mgt 635 syllabus 2010-11.pdf

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YaleSchool of Management MGT 635 Introduction 1_______________________________________________________________________

Introduction, Goals and Course Outline

[email protected]

O David Cromwell worked at JPMorgan & Co. for 30 years in a variety of job positions in

New York and London. He retired early in 1995 and began teaching at Yale in 1996.O During his years at JPMorgan, David Cromwell had trouble holding down any given job.

The Bank reassigned him to a new department almost every time he was just gettingthe hang of his then current job. During 1966-1995, his job assignments included:

Year Location Department Job Function

1966 New York Credit Department Financial Statement Analysis11967 New York Credit Department Credit Investigations, Credit Analysis

1969 New York Securities Research Industry Securities Analyst Chemicals

1970 New York Corporate Research Credit Analyst -- Airlines & Aerospace

1971 London Financial Analysis Vice President & Unit Head -- London1973 London Project Finance VP Banker Energy & Mining Projects

1974 London UK Banking Dept. VP & Unit Head Corporate Banking

1978 New York Financial Analysis Senior Vice President -- Dept. Head

1981 New York Mergers & Acquisitions Senior Vice President -- Dept. Head

1983 New York Corporate Banking Group Executive UK & Industries USA

1985 New York Training & Adult Ed. Head of Corporate Training1986 New York Banking Division Morgan Guaranty Senior Credit Officer

1987 New York Investment Banking Managing Director, Head of Research

1989 New York JPMorgan Capital President & CEO Private Equity

O During six years as head of JPMorgan Capital, that firm invested over $750 million inabout 75 companies, mainly in the USA but also in Europe, Latin America and Asia.Investments included venture capital, buyouts, turnaround situations and privatizations.

Investments sold showed total gains of about $2 billion an IRR of 32% per annum.

O When Cromwell arrived late in 1989, JPMorgan Capital reported a modest pretax profit

of about $17 million. By 1994, its reported pretax profit was $625 million, about one

third of JPMorgans total earnings for that year.

O During 1989-95, the investment portfolio grew from 50 companies worth $500 million to

about 85 companies worth $3 billion. (Today, JPMorgan Partners is one of the larger

private equity investors in the world: portfolio = $7 billion.)

O In addition to teaching, David Cromwell remains active in the field of private equity as a

private investor, an advisor to local startup companies and on the Board of Directors of

some local venture companies.

1War Story: Bethlehem Steel: Statement Spreading and learning to round off the small change.

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Course Goals

o Private equity investing is an apprenticeship business. One learns best by doing.

o Successful investors require a wide variety of skills and knowledge:

Ability to understand a business Knowledge of financial markets

Industry and country knowledge Financial statement knowledge

Knowledge of information sources Ability to do financial modeling

Effective research skills Knowledge of capital structure

Ability to work with insufficient data Knowledge of legal concepts

Ability to focus on the key issues Ability to work under pressure

Drawing appropriate conclusions Negotiating and selling skills

Communication & presentation skills Teamwork skills, facilitation

Interpersonal and people skills Leadership and flexibility

Ability to organize self and others Ability just to say, No. Creativity and flexible thinking Sense of humor

o This course aims to provide students a chance to develop these skills and knowledge.

Course Outline (See Attached Schedule Summary)

The course contains both lectures and cases. Proper textbooks on the topic do not exist.2

Actual private deals (that involved the professor) form the basis for all the cases.

The first third of the course contains most of the Lectures. Lectures attempt to provide

students with enough basic principles and techniques so that they can work on the cases.

o Attached is a list of 27 Lectures topics.

o The professor covers 15 lectures over the first five weeks of the course. Familiarity with

this material enables students -- working together as teams -- to tackle complex deals.

o Copies of the Lecture Notes are available in packets from the Mail Room (HUB). The

first packet is there now; the second packet will be available in about three weeks time.

The Notes will enable students to spend most of their time listening to the lectures,

rather than writing down what the professor says.

The Professor strongly recommends reading the Lecture Notesaftereach lecture, rather than before.

o Students should buy a 3-hole binder for Lecture Notes and bring the notes to class.3

2If youfind a proper textbook, please let me know. There must be one, somewhere3 Probably because of the total lack of sentences with verbs in the passive voice, a number of formerstudents have said that they have continued to refer to the Lecture Notes long after graduation from SOM.

