Mega Fund Case Study (r/FinancialCareers)
Instructions
• Time: 90 Minutes
• Step 1: Build Functional LBO Model with Returns Schedule (Calculate Five-Year IRR and MOIC)
– Read Situational Overview in Case Study Packet and Use Management Projections if Appropriate, or Adjust Estimates
– Model Should Integrate the Information Found in the Prompt with a Full Debt Schedule and Scenario Analysis
• Step 2: One-Pager on Key Takeaways
– Be Prepared to Discuss Investment Thesis and Model Assumptions for 30 Minutes Minimum
– Understanding of the Business Model, Key Drivers of Future Performance, and Financials are Being Tested
– Required to be in Bullet Point Format, 6 to 8 Discussion Points
• Step 3: Present Findings in Case Review
– Once Time is Up, 30 Minute Discussion with Reviewer
Situation Overview
• As an Associate, You Receive a Call from a Partner to Evaluate Project __________
– Packet Contains Historical Financials, Management Projections, Product/Service Mix, End Market Data
– Plus, Industry Report on Recent Trends, Competitive Landscape, Peer Trading Comps, and Precedent Transaction Multiples
• Discussion Questions:
– Do you recommend investing in this opportunity? Yes or No?
– If you had to pick three, which questions would you ask to the management team?
– What do you find the most interesting about the business? Or what concerns you the most?
– Which specific areas would your diligence focus on if the firm decided to proceed further in the sale process?
– How much in total leverage could this company reasonably take on?
– Up to what price would you be willing to pay for this company? Which pricing range do you recommend staying around?
• Investment Thesis Should Clearly State Your Recommendation and the Pros/Cons of the Investment
– Include Commentary on the Risks + Mitigants, Thoughts on Management Projections, and Focus for Future Diligence
– Even if Recommending a Pass, a Price Recommendation Must Be Stated Based on the Returns Under Various Entry/Exit Multiples
– Approximate the Debt Capacity and Opinion on Target's Ability to Raise Debt Financing from Lenders (Easy or Difficult to Raise Capital?)
Transaction Assumptions
• Assume Cash Free-Debt Free Transaction and Closing Date of December 31, 2020
• 100% of Equity Contribution Comes from Financial Sponsor
• Management Looks to Remain in Charge of Running Company But Not Interested in Rolling Over Equity
• Financing Fees for Term Loan and Senior Notes are 3% of Debt Raised, while Transaction Expenses are 3.5% of TEV
• Determine the Appropriate Capital Structure to Fund the Deal & the Purchase/Exit Multiples
• Debt Available: Revolver (Undrawn at Close), Term Loan, Senior Notes – Come Up w/ Well-Reasoned Funding Structure
• Term Loan Comes with 10% Mandatory Amortization and Full Cash Sweep (No Prepayment Penalty)
• Expected Holding Period is Five-Year Exit Based on LTM TEV/EBITDA Multiple
Lender Debt Terms
Revolver ($80M Capacity)
1st Lien Term Loan
2nd Lien Senior Notes
Pricing
LIBOR + 400
LIBOR + 425
12.50%
Tenor
6 Yrs.
6 Yrs.
9 Yrs.
Other Assumptions
LIBOR
2021E
1.50%
Unused Revolver Fee
Effective Tax Rate
0.25%
30.0%
2022E
1.60%
2023E
1.70%
2024E
1.90%
Cash Interest (Annual)
Min. Cash Balance
Company Overview (LTM Data)
• Target is a Leading Transportation Management (TM) Services Provider Offering Logistics Services and Secure Delivery Tracking (Monitoring)
• Proprietary B2B SaaS Platform is Cloud-Based and Enables Transparency from Carriers to Customers
• Customer Concentration: ~250 Customers LTM & Top Customer Accounted for 5% of Revenue while Top 5 Accounted for 18.5% of Revenue
• Key End Markets: Food & Beverage (40%), Industrials (25%), Healthcare & Pharmaceuticals (20%), Consumer Discretionary (10%), Retail (5%)
• 75% of Customer Relationships are > 5 Years & 40% > 10 Years
• TM Platform Contracts Structured as Five-Year Contracts Typically (Freight Data Analytics Platform Enables Cost Savings for Management)
• Brokerage Services Revenue Comes from % Fee for Connecting Shippers and Carriers, Fee Ranges from 10% to 15%
