Private Equity & Venture Capital Primer
September 2021
Part 1: Private Equity
Using the PE Primer
 Use with IB Primer: The IB primer circulated by Beta contains the basics of valuation and financial concepts.
Reading the PE primer along with the IB primer would help in getting a holistic view. Usually, PE preparation
encompasses most preparation done for IB interviews. Additional elements are included in this primer.
 Other Sources: This primer is a start-point for your Private Equity preparation and is intended to point you
towards the right sources of preparation. Hence, use other sources extensively throughout your preparation.
De-construct top line
Revenue
Geography
•
•
This analysis is valid for
companies with
presence across
multiple markets
For instance, Godrej
Consumer reports
revenue by Indonesia,
India and Africa
businesses for different
products
Channel
•
•
A similar product can be
sold through different
channels and result in
different cost structures
and margin profiles
For instance, general
insurers sell insurance
through bancassurance,
agency, direct and via
tie-ups
Product
•
•
This is used by
companies with a wide
& differentiated product
assortment
FMCG companies
usually break down
revenues by different
products (HUL reports
personal care, home
care, refreshments,
food etc.)
Customer Segment
•
•
Buying behaviour
changes with customer
segment. This
breakdown is typically
done at a product level,
or at a company level
for a company with a
single product.
Hotel companies
typically have different
customer segments
Referring to the breakup given in the company’s investor presentation could be a good indicator of the relevant criteria for the
company & the industry
Estimating volume growth for the company
Illustrative
Pick up an
industry/company
Look through the
annual report and
analyst reports to
identify key
products/segments
•
Cement/Ultra Tech
•
•
4 main markets – North, South, West & Central
The key customer segments in each market is
housing (rural & urban), infrastructure,
commercial and others
Revenue
•
Understand
underlying growth
drivers for each
elements
Triangulate growth
with macro variables
Illustrative
•
•
The drivers for housing growth are EWS
housing schemes, availability of CLSS,
government schemes such as IAY and PMAY
(Estimate Cement MT/sq. ft construction)
The driver for infrastructure is Govt schemes
like freight corridors, Bharatmala project, metro
construction etc. (Estimate Cement MT/km of
road construction)
Triangulate bottom up growth with growth in
macro variables (GSDP growth per region) to
close revenue projection
Product 1
Product 2
Product 3
Market 1
Market 2
Market 3
Segment
1
Segment
2
Segment
3
Understand growth drivers
A useful check is to verify the growth projection with the historical growth rates of the company to see whether they are reasonable. In
case the short-term growth projection involves a recovery from COVID-19, have supporting data facts to show the pace of recovery
Estimating price growth for the company
A list of illustrative (non-exhaustive) factors to be considered for estimating a change in prices are:
 Market share/ market positioning: Different peers may occupy different positions in the market and pricing growth will
depend on yield growth in segment rather than the overall market
 Product functionalities vs competitors: Product functionalities may vary across peers and the yield improvement
may depend on growth in customer segment rather than the overall market
 Capacity utilization: Higher utilization peers may command more pricing power than lower utilization players
 Inflation expectation: Inflation expectations can influence pricing indirectly by pushing costs up/down
 Margin based pricing: For non-differentiated products and services, the product may be priced on a cost + margin
basis. For those categories, cost drivers will explain margins
 Other factors: competitive dynamics, IP protection on innovation, demand sensitivity in market, number of
intermediaries in marketing chain
Try comparing your growth projections with analyst estimates available on Bloomberg/ Capital IQ/ other databases. They could help
in substantiating the growth projections assumed for the company
Key points to remember about revenue growth
 Be very granular while understanding growth
 Understand key drivers of growth; remember to keep those handy for interactions/buddy calls
 Focus on understanding historical/current state before projecting
 Avoid making unsubstantiated assertions: back your opinion with (multiple) data points. Try to triangulate the
numbers to show better understanding of your estimates
 Try comparing your growth projections with analyst estimates available on Bloomberg/ Capital IQ/ other databases.
They could help in substantiating the growth projections assumed for the company
Getting to the Bottomline
Costs
Raw Material
•
•
Primarily for
manufacturing
companies, raw
material costs
make a difference
Can vary in case
of industrials if the
raw materials is a
natural resource,
and the company
has mining rights
Labour
•
•
Is a big factor for
services industry,
for example – IT
services
Good to
benchmark the
labour/unit of
output across
industry in case
labour makes a
big portion of the
costs
Fuel/ Power
•
•
In a manufacturing
set up, fuel costs
for running the
production
process can make
a difference
Depends on fuel
prices, electricity
tariffs, fuel
efficiency, etc.
Sales and
Distribution costs
•
•
•
Cost of delivering
the goods/services
to the customers
In manufacturing,
logistics cost make
a difference
In services, sales
and marketing
expenses can be
high
Industry specific
•
•
Express the costs in % terms while explaining to the interviewer so that it is easier to comprehend for the interviewer
In each industry
there are industry
specific costs that
need to be
benchmarked
For example – in
banking, we need
to track interest
cost on deposits,
claim ratios in
insurance, etc.