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Lecture Notes -- Content Summary 4

Part 1

1) Private EquityJargon:EBITDA, pari-passu, P/E Ratio, Rule 144, vorpal blade

2) Private Equity Basics: Description, history, economics, players, risk concepts

3) Screening Deal Flow: Finding new opportunities, quick kills, the pursuit, criteria

4) Business Plans: Investment plays, unique strategies, secrets & lies

5) Macro Economic and Industry Analysis: Countries, industries, niches, competitors

6) Teamwork: Organization, techniques, Dos and Donts, performance evaluation

7)Financial Statement Analysis and Ratios : Definitions, key ratios, foolish traditions

8)Financial Plans: Projection models, key elements, sensitivity, standard format

9)Timing theMarket: (Just say, No.) Investors folly, big egos, indexing, discipline

10) Equity Valuation: Simple math, VC jargon, IRR, tools, comparable companies

Part 2

11)Custom Financial Models: Assumptions, traps, startups, getting rich and famous

12) Deal Structure: Management incentives, instruments, governance, exit alternatives

13) WritingStyle for Business Proposals: Goals, standard outline, reading ease index

14) OralPresentations: Presentation tactics, handouts, slide shows and oral deliveries

15)Evaluation of Management: Judgment art, difficulties, soft research, private eyes

16) Leveraged Buyouts: Buyout concepts, capital structure issues, credit risk analysis

17) Legal Documentation: Key issues, boilerplate, lawyers, the taxman, boring samples18)Negotiations: Positions, interests, getting to Yes, emotion, gremlins

19) Term Sheets: Investment proposals, outline of key provisions, standard examples

20) Investment Memos: Purpose, standard format, list of pro and con reasons

21) International Investing: Regions, regulations, language, culture, country & FX risks

22) Follow-On Investments: Good money after bad, down & dirty, a little poker math

23) Monitoring; Exits: Board reps, IPO, selling out, block sales, going bust gracefully

24) Common Obstacles: Insufficient research, valuation gaps and common death traps

25)Portfo lio Management: Diversify, timing, rule of 20, discipline, portfolio accounting26) Raising a Private Equity Fund: Types, finding investors, track record, key terms

27) Career Opportuni ties:In venture capital and the private equity investment industry

4Copyright by David Cromwell. Revised in October 2010.

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Key Features of the Course

o The professor hands out casesas we go. Major cases are rather complex and require

the use of multifarious skills. Cases require knowledge and techniques students have

learned in other SOM courses (or before coming to SOM.) Most of the opportunity to

learn -- comes from working on the cases, outside of class hours.

o The cases all contain financial projection models. Via email, students will receive

copies of the models in Microsoft Excel format.

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o Investing in the equity securities of private companies -- typically requires many steps.

Screen deal flow-- by reading Private Placement Memos from deal sponsors.

Do macro research on economics, industry, sectors, niches and competition.

Prepare and analyze financial statement projections, usually a custom model.

Do equity valuationwork and compare the results to similar public companies.

Reach conclusions, makewrit ten and oral presentations.

Negotiatethe price and other terms & conditions of a deal, sign legal documents.

o Except for negotiations, the first case takes each of the above steps, one at a time.

Students work in teams to learn the basics.

o All the other cases require combination of the steps. Students work in larger teams.

o Major cases include early stage venture capital, leveraged buyouts and turnarounds.

o The last two cases are international, cross-border investment deals. The final case is

extremely complex. It requires creativity, flexible thinking and a sense of humor.

o Effective teamwork is critical for the cases. Teams of 5-6 students play roles,

compete or join forces with each other -- to attempt to do the deal. Teams share the

heavy workload. One luckless team plays the difficult role of Management, trying to

raise capital. The professor rotates the teams for each case, so that people will work

with a completely different team each time, and with many members of the class.

Rotation also allows the professor to balance the teams with respect to skill levels.

o After each case, students receive feedback on perceived performance of both teams

and individuals. Feedback includes (a) things done well and (b) things students could

improve for the next time. This is how apprenticeship learning works.

o The professor will attempt to explain the key business learning points of each case.

These include a variety of general business principles beyond just equity investing.

There is a lotof feedback in this class.

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Logistics and Other Features

o This course requires a heavy time commitment. In addition to class time, students

should allow up to 15 hour's time per week, especially during the last half of the course.

o Workload during the first week of the course is relatively moderate. Thereafter, the

work tends to expand to fill all the available time, as major deals get underway.

o

Prerequisites Financial Accounting, Valuation / Corporate Finance and Options

o Some working knowledge of financial analysis is useful, but this is not required. Most

cases require the manipulation of detailed, company financial projections. Doing the

model is not that difficult, but does require lots of practice. In addition to class lectures,

optional training workshops on How to do research at SOM are available.

o There is no textbook reading.

o Performance on five major cases is 92% of the course grade, with 8% of the gradelinked to a minor case and feedback tasks. There are no exams.

