Group Assignment

Private Equity and Venture Capital

Cases and Valuation problems for submission

Sl No. Assignment Submission

1 Case - Fairfax and Thomas Cook India - PE, Permanent Capital and Before session 5
Public Markets (HBS no. W 15463)
2 Case - Blackstone’s IPO (HBS no. 9-808-100) Before session 9
3 Case - : Hony, CIFA and Zoomlin - Creating Value and Strategic Before session 15
Choices in a Dynamic Market (HBS no. 9-811-032)
4 Case - Canada Pension Plan Investment Board (HBS no. 9-813-103) Before session 19

1 The Venture Capital Method - Valuation Problem Set Before session 16

(HBS No. 9-396-090)

Notes on Submission
1) Group Assignment on Valuation: The solution should be submitted by mail to
[email protected] before the start of the class in which the solution will be discussed.
2) Group Assignments on Case based questions: For each of the assigned cases each team will
mail (to [email protected]) the answers to the suggested questions. The write-up should be
double-spaced, font size 12, and as a guideline should be limited to four pages in length. The
four page limit is for text only. You may attach as many numerical calculations as you wish. But
your submission must be integrated into a single file. The submissions should be submitted
before the start of the classes in which the cases will be discussed.
3) Pl mention the group no., names of the group members along with their mobile nos. in the
front page of the submission. in all cases.

Cases for discussion

Sl No. Case details Discussion
1 Case – Adara Venture Partners (HBS no. IN 1112) Session 7
2 Case - Husk Power Systems - Financing Expansion (HBS no. UV 5625) Session 11
3 Case - Nurturing Green - The Growth Dilemma (C) (HBS no. W 13375) Session 13
4 Case - Shriram Transport Finance (HBS no. W 16533) Session 17
Case Questions
1) Case: Fairfax and Thomas Cook India - PE, Permanent Capital and Public Markets
(HBS no. W 15463)
Pedagogical objectives
This case focuses on acquisition, private investment in public equity, or comparing private and public
equity investment. This case also allows for a discussion of emerging markets (in particular, India) and
differences between the US and Indian financial markets.

Please answer the following questions.

a) Is Watsa a typical value investor? Describe the similarities and differences between the typical
investor types.
b) Describe the investment opportunities in India.
c) What are the unique characteristics of the Indian PE market?
d) What are the pros and cons of investing in Thomas Cook India?
e) What is your valuation of Thomas Cook India?
f) If Fairbridge decides to acquire Thomas Cook India, should Fairbridge keep it public or take it
private? What should be done with the forex business?

2) Case: Adara Venture Partners (HBS no. IN 1112)

Pedagogical objectives
a) To understand the entrepreneurial challenge of building a venture capital firm

Please answer the following questions.

a) What team factors should the GP include in assessing the potential underwrite?
b) How much, if any, of the first closing commitments should the GP be willing to underwrite?
c) If they do not decide to underwrite:
i) What are the implications, apart from the obvious risk of not closing the fund ahead of the
anchor investor’s deadline?
d) If they do decide to underwrite:
i) How should the GP position the underwriting with LPs that have already committed to
participate in the first closing? What would you expect the reaction from LPs?
ii) How would you assess the probability of partners being capable of placing the underwrite after
the first close, both in terms of amount and timing?
iii)How would you suggest the GP market the underwrite to potential investors? Should the
placement approach change over time?
iv) Should the GP prioritize a) placing the underwrite or b) increasing the size of the fund as they
have conversations with potential LPs after the first closing?
v) Are there any potential conflicts of interest in the ongoing management of the fund resulting
from a potential underwrite? How can the partners mitigate these?
vi) What are the potential interrelationships between the structure of the first closing
(underwritten or not) and the implementation of the investment strategy?

