Investment Banking & Private Equity Fundamentals

Overview of what we will be covering in Part 1.

We paint a picture of the two different situations you might find yourself in: working with and analyzing a private company or working with a public company, and we arm you with the information you will need in both situations.

Get an overview of the 10K, 10Q, Earnings call transcripts, S1, S4, 8K and more.

When using a company’s filings like their 10K, you should absolutely not read starting from page 1 until the end. You should go in with a plan. In this video we dive into the strategy.

Private companies present a unique set of challenges… namely they don’t always keep diligent records and the information is often just that… private. If however you are hired to advise on a private company you will have access to documents via a CIM and a data rooms… so what can you expect?

The foundation to all banking analysis requires an understanding of these big three financial statements, the Income Statement, Cash Flow Statement and Balance Sheet. This video goes through how these three statements tie together in a diagram that will continue to pop up throughout the remainder of this course and into our financial modeling course.

Learn the rules, conventions and analyses for the income statement as we walk from Sales down to Net Income in layman terms and go through the most important calculations for analysis and modeling as we map out the growth and margins formulas.

This exercise reinforces all the key take aways related to the income statement. There is an Excel file that can be downloaded you as the viewer can work through on your own before coming back and reviewing the solution.

Learn the rules, conventions and analyses for the Cash Flow Statement including how it connects to the other statement, the overall structure, and what the cash flow statement can tell us about the financial health of a business.

This exercise reinforces all the key take aways related to the cash flow statement. There is an Excel file that can be downloaded you as the viewer can work through on your own before coming back and reviewing the solution.

Learn the rules and basics of the Balance Sheet including how it connects to the other statement, the overall structure.

Assets = Liabilities + Equity is one of the most important accounting concepts there is. Think of it like Newton’s First Law for accounting. In this video we walk through how to use it to logic your way through how how transactions impact cash, and each account, a skill that is the foundation for financial modeling.

Here we dive into current vs. long term assets and liabilities.

The Skinny on what you must know about the Balance Sheet

The matching principal is the second essential law of accounting… let’s call it Newton’s Second Law of Accounting.

Understanding how non cash expenses flow through the three financial statements is essential not only for understanding accounting, building financial models, calculating EBIT and EBITDA, it’s also one of the most common interview questions you should be prepared to get.

Now that we understand depreciation, we tackle depreciation’s twin, amortization.

On the cash flow statement depreciation and amortization are often combined. Therefore, if we want to find depreciation separate from amortization, how do we do it?

The final non cash expense we tackle is stock based comp. What is it, why do companies use it?

We go through how stock based compensation flows through the three financial statements.

EBIT, which stands for Earnings Before Interest and Taxes, is one of the most important financial metrics used in finance. In this video we walk through what EBIT is and how it’s used.

EBITDA is probably THE most important financial metric used for everything from raising debt to valuing businesses. In this video we walk through how EBITDA is calculated and used by bankers.

This exercise reinforces all the key concepts covered related to EBIT and EBITDA.

The distinction between Net Working Capital and Operating Working Capital is one that is a bit tricky due to the language used by bankers. We set the record straight here.

The cash conversion cycle is a way to calculate metric bankers and CEOs use to measure how quickly a company converts a cash outlay for resources to a cash inflow from a sale. This video dives into how it’s calculated as well as diagrams out how to think about it in an intuitive way.

In order to actually calculate the cash conversion cycle we use activity ratios, but where do they come from? In this video we walk through the calculation and again the intuition for these important metrics.

When we talk about financial metrics on the income statement or cash flow statement - so, EBIT, EBITDA, sales etc. - the timing matters. Are we talking last twelve months (LTM)? Last fiscal year (FY)? Projected calendar year (CY)? And by the way how the heck do we calculate LTM when our 10K and 10Q don’t provide it? In this video we get into all of that.

This exercise reinforces all the key concepts from the balance sheet.

Dive into the rules that govern when we see on the balance sheet are book value or fair market value so that we can understand where we need to take the time to approximate the market value for various line items and where we can get away with using the book value.

Learn the nuances of what “cash” means to a banker. (Spoiler it’s more than just the cash and cash equivalents” line item on the Balance Sheet) as well as what is considered “debt” and finally how to calculate and why bankers use “net debt”

This might be the concepts that junior bankers struggle with the most. We break it all so you will walk away feeling confident in what these mean and how they impact a company’s value.

