KKR Case Competition 2020
Diversity, Inclusion & Innovation
October 2020
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Include slide on your team
and its diversity
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Diversity
How Diversity Makes us Smarter by Professor Katherine W. Phillips
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Decades of research by organizational scientists, psychologists, sociologists, economists and
demographers show that socially diverse groups (that is, those with a diversity of race, ethnicity,
gender and sexual orientation) are more innovative than homogeneous groups.
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It seems obvious that a group of people with diverse individual expertise would be better than a
homogeneous group at solving complex, nonroutine problems. It is less obvious that social diversity
should work in the same way—yet the science shows that it does.
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This is not only because people with different backgrounds bring new information. Simply interacting
with individuals who are different forces group members to prepare better, to anticipate alternative
viewpoints and to expect that reaching consensus will take effort.
McKinsey Report: Why Diversity Matters (2015)
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Companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial
returns above their respective national industry medians.
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Companies in the top quartile for gender diversity are 15 percent more likely to have financial returns
above their respective national industry medians.
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Companies in the bottom quartile both for gender and for ethnicity and race are statistically less likely
to achieve above-average financial returns than the average companies in the data set (that is,
bottom-quartile companies are lagging rather than merely not leading).
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Competition Timeline
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October 14: Reception at KKR
October 27: Deadline to submit team roster to the Private Equity Program
November 5: Final PowerPoint deck for presentation submitted to the Private
Equity Program
November 16: Finalists selected and notified if they will be invited to present
on November 18
November 18: Finalists will present to a panel of private equity professionals at
KKR. Winning team to be announced.
November 24: Wiining Team will have an exclusive virtual session with Henry
Kravis ‘69.
Individual and Team Advising
● Students and teams may sign up to meet with Michael Hillmeyer from the PE
Program using the following link: calendly.com/michaelhillmeyer
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Sourcing - Watson Library Resources
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Databases
Preqin
Thomson One [Internet Explorer Browser ONLY; Initiation reports best]
Business Source Complete
Capital IQ [requires account]
Factiva
Proquest Direct
Ibis world
SEC/ Edgar
Bloomberg There are ten Bloomberg terminals available across the Libraries:
seven in the Watson Library; one terminal in Lehman Social Sciences Library
in Lehman Library
Teams should reference the target company’s public filings (10-K, 10-Q,
investor presentations, earnings releases and earnings transcripts) as well as
research reports available through CapitalIQ.
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Investment Thesis: Basics
Company
• What does the company do?
• How does it make money?
• Who are its customers?
• Who are its suppliers?
• How does the company sell products/services?
• Why do customers buy the products/services?
• Why do they buy from the company in particular
Industry
• How big is it?
• Does it grow?
• Is it cyclical or seasonal?
• What are current trends?
Competitive Marketplace
• How many competitors?
• How big are market shares?
• Do competitors compete on price or value?
Source: Competition Demystified, Bruce Greenwald
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Investment Thesis: Price and Value Proposition
How good a business is the company?
- The answer determines price you want to pay
How will you drive value creation?
- is the target a good fit with your firm?
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Investment Thesis: What is a Good Business?
• Predictable, recurring and growing FCF over the long
term using minimal capital investment
• High probability of the company achieving projected
profitability
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Investment Thesis: Feedback From 2019 Competition
Clarity
Have a CLEAR investment thesis
(being undervalued compared to
competitors is not a good enough of
a thesis)
You need to explicitly state why you
believe you could make money
Articulate why this specific business
is the one you chose- explain
fundamentally how this is a good
business
Clearly express what you believe the
catalyst for growth will be going
forward and how you plan on
operating more efficiently
Identify KKR value proposition
Thoughtfulness
Have charts that display growth
projections or how comps have
grown
Include a broader discussion of
industry trends
Develop an elaborated detailed
business plan and implementation
timeline, including exit strategy
Creativity
Don’t be afraid to find deal ideas in
unusual places
Not enough to have an interesting
idea- you need to explain your
thinking
Have an angle or differentiator to
show creativity
Justify why it is an attractive market
to be in
Explain the downside as well - have
follow up details around risks and
mitigants
Check for typos!
