PRIVATE EQUITY
Harvard Summer School MGMT S-2790 (CRN 33375)

Viney Sawhney
<sawhney@fas.harvard.edu>

Summer Session dates and time:

Seven-week session June 25 – August 8, 2019 (no class July 4th)
Tuesdays, Thursdays, 6:30-9:30 pm
Classes begin Tuesday, June 25, 2019
Final Exams & last class meetings Thursday, August 8, 2019

Location:
Emerson Hall Room 210

Introduction – Course Description

This course is the study of private equity money invested in companies that are not publicly
traded on a stock exchange or invested in as part of buyouts of publicly traded companies.
The objective of the course is to provide a comprehensive overview and in-depth understanding
of the private equity markets. Private equity finance will be explored from a number of
perspectives, beginning with the structure and objectives of private equity funds; followed by the
analysis and financing of investment opportunities; and finally crafting strategies for harvesting
investments.
There has been an increase in both the supply of and demand for private equity. On the supply
side, the amount of private equity under management - by partnerships investing in private
equity, growth investments, leveraged buyouts, distressed companies, real estate, etc. - has
increased dramatically in recent years. On the demand side, an increasing number of individuals
and companies are interested in starting and growing their respective businesses. Collectively,
small and medium businesses are focused in gaining access to Private Equity and understanding
the dynamics of this unique funding source.

Course objectives
The main objective of the course is to provide students with the necessary theoretical and
conceptual tools used in private equity deals. The course provides the intellectual framework
used in the private equity process, valuation in private equity settings, creating term sheets, the
process of due diligence and deal structuring. Other learning objectives include building an
understanding of harvesting through IPO or M&A, public-private partnerships and sovereign
wealth funds. The final objective of this course is to show how corporate governance, ethics and
legal considerations factor into private equity deals.

 
 

Appropriate for Students Pursuing:

This course is appropriate for students pursuing a career in private equity and for students who
wish to broaden their understanding of finance by applying financial concepts and techniques to
analyze activities and enterprises in the private equity market.

Main Topics
1) Private Equity Process
2) Deal Sourcing
3) Deal Structuring
4) Valuation and Term Sheets
5) Harvesting
6) Due Diligence
7) PE in Emerging Markets
8) Legal, Ethical and Governance Issues in Private Equity Settings

Course Evaluation
The grading of the course will be based on the following weighting scheme:
20% Class participation
30% Quizzes and take-home assignments
30% In-class midterm exam
20% Final project / exam
Summer School policy requires attendance in all classes. Missed classes will negatively affect
the class participation part of your grade; missed assignments or assignments submitted after
due-dates will negatively affect the quizzes and take-home assignments part of your grade.
The course will be taught in the form of lectures together with case studies intended for in class
discussion. Each week students shall be e-mailed three select articles from leading financial
publications, e.g., New York Times, Financial Times, and The Wall Street Journal.
Each student will be part of a study group made up of at least four members. Weighting for class
participation will be derived from individual assignments and class discussion of case studies.

Teaching Method
This course will have a number of different dimensions including:
• Lectures
• Case Analysis
• Guest speakers from industry and academia
• Group Presentations

Required reading
Reading of leading financial newspapers is required for the interactive class discussions of
current events.

 
 

Summer School policies

Summer School policies around Student Responsibilities:
http://www.summer.harvard.edu/resources-policies/student-responsibilities

Academic Integrity
Information on Academic Integrity can be found at
http://www.summer.harvard.edu/resources-policies/resources-support-academic-integrity 
"You are responsible for understanding Harvard Summer School policies on academic 
integrity and how to use sources responsibly. Not knowing the rules, misunderstanding the rules,
running out of time, submitting “the wrong draft,” or being overwhelmed with multiple demands
are not acceptable excuses. There are no excuses for failure to uphold academic integrity."

Using Sources
The Harvard Guide to Using Sources is available at http://usingsources.fas.harvard.edu

Disabilities Services
The Summer School is committed to providing an accessible academic and residential
community. The Disability Services Office offers a variety of accommodations and services to
students with documented disabilities, permanent and temporary injuries, and chronic conditions.
Information on Disabilities Services can be found at
http://www.summer.harvard.edu/resources-policies/accessibility-services 
If you are a student with a disability, we engage you in an interactive process to provide you an
equal opportunity to participate in, contribute to, and benefit from our academic and residential
programs.
Disability Services Coordinator
phone: 617 998-9640
e-mail: accessibility@extension.harvard.edu

Course Textbook and CoursePack

Cendrowski, Harry, Martin, James P., Petro, Louis W., and Wadecki, Adam A, Private Equity
Second Edition: History, Governance, and Operations (Wiley Finance © 2012)
CoursePack: MGMT S-2790: Private Equity
Professor V. Sawhney, Harvard University Summer 2019

 
 