Here we wrap up the section and get you ready for what is coming next!

Here we set the stage and give you background information necessary to understand our case study we’ll be using throughout the rest of this module.

Here we preview everything we will cover in this module, walking through the football field for our valuation of WayStar giving you an overview of public comps, precedent transactions and the DCF.

Here we introduce the first two valuation methodologies: public comps and precedent transactions, our “relative” valuation analyses.

In this video we recap the difference between Equity Value and Enterprise Value, two concepts we introduced in the Accounting module before diving into actually how to practically calculate these two numbers.

In this lesson we walk through the calculation of “diluted share” walking through how to handle different types of dilutive securities including options, restricted stock and restricted stock. We also get into how the term “Option” differs in the Sales and Trading context vs. the Investment Banking or Corporate Advisory world.

In this lesson we walk through how to calculate Equity, we discuss why we can’t use the “diluted shares” provided on the Income Statement to calculate equity value and why we have to go through the actual calculation ourselves and finally we wrap up explaining how to handle companies like Fox and WayStar who have two classes of shares.

In this video we actually calculate the enterprise value, going through where to get all the numbers necessary.

In this lesson we cover the the key valuation multiples and how to ensure your multiples are on an apples to apples basis.

In this lesson we actually go through and calculate what the implied fair share price is for WayStar using its public comps.

In this video we walk through what it looks like to SPREAD a public comp. We take a look at Fox’s 2023 fillings, using their 10K and 10Q. We talk about when you need which filing, the complexities with its dual class shares, and ultimately go through how to use this real comp and the multiples from the other comps in the comps universe to calculate a fair share price for WayStar. We wrap up by looking at how that actually translates to the football field.

This lesson lays the groundwork for the deal comps discussion explaining how deal comps differ from public comps, the importance of understanding the STORY behind the transaction, why consideration matters (so whether a deal was all cash, all stock or a combination) and sets us up to get a preview of some of the specific deal comps analyses we’ll need to do that are different from public comps.

In this module we walk through calculating offer value using the Option Spread method and Netting Option Proceeds method as well as get into the difference you need to be aware of when determining the correct option count and strike price for precedent transactions.

Learn how to deal with companies that use their own stock as acquisition currency. We dive into exchange ratios (actual and theoretical) as well as touch on synergies, deal comps specific multiples including transaction value to adjusted EBITDA multiples and finally the premiums paid analysis.

In this lesson we get practical and actually spread the deal comp for the Disney acquisition of Twentieth First Century Fox. Because Disney only purchased 80% of the company we discuss complications including how to “gross up” the multiples. We then use this multiple along with other multiples to calculate what a fair implied offer price would be to purchase WayStar.

This lesson lays the groundwork for the third and final valuation methodology we are going to cover: the DCF.

This lesson lays the groundwork for the third and final valuation methodology we are going to cover: the DCF.

This lesson gets into the basics of calculating the cost of equity and using the Capital Asset Pricing Model also called “CAPM”.

We now niche down into the various components of CAPM starting first with how to determine the “risk free rate” (a term that fixed income investors would take issue with) as well as how to handle coming up with the risk free rate in countries outside of the United States. We then get into a deep dive into what the beta represents, how to find it including how to deal with private companies where you need to unlever and relever betas before going through an actual example.

Between predicted betas, past betas, industry average… what do we choose!? In this video we go through how and why institutions pick the betas they do and how it compares to academia.

The final part to CAPM is finding the market risk premium.

In this video we walk through a standard interview question which is “how does increasing debt impact the WACC”. The reality is the answer to this isn’t straight-forward as it depends on what theory of capital structure you are using: Traditional Theory, Pecking order theory, Modigliani and Miller etc.

In this lesson we walk through how to go from Sales or EBITDA on the income statement to Unlevered Free Cash Flows.

In this video we walk through the basics of time value of money including how to calculate the NPV of a series of cash flows in Excel covering the PV function, NPV and XNPV.

Learn the rationale behind mid period convention as well as mechanically how to calculate the NPV of a stream of cash flows using mid period cash flows. We also discuss how to discount to a specific valuation date and how to calculate the stub period.