3) Case: Blackstone’s IPO (HBS no. 9-808-100)

Pedagogical objectives
a) To explore the structure of a very large, multi-faceted PE firm?
 b) To consider the many interests that must be aligned in going public, and examine how Blackstone
proposed to do so.
c) To evaluate the reasons for a PE firm to go public and decide if this is an anomaly born of
irrationally exuberant markets or the wave of private equity in future.

Please answer the following questions.

a) What are the built-in tensions with a public PE firm? How does Blackstone’s structure attempt to
reconcile them?
b) If you were an LP in Blackstone. How would you view the structure Blackstone has put in place
to go public?
c) Would you rather be a unitholder in Blackstone or an LP?
d) As a potential employee, how you evaluate the Blackstone compensation package against a
commensurate offer from a similar large-scale PE firm that was not public?

4) Case: Husk Power Systems - Financing Expansion (HBS no. UV 5625)

Pedagogical objectives
a) To discuss the attractiveness of a young, socially responsible green-energy enterprise serving
rural Indian villages.
b) To develop knowledge about structured financing of early-stage companies.
c) To alleviate students’ concerns about the arbitrary nature of early-stage valuation methods.
d) To examine sources of risk and their effects on financing structure.

Please answer the following questions.

a) How attractive is HPS as an investment opportunity?
b) Do you have any concerns about the company’s business model or expansion plan?
c) What is the proposed financing structure? Please evaluate the IRRs of the proposed investment
and the founders’ implied equity stake under the following scenarios:
Scenario 1: HPS’ follow-on “equity” financing round occurs in 2012; $5 million in equity capital
is raised in return for a 17% equity stake after conversion of the convertible note.
Scenario 2: HPS’ follow-on financing round occurs in 2012; $5 million in equity capital is raised
in return for a 38% stake after conversion.
Scenario 3: The firm fails to expand and has no prospects of raising additional capital. The
founders agree to liquidate the firm’s assets in 2014 using a liquidation value of $3.5 million.
d) Should dilution be factored into the calculations? How?
e) What is the most crucial risk factor the investors have to assess in this deal? What are the
advantages / disadvantages of “convertible note” financing as compared with pure (preferred)
equity?
f) What is the founders’ biggest concern in raising the funds? Does the proposed financing structure
mitigate this concern?

5) Case: Nurturing Green - The Growth Dilemma (C) (HBS no. W 13375)

Pedagogical objectives
This case considers various options for growth and to choose the best growth strategy in entrepreneurial
ventures, and to match them with external threats and opportunities while tainto account internal
competences and capabilities. More specifically the objectives are as follows.
a) How to handle the pressures of growth by a VC on the entrepreneur?
b) The trade-off between getting funded and parting control.
c) Achievement of strategic objectives under investor pressures.
d) The growth dilemma: whether to grow through expanding product or market.
e) What should be the funding option for the next round of financing?
f) Which is more important: speed or direction? Why?
g) What type of innovation is this: incremental or disruptive?

Please answer the following questions.

a) What should be the span of planning, especially during the growth stage of an entrepreneur?
Why?
b) Which is a better strategy – to grow slowly or to grow quickly by surrendering the majority of
ownership to a VC? Explain.
c) How would you have negotiated with the VC if you were Grover? What share of the company
would you have given the VC? Argue in support of your rationale.
d) What should be your sales strategy – to expand geographically or penetrate deeper in specifically
selected markets?
e) What is the optimum product mix for this company? Why?
f) What would you consider the best financial option for growth for Nurturing Green? Discuss your
reasons.
g) Was Nurturing Green’s innovation incremental or disruptive?

6) Case: Hony, CIFA and Zoomlin - Creating Value and Strategic Choices in a Dynamic
Market (HBS no. 9-811-032)

Pedagogical objectives
a) To study the structuring of cross-border leveraged buyout transactions.
b) To examine the challenge associated with the translation of the PE model in emerging markets.
c) To illustrate the development of competitive strategies by PE organizations.

