partners; Founder and Former Managing Partner, Schroder Ventures (now Permira) Case Preparation Prepare your analysis of Xeikon SA (A) and be prepared to discuss your conclusions in class. Should Xeikon become a public company? Is this the right time for an exit? How should they approach making the decision? Problem Set Assignment Complete Problem Set 3 (Xeikon IPO Issues) and submit the answers to Moodle by 1200 (Noon) Tuesday 5 June

Session 5 (1210 Wednesday 13 June): Structure, Returns, and Characteristics of Private Equity Funds Class Session Outline 1. In-Class Explanation And Discussion Of Problem Set 3 Solutions Modelling And Structuring Buyout Deals 2. How Private Equity Funds Work 3. Drivers of Private Equity Fund Returns 4. Measuring And Benchmarking Private Equity Fund Performance 5. Private Equity As An Asset Class Pre-Class Reading In order to get a feeling for the nature and returns of private equity funds, review the Private Equity Performance Review section of the Alternative Investment Management (AIM) Program Overview of the California Public Employees Retirement System (CalPERS) at:
http://www.calpers.ca.gov/index.jsp?bc=/investments/assets/equities/aim/private-equity-review/home.xml

Click on (1) Understanding Private Equity Performance, (2) AIM Program Performance Overview, and (3) AIM Program Fund Performance and get a feeling for the scale of CalPERS investment in private equity funds, the funds in which they have invested, the way they measure private equity returns, the level of returns they have been experiencing, and the distribution of these returns over time. Problem Set Assignment Complete Problem Set 4 (Modelling and Structuring Buyout Deals) before attending class Session 6 (1510 Wednesday 20 June): Investing in Private Equity Funds - the LPs Perspective Class Session Outline 1. In-Class Explanation and Discussion of Problem Set 4b Solutions Fund Economics 2. Role Of Private Equity In The Modern Diversified Multiple-Asset-Class Investment Portfolio 3. Some Practical Private Equity Investment Considerations 4. Class Case Discussion Yale University Investments Office: February 2011 5. Guest Lecturer: Mr Nicholas Ferguson Founder & Chairman, SVG Capital; former Founder & Chairman, Schroder Ventures/Permira Pre-Class Reading Read the Yale Endowment Update Report for 2010 (available online). Ensure you understand: - Yales investment philosophy generally and how it is related to private equity in particular - The historical performance and risk profile of each asset class - Yales performance and risk expectations for each asset class - How Yales asset-class allocations, including private equity, have changed over time

Yales perspective on the impact and lessons from the 2008/9 financial crisis

Case Preparation Prepare your analysis of Yale University Investments Office: February 2011 and be prepared to discuss your conclusions in class. Use the information from the 2010 update report (see above) to supplement the information contained in the case before preparing your analysis. What changes in investment strategy, if any, should David Swensen make? Problem Set Assignment Complete Problem Sets 5a and 5b: - 5a (Investment Recommendation To David Swensen) - submit to Moodle by 1200 (Noon) Tuesday 19 June - 5b (Fund Economics) before attending class NOTE ON INTERNAL RATE-OF-RETURN Understanding internal-rate-ofreturn (IRR) is essential to understanding private equity. It will be assumed you have a basic understanding of IRR and can use Excel or financial calculators to calculate it. If you are uncertain about your understanding of IRR, please work through the following interactive web lessons on Discounted Cash Flow, Net Present Value, and Internal-Rate-of-Return. They take only a few minutes and are quite amusing: 1. 2. 3.
http://sambaker.com/econ/dis/dis.html http://sambaker.com/econ/irr/irr.html http://sambaker.com/econ/invest/invest.html