Task Points Major Teamwork Cases Points

Screening Deal Flow 3 Cinemex S.A. 13FSSNE 13 Porco S.A. 22HigherOne, Inc. 22Luck Industries, Inc. 22 Team Reviews (5 of Them) 5

Subtotal 60 Subtotal 40

o For the five major teamwork cases, the instructor awards half of the points based on theperceived performance of each team as a whole. Ones personal contribution to his/herteams effort -- as perceived by other members of your team --is the other 50%.

o After each case, all team members will complete a short Team Review report. This

review evaluates the quality and quantity of effort contributed by each team member.

Students make three brief comments about each of their teammates greatest strengths

and three remarks about areas needing improvement for the next time. The professor

keeps the sources of these student comments strictly confidential. The professor editsthis input for detailed feedback to each person, after each case.

o Judging skills, strengths and weaknesses of people is a business skill -- that is vital for asuccessful private equity investor. If you cannot (or will not) judge performance of

people, then this course is not for you.5

5Business in general may not be for you, either, since managing and judging performance of people is afundamental business skill. If judging people offends you, you maybe could join FEMA or some othergovernment agency where performance does not seem to matter that much?

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Logistics and Other Features (Continued)

o People who do not do their share of the teams workload also are in the wrong class.

Student colleagues and the professor will slam Free Riders -- who coast along on the

work of others. Insufficient effort hurts your colleagues and it limits your learningexperience. Slackers will end up at the bottom of the class, or worse. The professor

does give grades of less than proficient to slackers and free riders.

o Quiet People -- who almost never say a word in meetings -- tend to do rather poorly.

The major cases involve active discussion and debate. Talking to your colleagues is

important in making a useful contribution to solving the tasks. If you feel you cannot or

will not speak up, ever, no matter what -- then you should give this class a miss.

o The professor does not permit Audit of this class, since it does not work. Much too

much of the learn by doing is off-line, outside of class, in team meetings and in long

negotiating sessions with other teams.

o Waiting List. If you are on a waiting list to get into the course, come to class and do

the homework -- until your status finally is clear. Those who turn up for the class and do

the work will receive priority when openings occur. We will keep an attendance list.

(There is too much content at the front end of the course to easily catch up, later on.)

o The class size limit is 36 mostly second-year students. The course will work with

less than 36 people, but not with more. This large class size restricts active in-class

discussions. As part compensation, there are active off-line team discussions, plus the

professor has a tendency to inject side comments and feedback wherever possible.

o We will set up a free Hotmail account for each student around mid-way -- and use free

Microsoft Messenger and Microsoft Netmeeting software. This will allow students tochat with the professor and each other online, negotiate, and to share and edit

documents or models online.

o There will be workshops for (1) How to do research -- Library, Lexis/Nexis, Bloomberg

and the Internet and, if requested, on (2) How to run the Simplexmodel.

o The professor always is looking for ways to make this class better. There will be a

custom survey and an official end-course survey to collect your ideas and suggestions.If you discover something that looks wrong or out of date, please let me know right

away, so I can fix it.

Registrar Generals Warning: This course carries a heavy workload and

requires a large commitment of time. This VC Class may threaten all of

your spare time and can cause serious damage to your social life.

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1. Monday October 25, 2010

Lectures: Introduction, Course Goals and Outline (See Handout)(Logistics, Heavy Workload and Other Requirements)

2. Private Equity Basics (Start, Part 1)

Assignment: Read:Lecture Note 1: Private Equity JargonFor Next Class

2. Wednesday October 27, 2010

Lectures: 2. Private Equity Basics (Continued, Part 2)

3. Screening Deal flow

Assignment: Screening Deal Flow (E-mail answers before 8 AM Monday)For Next Class Training: Macro Research (Several Dates: Optional)

3. Monday November 1, 2010

Lectures: 4. Business Plans

5. Macro Research / Industry Analysis (Information Sources)

Discussion: Screening Deal Flow

Assignment: Read Case: FireSecurity Systems of New England, Inc.