Learn the two ways you can calculate the terminal values (perpetuity growth method and EBITDA multiple method) as well as put the whole thing together and calculate the value of the entire firm, the value of the equity and finally the share price.

This final module puts everything together walking through building a DCF for WayStar in Excel. We cover basic concepts including how to set up a simple model, how to calculate our historical analysis, how to use historical analysis to come up with projections, how to calculate the implied fair TEV, equity value and share price in the DCF and finally how to run a data table, and then finally how the output from the DCF ties to the football field.

In this video we discuss the two types of buyers: strategic buyers and financial buyers. We get into the motivation of each to do acquisitions, discuss financial metrics and analyses each focus on when determining whether an acquisition is “affordable” and the differences between the typical considerations and balance sheet constraints.

Here we dive into the private equity landscape covering the differences between venture capital, growth equity and traditional buyout.

In this video we dive into the key characteristics of a “good” leveraged buyout candidate.

In this video we dive into the nuances of how private equity firms and funds work. We define key terms including GP, LP, LPA, co-invest, capital call, dry powder, etc. We talk about the LPs, who they are and why / how they invest both in general and with PE firms.

Here we dive into the basics of how a leveraged buyout works including the three ways they create value.

Here we dive into “2 and 20” the fee structure used by private equity firms (including venture capital, growth equity and traditional buyout). We get into hurdle rates, catch ups, and the math so we can see in an example how much a PE firm would earn on a generic deal.

In this video we walk though the five simple steps you can run through to analyze any leveraged buyout model.

In this video, we walk through how to calculate transaction value for both a public company and a private company. For public companies, we need to buy the equity in the public market at a premium, and then deal with existing debt and the other capital holders separately, whereas for private companies we assume a cash free debt free transaction.

In this video we walk through the different types of debt and get into financing basics including: What is the difference between senior and subordinated debt, bank loans vs. high yield bonds vs. private credit, floating vs. fixed rate debt, and more.

In this video we walk though a sources and uses table both for a private company doing a cash free debt free transaction as well as a public company who is buying out publicly traded shareholders. We discuss various fees, minimum cash, and prove that the debt raised and sponsor equity are basically the same regardless of whether the company bought is public or private.

Here we go through a very high level overview of the operating model in the LBO.

In this video we dive into Excel and start building steps 1 - 3. We go through how to project out our sources and uses table for a cash free debt free transaction, review the income statement, cash flow statement and debt schedule, discussing how to build a revolver, how to model a debt tranche with good faith amortization and a free cash flow sweeps and review how it compares to modeling a high yield bond. We then project and link interest which gets us into basics of circular models including how to trouble shoot and what to do if the model blows up. And we do all this learning some must know Excel shortcuts along the way.

In this video we both go through the final steps of calculating transaction value and equity value at the sale and finish up by running a data table to sensitize the IRRs for various exit multiples.

We now get into the paper LBO. We discuss why banks and PE firms like using this as a way to test a bunch of valuation and accounting concepts while also seeing how you think on your feet. We then set up the sample paper LBO exercise that we walk through over the remaining videos.

Here we review the steps focusing on what is unique to the paper LBO vs. an actual LBO model in Excel. We introduce a download / framework to approach paper LBOs in general so that you can mentally always fall back on this set up in any scenario.

In this video we dive into tricks you can use to simplify your assumptions as you get ready to build the paper LBO.

In this video we get into how to simplify operating assumptions. We go through what constant growth tables are and how to apply them, when we can use them and when we can’t and some important considerations for combining margin assumptions. We also discuss some tricks you can use to do mental math in your head.

In this video we finish going from EBITDA to Net Income, again discussing tricks we can use to simplify the math. We also discuss how to project Debt and the assumptions we make in paper LBOs to drastically simplify this projection.

We finish up the operating model of the paper LBO by now working through the cash flow projections. This leads us to being able to calculate cumulative cash flows and ultimately our ending debt balance. We then review how to calculate TEV and Equity value at exit.

In this video we walk through the back of the envelope tricks you can use to take a multiple of invested capital (”MOIC”) aka multiple of money (”MOM”) into an IRR.

In this video we wrap up and provide our resources to learn more deeply about the private equity recruiting cycle, distressed debt, PE secondaries, the lifestyle at various funds and so much more.