Please answer the following questions.

a) What are the risks of pursuing the CIFA acquisition? What are the potential benefits?
b) How is investing in Zoomlion’s acquisition of CIFA different from investing in Zoomlion itself?
Does this pose fewer or more risks for Hony?
c) What is the valuation of CIFA? Please use cash flows and cost of capital data from the case. You
may wish to assume that CIFA will grow at 5% per year through 2012 and 2% per year thereafter.
d) Another source of profits for Zoomlion is sales of its own products through CIFA’s distribution
network. This might be assumed to begin in 2010 and to grow at the same rate as CIFA’s sales.
How significant will the after-tax profits from such sales need to be (if any) to justify a valuation
of 500 million Euros?
e) How much do you believe should Zoomlion bid for CIFA, based on the answers above?
f) What is the estimated return of CIFA deal for Hony? Assume that a) Hony will exit in 5 years; b)
Hony will exercise the option at the time; c) CIFA’s entry trailing EV/EBITDA multiple was 10,
and Zoomlion would be trading at an average EV/EBITDA multiple of 20 at the time of exit.
g) Should Hony participate in the Zoomlion acquisition?
7) Case: Shriram Transport Finance (HBS no. W 16533)
Pedagogical objectives
This case discusses the key strategies used by financial sponsors to manage a successful investment. This
case explores three key drivers of a PE deal with respect to identifying the right investment opportunity,
evaluating different exit options and timing the exit with the goal of arriving at a rich valuation on exit.

Please answer the following questions.

a) Briefly describe the evolution of the PE industry in India. Does India offer a good investment
opportunity for PE investors? Why?
b) What makes the Shriram Group of companies an attractive target for investment? What factors
did TPG consider when targeting STFC for investment?
c) What would be a suitable exit valuation? Which valuation method is best suited for the given
case? What is the appropriate valuation range?
d) What is the best exit option for TPG? Perform a comparative analysis of the different exit options
available. Is the time ripe for exit?

8) Case: Canada Pension Plan Investment Board (HBS no. 9-813-103)

Pedagogical objectives
a) To introduce students to a type of limited partner (LP) that is rapidly becoming the largest
allocator to private equity funds – pension funds / sovereign wealth funds.
b) To explore the needs and issues of a large LP as they are buffeted by the Great Recession to help
students understand how this affects the industry and private equity firms.
c) To consider the ramifications of the decision to move so heavily into PE as well as the drivers of
this decision.
d) To investigate the challenges of direct investing, co-investing or using funds or using fund of
funds.

Please answer the following questions.

a) Does CPPIB have a clear investment strategy? How would you characterize it? How similar or
different is it from Yale’s?
b) To what extent is CPPIB saving money by investing directly? If it were instead to invest in
traditional private partnerships through funds-of-funds, how much better would the private equity
partnerships need to be to justify their fees? Compare CPPIB’s approach with the alternative of
investing through a fund-of-funds. In analyzing this question, you may wish to assume that:
1) CPPIB invests $1 billion over three years into direct deals:
i) These funds are invested 1/3rd. each year.
ii) It pays no fees or carried interest on these transactions.
iii) The cost of compensation and fees associated with the investment is
approximately 1.5% of the amount invested, incurred at the time of the deals.
2) It could alternatively invest this capital in funds-of-funds:
i) The funds are typically drawn down in three equal tranches, 1/3 rd. at the time
of the original investment, 1/3rd. one year later and 1/3rd. two years later.
ii) The private equity funds typically charge a management fee of 1.5% and a
carried interest of 20% of capital gains.
iii) The funds-of- funds typically charge a management fee of 1% and a carried
interest of 5% of capital gains.
3) Assume the return on these investments is 2.5 times (before fees) in five years.
i) 15% is a reasonable discount rate for low beta levered companies.
c) If you were another LP in a fund with CPPIB and you see CPPIB co-investing alongside
the General Partner (GP), how would you react?
d) What risks and challenges does CPPIB’s strategy pose? How might it backfire? People
are an essential part of private investing. How does CPPIB recruit and retain its
investment staff? What challenges does it face?