Competition 2019 Feedback
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Diligence: Key Issues for LBO Investments
• Price
• Growth (industry/company)
• Leverage/Cash Flow
• Market
• Management
• Geography
• Exit
Source: MFG Partners
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Diligence: More Issues to Consider
• Comps (Public / Private)
• Legal / Environmental
• Customer (Concentration/Power over)
• Capital intensity
• Cyclicality
• Performance in a recession?
• M&A/synergy opportunities
Source: MFG Partners
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Diligence: The Fund’s Perspective
• Size of the deal
• # of portcos in the fund; time to next fundraise
• Work required
• Style
• Source
• Financing sources
• Upside  Downside 
KNOW THY FIRM
Source: MFG Partners
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Diligence: Feedback From 2019 Competition
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Make sure to do financial diligence
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Show thoughtful comps
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Have a page on potential risk of investment clearly laid out
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Make sure to show work around the market dynamics
Competition 2019 Feedback
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Ten red flags of operational due diligence – Tao Tan ‘11
1.
Operating cash flow. Is it steady
and rigorous?
2.
Adjusted EBITDA. Is there true
earnings power vs. add-backs and
one-timers?
3.
Stress test. Will sudden revenue
loss or cost increase strain the
company’s liquidity?
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Management. Does management
pass the safe hands test?
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Organizational alignment. Can
employees up and down articulate
the strategy and direction?
6.
Ability and drive to execute. Can
your management pivot to a PE
operator mindset?
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Value trap. Are your improvement
levers straightforward to monetize?
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Exit planning. Who or what would
buy this company at the exit?
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Disruption. Are there sudden
events or competition on the
horizon?
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Pre-mortem. What else could
possibly go wrong?
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LBO Modeling: Purpose
What would a financial buyer be willing to pay?
– Iterative modelling exercise to determine maximum equity
purchase price a sponsor could pay
– Subject to return and risk constraints
• Internal Rate of Return (IRR) = 20%+
• Exit within 5-7 years
• Total Debt / EBITDA <= ~6.0x
• Must able to pay off 50% of debt within 5 years
• Limited if any synergies
LBO Modeling: Resources
PE Program Resources for LBO Modeling
– LBO Technical Note
– Gaby Baum ‘19 Solved LBO Model
– Other LBO Resources on PE Program web site (password
protected)
Other Resources
– PE Club LBO Training
– Rosenbaum & Pearl - Investment Banking, 2nd Ed
LBO Modeling: Tools
Short Form Model
Long Form Model
– Limited information,
assumptions, and
analysis
– Extensive information,
assumptions, and
analysis
– Positive: a “one-pager,”
quick and determines
whether the deal is
viable / warrants further
analysis
– Positive: accommodates
multiple operating and
capital cases, detailed
transaction elements,
ownership, and returns
analysis
– Negative: limits
operating and capital
cases, transaction
elements, ownership,
and returns analysis
– Negative: can take 1-2
days to complete and
can be difficult to use
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LBO Modeling: Short Form Model
LBO Modeling: Steps
● Excel
Setup
● Operating Case
● Debt
Schedule
– Payments
– Income Statement
– Principal & Interest
– Balance Sheet
– Credit Analysis
– Cash Flow Statement
● Transaction
Case
– Transaction Value
● Returns
– Returns Analysis
– Sensitivity Analysis
– Sources & Uses
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LBO Modeling: Excel Setup
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File…Options…Formulas…Enable Iterative Calculations
– Always OFF when in “build” mode to alert for accidental,
unwanted circular references
• Circularities typically develop via Cash, Debt, and Interest Income /
Expense
– Turn ON after model is complete to utilize stable, forced circular
references
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Inputs: Blue / Outputs: Black / Links: Green
LBO Modeling: Operating Case
LBO Modeling: Income Statement
Drivers
– Revenue (% Growth)