Estimating changes in margins for a company
Illustrative
Pick up an
industry/company
Look through the
annual report and
analyst reports to
identify key costs
heads in the P&L
•
Cement/Ultra Tech
•
•
3 main cost heads – raw material, fuel, logistics
Identify the cost heads that cover 70-80% of the
costs, and see how they vary across companies
in the industry
•
Understand
underlying drivers
for each cost head
Identify sources of
cost reduction
(margin
improvement) for the
company
•
•
Drivers of raw material cost can be – presence
of limestone mine within the plant, source of fly
ash and slag, source of gypsum, etc.
The drivers for logistics and fuel costs are
primarily the crude prices, and the efficiency of
company’s processes. These can be reduced by
initiatives like Waste Heat Recovery, better
network planning, etc.
Illustrative
Revenue
Raw
Material
Fuel
Labour
Fuel mix
Fuel
efficiency
Per unit
cost
Quality of
fixed asset
Technology
Processes
By benchmarking, identify cost heads where the
company is performing worse compared to its
competitors – analyse the reasons for the
difference, and see if the company can close the
gap
Split each cost head into the maximum level of detail available and compare it with industry figures to identify key differences in cost
structure between various companies. This could point to a sustainable competitive advantage for the company
Key points to remember about cost structure
 Be very granular while understanding cost structure
 Understand key drivers of each cost head; remember to keep those handy for interactions/buddy calls
 Try to benchmark each cost head with the competitor companies, and see what is the source of difference, and
whether the company can close the gap
 Look at per unit margins both in terms of percentage and rupees (difference can arise due to differences in prices
across companies)
Estimating the Unit Economics of a Company
A good way of summarising the business model of the company is to estimate unit economics of a company wherein one
establishes profitability at the unit level. The unit could differ based on the industry. For illustrative purposes, unit
economics for cement industry is given below:
Unit Economics (per Bag of Cement)
Key Pointers
350
300
 In addition to estimating the profitability per unit, do
estimate the unit Return on Capital employed
based on estimates of capital investment required
for setting up capacity of 1 tonne/ bag of cement
33
250
200
150
35
65
331
265
100
56
233
198
168
148
50
0
 Triangulate it with other metrics like NPV, IRR and
payback period at a unit level, which would help in
furthering your business understanding
50
92
MRP
Dealer's
Margin
GST
Net
Realisation
Raw
Material
Source: CRISIL Analyst Presentation – Nov 2019
Power &
Fuel
Freight
52
40
40
Gen. &
Admin Exp
EBITDA
 Analyzing differences in unit economics between
competitors could help in quantifying the
competitive advantage enjoyed by the company in
relation to its competitors
Other important factors to consider
 Working capital – understand the working capital cycle of the industry (in terms of receivables, inventory and payable
days) – see how the company can improve the cycle. Understand how much investment in working capital is required
each year
 Fixed assets – understand the committed and likely investment in fixed assets by the firm, and also the nature of the
expenditure – whether it is replacement capex or capex for expansion
 Leverage – understand the extent of leverage by the firm in terms of – Debt to Equity, Debt to EBITDA, Interest
Coverage and DSCR – this can show if there are chances that company can come into immediate distress, and if the
company has the capacity to expand by leveraging more
 Dupont Analysis – This tool is a way to break down the Return on Equity and helps in identifying the return drivers of
the company
Fig: Dupont Analysis
Return on Equity
(Net Profit/ Equity)
Return on Assets
(Net Profit/ Assets)
Net Profit Ratio
(Net Profit/ Sales)
Asset Turnover Ratio
(Sales/ Assets)
Assets/ Equity
Preparation Checklist (1/4)
Overall, the candidate needs to demonstrate a strong grasp on both the operational and financial side of business,
especially how the two relate to each other (eg. How would an asset-light strategy show up on a P&L). Elements of both
PE+IB preparation are recommended. Other specifics are detailed below:
Technical/Industry Knowledge
 Detailed understanding of all drivers for an industry and company. Granular understanding of what moves revenues,
costs and multiples for the chosen industry and how firms are positioned within the industry
 Strong grasp on FRA and Corporate Finance (be on top of Damodaran videos at the very least)
 A structured response to “How to Evaluate an investment opportunity”
 What-if scenarios – similar to a consulting case (in shorter form)
About the Industry
 Different stages and rounds
 Difference between Angel funding, VC Funding and PE funding
 Difference between PE, VC, Asset Reconstruction Companies, etc.
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Preparation Checklist (2/4)
Stock Pitch
 Candidate is expected to present structured long-term view of the company as opposed to mere trading tips published
in newspapers
 Expect detailed pushbacks on company fundamentals like product mix, poor margins or return ratios, etc.