If you are unsure about calculating IRR, ask one of your classmates to explain. BACKGROUND READING Given the wide range of topics covered in this course, there is no single book that is current and does a good job of covering all course topics. The following books cover some parts of the course: Inside Private Equity James Kocis, James Bachman, Austin Long, Craig Nichols International Private Equity Eli Talmor, Florin Vasvari Valuation: Measuring and Managing The Value of Companies - Tim Koller, Marc Goedhart, David Wessels Private Equity Exits Stefan Povaly Private Equity as an Asset Class - Guy Fraser-Sampson Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment - David F Swensen Unconventional Success: A Fundamental Approach to Personal Investment David F Swensen

In addition, you may find the following books interesting and, perhaps, even entertaining:

Barbarians at the Gate: Fall of R.J.R. Nabisco - Bryan Burrough and John Helyarb Done Deals: Venture Capitalists Tell Their Stories - Udayan Gupta Smarter Ventures: A Survivor's Guide to Venture Capital Through the New Cycle - Katherine Campbell The Chasm Companion Paul Weiffels The Second Bounce of The Ball Sir Ronald Cohen

There is a wealth of interesting information about private equity available on the following industry association websites: National Venture Capital Association (www.nvca.org/) British Private Equity and Venture Capital Association (http://www.bvca.co.uk) European Private Equity and Venture Capital Association (www.evca.com/)

If you would like to gain a better understanding of actual private equity funds, you might enjoy perusing some of the following websites: Venture Capital Funds - Amadeus Capital Partners www.amadeuscapital.com - Balderton Capital - http://www.balderton.com/ - Fidelity Growth Partners - http://www.fidelitygrowthpartners.eu/ - Gemini Israel Ventures - http://www.gemini.co.il/ - Index Ventures - http://www.indexventures.com/cgi-local/ivw_home.cgi - Kleiner, Perkins, Caulfield & Byers - http://www.kpcb.com/ Buyout Funds - Apax Partners - http://www.apax.com/EN/ - Bain Capital - http://www.baincapital.com/PrivateEquity/default.asp - CVC Capital Partners - www.cvc.com - KKR - http://www.kkr.com/ - Permira - http://www.permira.com/ Distressed Companies Fund - Better Capital - http://www.bettercapital.gg/index.cfm Growth Funds - Warburg Pincus - http://www.warburgpincus.com/ - Palamon Capital Partners - http://www.palamon.com/ Quoted Funds and Funds-of-Funds - 3i Annual Report http://www.3igroup.com/shareholders/presreports/reports/2008/annrep08/ar2008new.pdf - Castle Private Equity AG - http://www.castle.li/castle/en/cpe/index.html - KKR Private Equity Investors LLP - http://www.kkrpei.com/about.html - Pantheon International Participations (PIP) - http://www.pipplc.co.uk/privateq.htm - SVG Capital - http://www.svgcapital.com/ BACKGROUND - EDGAR MILLER Edgar Miller is Senior Visiting Fellow in Finance at Cass Business School.

He also is Managing Director of Palladian Limited, a London-based corporate finance advisory firm that specialises in advising management teams on start-ups, structuring leveraged buyouts, assisting clients throughout Europe in raising capital from private equity sources, advising on mergers and acquisitions, and creating international strategic partnerships. Mr Miller has also served on a wide range of company boards in both the US and Europe. Before founding Palladian, Mr Miller was responsible for leading the private-equity investment activities of the Pallas Group in France, Germany, Spain, the UK, and the US and served as Managing Director of Pallas Limited, the London-based investmentbanking arm of the Pallas Group. In 1981, Mr Miller was a founding General Partner in New York and Palo Alto of the first private equity fund established by Dillon Read, a major New York investment bank. Before joining Dillon Read, Mr Miller was a Partner of McKinsey & Company in London, responsible for the Firms worldwide electronics practice. Mr Miller began his career in the early days of the integrated circuits industry, where he worked in various management and engineering assignments with Fairchild Semiconductor in Mountain View, California and in integrated circuit device development at Texas Instruments in Dallas, Texas (the leader of his group received the Nobel Prize for inventing the integrated circuit). Mr Miller holds an MBA from Harvard Business School, an MSc in electrical engineering from MIT, and a BS in engineering-science from The University of Texas.