– EBITDA Margin (% of Revenue)
– Tax Rate (% of EBT)
– Interest Expense (% of Average Debt)
LBO Modeling: Balance Sheet
Drivers
– Capex (% of Revenue)
– Depreciation (% of Beginning P,P&E)
– ∆NWC (% of ∆Revenue)
LBO Modeling: Cash Flow Statement
Cash Flow Available for Debt Repayment
– EBITDA
– Less: Interest Expense
– Less: Taxes
– Less: Change in NWC
– Less: Capital Expenditures
LBO Modeling: Transaction Case
LBO Modeling: Transaction Value
Multiple Method
– EBITDA Multiple
– LTM EBITDA
– Net Debt (Cash)
Premium Method
– Unaffected Share Price
(Close Day Before
Announcement)
– Premium Paid (% of
Share Price)
– Basic Shares
Outstanding
– Options Outstanding
– Average Exercise Price
– Net Debt (Cash)
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LBO Modeling: Sources & Uses
Sources
– Credit Revolver
– Senior Secured Debt
Uses
– Equity Purchase Price
• Term Loan A, B, C
– Existing Debt Refinance
• Notes / High Yield
– Financing Fees (% of
Debt)
– Senior Unsecured Debt
– Junior / Subordinated
Debt
• Mezzanine
– Advisory Fees (% of
TEV)
• Sponsor
• Management / Rollover
– Operating Cash
– Equity
– Existing Cash
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LBO Modeling: Debt Schedule
LBO Modeling: Payments
Mandatory
Repayments
– Senior Secured Debt
– Senior Unsecured Debt
Sweep Repayments
– Senior Secured Debt
– Senior Unsecured Debt
– Junior / Subordinated
Debt
– Other Debt
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LBO Modeling: Principle & Interest
Principal Repayments
– Amortization (Mandatory
Periodic Payments) (%
of Beginning Balance)
– Bullet (Mandatory at
End) (100% of Beginning
Balance)
– Sweep (Discretionary
Cash Flow) (Minimum of
Available Cash Flow or
Beginning Balance)
Interest Expense
– Cash or Paid-in-Kind
(PIK)
– Interest Rate x Average
Debt Balance (creates
circularity)
– Senior Secured Debt =
Floating Rate (LIBOR +
Spread)
– Senior Unsecured Debt
= Fixed Rate
– Junior / Subordinated
Debt = Fixed Rate
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LBO Modeling: Credit Statistics
LBO Modeling: Credit Analysis
Leverage
– Senior Secured Debt /
EBITDA
– Senior Unsecured Debt /
EBITDA
– Junior / Subordinated
Debt / EBITDA
Coverage
– EBIT / Interest Expense
– EBITDA / Interest
Expense
– (EBITDA – Capex) /
Interest Expense
– Total Debt / EBITDA
– Total Debt / (EBITDA –
Capex)
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LBO Modeling: Returns
LBO Modeling: Returns Analysis
Equity Value at Exit
Measurement
– Exit Year EBITDA
– IRR (%) (20%+ Target)
– x Exit Multiple
– Cash on Cash (Multiple of
– = Enterprise Value
– + Cash
– - Senior Debt
Investment)
– By Owner (Sponsor, Rollover)
Drivers
– Leverage & Tax Shield
– - Subordinated Debt
– Revenue Growth
– =Equity Value
– Margin Improvement
– x Ownership %
– Efficiency Improvement
– Multiple Expansion
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LBO Modeling: Sensitivity Analysis
Transaction
– Premium Paid
– Entry Multiple
– Leverage
– Interest Rates
Operations
– Financials (Growth,
Margins, etc.)
– Synergies (Margins,
Investments, etc.)
– Exit Multiple
– Exit Year
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LBO Modeling: Feedback From 2019 Competition
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Have a reconciliation of underwritten Ebitda (explain and justify all financial
assumptions) – are you backing out appropriate adjustments?
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Clearly stated rationale for everything
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Have a justification for your exit multiple and a discussion of exit strategy
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Don’t just give limited insights into valuation and path to exit
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Lay out cashflow
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Can use appendix for some things- (ex: don’t need market beta charts up front)
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Don’t have superficial model pages with no details of historicals and % growth and
margins.
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Explain why IRR is compelling vis a vis the risk taken
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Make sure your returns up front are consistent with your sensitivity analysis in back
Competition 2019 Feedback
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Appendix
● Private
Equity Value-Add
● Presenting
● Key
to the Investment Committee
Considerations for the Investment Committee
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Source: Deal Camp
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