SYLLABUS

Session 1 (June 25): THE PRIVATE EQUITY PROCESS

This session introduces the private equity process, the terms and how value is created. This session
covers the private equity process from initially determining the size of the fund, through fund raising,
sourcing portfolio investments, acquiring the portfolio companies and converting equity value back to
cash by liquidating portfolio holdings. The means by which private equity firms create value and enhance
the valuation of their portfolio is also covered.
Required Reading:
Text book:
Cendrowski, Harry, Martin, James P., Petro, Louis W., and Wadecki, Adam A, Private Equity
Second Edition: History, Governance, and Operations; Chapter 1
Background Notes:
“The Basics of Private Equity Funds” Darden Business Publishing UV6986, Rev. Sept 15, 2015
“A Note on Private Equity Fund-Raising,” Rev. 2011, HBS Publication # 9-201-042
Case:
“Yale University Investments Office: February 2015,” 2015, HBS Case # 9-815-124
The Yale Investments Office must decide whether to continue to allocate the bulk of the university's
endowment to illiquid investments-hedge funds, private equity, real estate, and so forth. This case
considers the risks and benefits of a different asset allocation strategy and highlights the choice between
different subclasses, e.g., between venture capital and leveraged buyout funds.

Session 2 (June 27): DEAL SOURCING AND THE PROCESS OF INVESTMENT

Provides a broad overview of the evolution of the private equity industry. Introduces the objectives and
perspectives of institutional investors in private equity funds and highlights the incentive and information
problems that private investors in private equity funds face and their responses to these problems.
Required Reading:
Background Notes / Article:
“A Note on Private Equity Partnership Agreements,” 1994, HBS publication 9-294-084
“Evaluating a General Partner’s Deal Flow – Considerations for gauging this important determinant of
success,” Megrue, John F., Jr. This Note covers the types of deals, the models for finding deals and that
the factors that lead to deals with high returns. Sourcing, and evaluation, firm reputation, specialization
and competitive advantage are addressed.
Case:
“Venita Fields: What Private Equity Professionals Really Do” 2010, Kellogg Case # KEL500
This case enables students to understand the business activities and actual day-to-day work private equity
professionals perform. Students will gain a broader perspective on the human aspect of private equity,
beyond the analytical and financial aspects. The case covers not only the investment process but also the
importance of having a network and hiring adept managers for the portfolio companies.
Graded case study assignment:
Using the industry background note from Session 1, “The Basics of Private Equity Funds,” in a team
environment, students are required to calculate compensation in the PE industry in terms of: total fund
profits, distributions to LPs, distributions to GPs and LPs’ profits and IRR.

 
 

Session 3 (July 2): COMPENSATION IN PRIVATE EQUITY PARTNERSHIPS

Required Reading:
Background Notes:
“A Note on Limited Partner Advisory Boards,” 2008, HBS publication 9-808-169
Case:
“Pawson Foundation August: 2006,” 2008 HBS Case # 9-806-042
This case introduces the interactions between the two major players in the private equity universe:
General Partners and Limited Partners. It also introduces fees, carried interest and hurdle rate and the
concept of clawback.

Session 4 (July 9): STRUCTURING TERM SHEETS

This session covers the elements and characteristics of term sheets. Also seeks to sharpen students'
understanding of how to compare term sheets and how to select the best term sheet given the likely
evolution of a venture.
Required Reading:
Background Note / Article:
“A Note on Private Equity Securities,” Rev. 2001, HBS Publication # 9-200-027
“Note on Private Equity Deal Structures,” Tuck School of Business at Dartmouth, 2005, Case # 5-0006
“Term Sheet Negotiations: A “Rich-vs-King” Approach,” 2011, HBS Publication # 9-812-028
This background note gives students and entrepreneurs a framework to guide term-sheet negotiations
Case:
“Term Sheet Negotiations for Trendsetter, Inc.,” 2004, HBS Case #9-801-358
Two aspiring entrepreneurs have just received offering documents for venture funding (known as term
sheets) from two venture capital firms. Neither of the entrepreneurs have experience raising capital, and
they are wondering how to compare the two proposals and which one to choose. They need to make a
decision fast. The documents contain two complete term sheets which are similar in structure but different
in important ways. Both term sheets have advantages and disadvantages for the entrepreneurs. Choosing
one over the other requires a careful analysis as well as a certain set of assumptions about the growth of
Trendsetter, Inc.