4. Wednesday November 3, 2010

Lecture: 6. Teamwork, Hints, Team Reviews

Assignment: FSSNE 1: Continue Macro ResearchFor Next Class


Lectures: 7. Financial Statement Analysis8. Financial Plans & Financial Models

Assignment: FSSNE 2: Model -- Build High, Low and Base CasesFor Next Class

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Lectures: 9. Timing the Market (Just say, No)

10. Equity Valuation Techniques

Assignment FSSNE 3: Do Equity ValuationFor Next Class


Lecture: 11. Custom Financial Models

Complete FSSNE Team Reviews (In class)

Assignment: Read Case:HigherOne, Inc. (New 6-Person Teams)

For Next Class


Lecture: 12. Deal Structure

Discussion: FSSNE Case Review

Assignment: HigherOne:Start Research, Do Financial ModelFor Next Class


Lectures: 13. Writing Style for Business Proposals

14. Oral Presentations

Breakout: HigherOne: Team Discussions (In Class)

Assignment: HigherOne:Team Discussions / Make DecisionsFor Next Class

Thanksgiving Recess: No Classes from Nov. 25-29


Lecture: 15. Evaluation of Management

Assignment: HigherOne:Prepare Presentation for InvestorsFor Next Class

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11. Wednesday December 1, 2010 Time: 10:00 AM-12:30 PM

Discussion: Presentations to Investors Extended Class TimeHigherOne

Special: Best Presentation Contest (Class Vote)

Complete HigherOne Team Reviews (In Class)

Assignment: Read Case:Luck Industries (New Teams)

12. Monday December 6, 2010

Lecture: 16. Leveraged Buyouts

Assignment: Luck: Team Discussions -- LogisticsFor Next Class

13. Wednesday December 8, 2010

Lecture: 17. Legal Documentation

Discussion: HigherOne: Case Review

Breakout: Luck: Team Discussions

Assignment: NoneFor Next Class

Winter Break: No Classes Until January 10

14. Monday January 10, 2010

Lectures: 18. Negotiations

Breakout: Negotiate Deal (In Class)

Assignment: Luck:Team Discussions, Negotiate DealFor Next Class

15. Wednesday January 12, 2010

Lecture: 19. Terms Sheets20. Investment Memos

Breakout: Negotiate Deal (In Class)

Assignment: Luck:Prepare Presentation For Investment CommitteeFor Next Class

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16. Friday January 14, 2010 Time: 10:00 AM-12:30 PMExtended Class: 6 Sections

Discussion: Investment Commit tee Meetings

Luck Industries

Assignment: Luck:Negotiate Final Deal Deadline:8 PM Mon. NightFor Next Class


Discussion: Luck: Final Deal Description vs. Actual Results

Complete Luck Team Reviews (In Class)

Assignment: Read Case:Cinemex (New Teams)For Next Class

18. Monday January 24, 2010

Lecture: 21. International Investing

Discussion: Luck: Case Review

Assignment: Cinemex:Team DiscussionsFor Next Class


Lecture: 22. Follow-On Investments (Poker Math)

Assignment: Cinemex:Prepare Presentation For Investment CommitteeFor Next Class

20. Monday January 31, 2010 Time: 10:00 AM-12:30 PMExtended Class: 6 Sections

Discussion: Investment Commit tee MeetingsCinemex

Assignment: Cinemex:Negotiate Final Deal Deadline:8 PM WednesdayFor Next Class

21. Wednesday February 2, 2010

Discussion: Cinemex: Final Deal Description vs. Actual Deal

Complete Cinemex Team Reviews (In Class)

Assignment: Read Case:PorcoComasas S.A. (New Teams)For Next Class

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22. Monday February 7, 2010

Lectures: 23. Monitoring Portfolio Companies, Exits24. Common Obstacles

Discussion: Cinemex: Team Performance & Case Review

Assignment: Porco: Team DiscussionsFor Next Class

23. Wednesday February 9, 2010

Lectures: 25. Portfolio Management

Special: Try to Solve Legal Language Puzzle (In Class)Assignment: Porco: NegotiateFor Next Class (Search for the vorpal blade)


Lectures: 26. Raising a Private Equity Fund27. Career Opportunities in Private Equity

Assignment: Porco: Prepare Presentation For Investment CommitteeFor Next Class (Watch Out For Gremlins)

25. Wednesday February 16, 2010 Time: 10:00 AM-12:30 PMExtended Class: 6 Sections

Discussion: Investment Commit tee MeetingsPorcoComasas S.A.

Assignment: Porco: Negotiate Final Deal Deadline: 8 PM SundayFor Next Class (Cash in Solar Credits, Find the Wine Bar)


Discussion: Porco: Final Deal Description; Case Review

Complete Porco Team Reviews (In Class)

Special: Official Course Evaluation

Final Exam Week NO EXAM

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