 Strong industry understanding of the stock you’re pitching
General Awareness
 Major PE funds in India and their investing philosophy. Their recent deals (form a view)
 Latest Deals and Funding rounds (optional but preferable)
Company-specific Questions
 Portfolio of the company and recent deals
 One portfolio company you would invest in, one portfolio company you would not invest in
 View on the PE’s sector (in case of a sector-specific PE)
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Preparation Checklist (3/4)
HRQs
Few Practice Questions
 Why PE?
 Do you invest. (If not) How can we trust you to manage investors’ money if you are not confident investing your own
money?
 Strong probing questions on company/industry where you have worked in the past. Be on top of financials of key
players in the industry
 What are your key weaknesses/strengths?
* Ability to do quick mental math is appreciated in PE interviews.
Page 15
Preparation Checklist (4/4)
Sources
 Bloomberg (Analyst Reports)
 CRISIL (Industry Reports)
 The Ken
 Inc42
 Venture-Intelligence (Deal Database)
 Mint – Especially the deal page
 Earnings call transcript of last few quarters
 Discussion with Analysts if possible
Page 16
Venture Capital
VC Primer
The VC Process1
1. Deal Origination: There may be various sources of origination of deals like referrals or active search through
networks, incubators, conferences, seminars, etc.
2. Screening: VCs undertake preliminary scrutiny of all projects on the basis of certain broad criteria, such as technology
or product, market scope, size of investment, geographical location and stage of financing.
3. Evaluation: After a proposal has passed the preliminary screening, a detailed evaluation of the proposal takes place. A
detailed study of project profile, track record of the entrepreneur, market potential, technological feasibility, future turnover,
profitability, etc. is undertaken.
4. Deal Negotiation: Once the venture is found viable, the venture capitalist negotiates the terms of the deal with the
entrepreneur. Terms of the deal include amount, form, price and seats on the board.
5. Post-Investment Activity: VCs track the performance of their portfolio companies and assist the founders by
leveraging their network.
6. Exit Plan: The last stage of venture capital financing is the exit to realise the investment so as to make a
profit/minimize loss. Exit can be through selling its stake to another VC/PE, acquisition by a corporate, or an IPO.
1. https://www.yourarticlelibrary.com/financial-management/venture-capital/process-of-venture-capital-financing-6-main-steps/72037
How to analyse (due diligence) a start-up?
VCs look at companies which are in the earlier stages (start-ups) of their business cycle. Therefore, VCs would be betting
more on emerging technologies and new business models. Since most of these businesses would not have any reliable
financial history, the conventional evaluation techniques are futile. The following are the key aspects that should be
assessed:
1. Huge market potential
2. Differentiating technology/product
3. Founding team pedigree
These criteria are quite logical. If the market is too small, it doesn’t matter how great the product or service is, it just won’t
have a big impact. If the technology is too similar to other competitors, then the odds of breaking away from the pack are
low. Finally, without incredible people, neither of the other two criteria matter.
Framework for Evaluation of Start-ups
Market Potential
Product
Team
• Market size
• Product market fit
• Experience/skills
• Market forces and trends
• Differentiation
• Founder dynamics
• Market readiness
• Customer feedback
• Passion
• Regulations
• Legal defensibility
• Vision for the business
• Evolution
Competitive landscape &
defensibility
Economics & scalability
Funding and Exit potential
• Alternatives
• Unit economics
• Investment required
• Degree of competition
• Operating margins (current &
• Strategic vs financial
• Scale and funding of competitors
• Competitive and sustainable
advantages
steady state)
• Traction and adoption potential
• Potential exit value
• Time frame
• GTM strategy and business model
• Capital efficiency
20
Preparation Checklist
1. Know your VC: Understand the investment philosophy, current portfolio and latest investments. Try to understand
what stage the VC prefers investing in and the average ticket size of funding.
2. Basic HRQs: An illustrative list:
i.
Why do you want a job in Venture Capital?
ii.
Why do you want to work for our firm?
iii.
What is happening in the industry currently? Which are the themes that you are bullish on? (Refer Additional
Reference Material point number 1 to track latest trends/developments)
3. Start-up pitch/evaluation: Analyze at least one start-up based on the following criteria:
i.
Founding team
ii.
Market potential
iii.
Growth drivers
iv. Product/Technology differentiation
Page 21
Additional Reference Material
1. Latest developments: Andreessen Horowitz blogs & podcasts, TechCrunch, Inc42, YourStory, The Ken, etc.
2. VC and start-up databases: Crunchbase, Tracxn, PitchBook, CB Insights, etc.
3. Valuing a start-up: https://masschallenge.org/article/how-to-value-a-startup-company-with-no-revenue
4. Unit Economics: https://www.lightercapital.com/blog/what-are-unit-economics/
All the Best!