• During Latest Recession, Net Revenue Grew 1.2% in 2008 and 0.8% in 2009
Management Commentary
• Industry-Leader in SaaS for TM and Delivery Tracking/Fulfilment on Behalf of Customers
• TM Platform is High-Margin (~80%) but Growth CapEx Moderately High to Further Build Out Capabilities (Still Projected CapEx < 5% Revenue)
• Differentiated Positioning Relative to Competitors (SaaS-Oriented Business, not Services)
• Target's Role in Freight Shipment Value Chain is Closer to Oversight (Provides Software, Largest Network for Brokers/Carriers, Growing Database)
• Customers Unwilling to Invest into their own TM Technology (More Cost-Effective to Outsource to 3rd Party)
• Competes on Software Quality and Services Related to Carrier Relationship Management – Higher Delivery Standards are Industry Tailwind
• Market Share is Modest at ~16.5% in the Freight Brokerage Outsourcing Industry, Liability Concerns are Industry Constraint
• Projected Revenue Growth Driven by ~95% Renewal Rate with Minimal Churn & Cross-Selling of Professional Fees with Platform On-Boarding
• Largest Margin Improvement Expected in TM Platform Due to Operating Leverage as Division Matures
Comps & Market Data
• TM Platform Comps Trading Around Low to Mid Teens, Non-Cyclical Valuation Multiples
• TM Brokerage Comps Trading Around Mid to High Single Digits, More Cyclical Valuation Multiples
• Median TEV/LTM EBITDA: TM Platform Comps = 12.8x & TM Brokerage Comps LTM = 6.4x
• SaaS TM Industry is Growing at a CAGR of 4.5% Over the Next 5 Years, whereas Standard Brokerage Industry is Growing at a CAGR of 1.8%
2025E
2.00%
0.25%
$5M
Income Statement
($ in millions)
Historical
2018A
2019A
2020A
2021E
Management Projections
2022E
2023E
2024E
2025E
Net Revenue
TM Platform Fees
% YoY Growth
(+) TM Professional Fees
% YoY Growth
(+) Standard Brokerage Services
% YoY Growth
Total Net Revenue
% YoY Growth
$56.5
N/A
34.8
N/A
54.6
N/A
$145.9
N/A
$60.0
6.2%
36.0
3.4%
64.2
17.6%
$160.2
9.8%
$64.2
7.0%
47.8
32.8%
71.2
10.9%
$183.2
14.4%
$71.5
11.4%
53.1
11.1%
78.0
9.6%
$202.6
10.6%
$86.5
21.0%
62.5
17.7%
86.4
10.8%
$235.4
16.2%
$95.0
9.8%
70.0
12.0%
97.1
12.4%
$262.1
11.3%
$104.5
10.0%
81.2
16.0%
108.7
11.9%
$294.4
12.3%
$118.2
13.1%
92.6
14.0%
116.4
7.1%
$327.2
11.1%
Contribution Per Segment
TM Platform Fees
% Segment Revenue
(+) TM Professional Fees
% Segment Revenue
(+) Standard Brokerage Services
% Segment Revenue
Total CM
% Total Net Revenue
(-) Total OpEx
% Total Net Revenue
Adjusted EBITDA
% EBITDA Margin
(-) D&A
% of Net Revenue
Adjusted EBIT
% EBIT Margin
$25.0
44.2%
21.0
60.3%
24.0
44.0%
$70.0
48.0%
(23.0)
15.8%
$47.0
32.2%
(16.0)
11.0%
$31.0
21.2%
$27.0
45.0%
24.0
66.7%
28.0
43.6%
$79.0
49.3%
(24.0)
15.0%
$55.0
34.3%
(15.5)
9.7%
$39.5
24.7%
$30.0
46.7%
29.3
61.3%
30.0
42.1%
$89.3
48.7%
(25.0)
13.6%
$64.3
35.1%
(15.0)
8.2%
$49.3
26.9%
$34.6
48.4%
32.1
60.5%
34.0
43.6%
$100.7
49.7%
(26.0)
12.8%
$74.7
36.9%
(14.8)
7.3%
$60.0
29.6%
$42.8
49.5%
38.4
61.4%
36.0
41.7%
$117.2
49.8%
(30.0)
12.7%
$87.2
37.0%
(14.5)
6.2%
$72.7
30.9%
$46.5
48.9%
42.0
60.0%
43.0
44.3%
$131.5
50.2%
(38.0)
14.5%
$93.5
35.7%
(14.3)
5.4%
$79.3
30.2%
$52.4
50.1%
48.6
59.9%
47.0
43.2%
$148.0
50.3%
(40.0)
13.6%
$108.0
36.7%
(14.0)
4.8%
$94.0
31.9%
$62.4
52.8%
56.0
60.5%
53.0
45.5%
$171.4
52.4%
(42.0)
12.8%
$129.4
39.5%
(13.8)
4.2%
$115.7
35.3%
($4.0)
2.7%
(2.8)
1.9%
($6.8)
4.7%
($5.0)
3.1%
(3.0)
1.9%
($8.0)
5.0%
($5.8)
3.2%
(3.1)
1.7%
($8.9)
4.9%
($5.9)
2.9%
(3.8)
1.9%
($9.7)
4.8%
($6.0)
2.5%
(4.6)
2.0%
($10.6)
4.5%
($6.0)
2.3%
(5.3)
2.0%
($11.3)
4.3%
($6.1)
2.1%
(6.4)
2.2%
($12.5)
4.2%
($6.2)
1.9%
(6.8)
2.1%
($13.0)
4.0%
($2.0)
(1.4%)
($3.2)
(2.0%)
($3.8)
(2.1%)
($4.0)
(2.0%)
($4.5)
(1.9%)
($5.1)
(1.9%)
($5.8)
(2.0%)
($6.0)
(1.8%)
Maintenance CapEx
% of Net Revenue
(+) Growth CapEx
% of Net Revenue
Total CapEx
% of Net Revenue
Change in NWC
% of Net Revenue
CAGR
'18 to '20
'21 to '25
6.6%
13.4%
17.2%
14.9%
14.2%
10.5%
12.1%
12.7%
9.5%
15.9%
18.1%
14.9%
11.8%
11.7%
12.9%
14.2%
17.0%
14.7%
26.1%
17.9%