Session 5 (July 11): ANALYZING BUYOUT DEALS

This session covers the mechanics of how a sponsoring private equity buyout firm acquires a company
using a significant amount of debt and a small amount of equity while using the assets of the company
being acquired as collateral. Students' will evaluate a LBO through the use of comparable company
multiples, comparable transactional multiples and discounted cash flow analysis.
Required Reading:
Cendrowski, Harry, Martin, James P., Petro, Louis W., and Wadecki, Adam A, Private Equity
Second Edition: History, Governance, and Operations; Chapter 9 pages 163 to 166
Background Note:
“A Note on Valuation in Private Equity Settings,” HBS Publication # 9-297-050, Rev. Date: 2011
Case:
“KKR-The Dollar General Buyout,” Pub. Date: Sept. 2013, Thunderbird School Pub. #: TB0345.
Dean Nelson, a prominent KKR consultant, just had a meeting with the board of Dollar General about
KKR's intention of taking Dollar General private. Nelson sensed that Dollar General was very receptive
of the deal, particularly on the terms that he proposed. Nelson was excited about this potentially lucrative
LBO deal, and prepared to present it to KKR's management team. He believed that if he put together an
impressive proposal, he was very likely to get a green light. He needed to come out with convincing

 
 

arguments as to why Dollar General would be a great addition to KKR's portfolio, to identify the key
drivers for value creation, and to make sure Dollar General was a good buy under the proposed terms so
that KKR could reap handsome profits from it.

Session 6 (July 16): DEBT INSTRUMENTS AND CAPITAL STRUCTURE

This session provides students with an opportunity to understand how leveraged buyouts are financed and
the factors that influence the amount of leverage to be utilized. Also covered are debt instruments,
financial covenants and use of a financial model to make decisions about the structure and level of debt.
Required Reading:
Background Article:
“Types of Debt & Debt Terminology,” http://breakingintowallstreet.com
Cases:
“North Village Capital Private Equity,” 2010, Ivey Publishing Case 910N10, Version: (A) 2010-04-29
An analyst for a private equity firm has been asked to design a capital structure for the leveraged buyout
of a security alarm company. Students are provided with an extensive financial model, which facilitates
the analysis. Key issues in the case involve the design of covenants for the debt instruments and
determining which alternative financing arrangement leads to the best rate of return while managing the
level of risk.

Session 7 (July 18): CAPITAL STRUCTURE AND VALUATION

This session covers valuation techniques in a highly leveraged setting, including a discussion of how
private equity firms create value and how deals are structured to realize such value.
Required Reading:
Background Note:
“A Note on Valuing Equity Cash Flows,” 2009, HBS Publication # 9-295-085
Cases:
“Hertz Corporation (A) and (B),” 2007, HBS Cases #9-208-030 & #9-208-031. The leveraged buyout of
Hertz in 2005, in a complex, high-profile deal, is a good example of cutting-edge practice in private
equity. Case (A) adopts the perspective of Clayton, Dubilier & Rice, the leader of a private equity
consortium bidding to buy Hertz from Ford in an auction. Set at the final round of the auction, the
immediate problem for the consortium is how much to raise its previous bid. A reasonable bid must be
based upon how much value the private equity consortium can create through improvements in Hertz's
global operations on the one hand, and a more efficient capital structure on the other. Case (B) focuses on
a particular part of the capital structure – rental car asset backed securities – and the unexpected
difficulties it presented after the auction but before the close of the deal.

Session 8 (July 23): MULTIPLE EXIT STRATEGIES

This session introduce students to exiting an investment • To raise the questions of when to exit an
investment and why • To introduce a variety of exit options and to discuss the pros and cons of each • To
introduce the concept of multiple stakeholders in a company who do not necessarily share the same
attitude towards the exit, but whose concerns need to be satisfied or at least addressed • To provide the
opportunity to analyze market conditions as they relate to exit alternatives • To consider valuation in
different scenarios • To consider the impact of terms negotiated at the time of making an investment.
Required Reading:
Text book:
Cendrowski, Harry, Martin, James P., Petro, Louis W., and Wadecki, Adam A, Private Equity
Second Edition: History, Governance, and Operations; Chapter 4 and Chapter 6

 
 

Background Note / Article:

“Private Equity Exits,” HBS Publication # 9-213-112, Rev. Date: 2014
“Note on the Initial Public Offering Process,” HBS Publication # 9-200-018, Rev. Date: 2007,
“The Role of Private Equity in Merger and Acquisition Transactions,” Rev. 2012, HBS Pub. # 9-206-101
Case:
“Square, Inc.: Financing a Unicorn,” Pub. Date: Oct. 2017, Publication # W17626
In 2009 Khosla Venture firm led a $10 million investment round, valuing shares at 22 cents each. The $10
million investment gave the company a $40 million valuation, before it had even launched its square-
shaped mobile credit card swipers to the public. By 2014, the company had raised $371 million over five
rounds of venture capital financing. This case illustrates the equity fundraising process and the initial
public offering process. This case gives students an opportunity to construct a capitalization table after a
round of financing.

Session 9 (July 25): MID-TERM EXAM

The mid-term will be an in-class exam, to be completed on an individual basis, giving students the
opportunity to demonstrate their understanding of the fundamental concepts, analytical techniques and
key issues of private equity investments. The exam will be based on the assigned textbook chapters, cases
studies and lecture notes.

Session 10 (July 30): DUE DILIGENCE

This session covers the intellectual framework necessary to perform due diligence in private equity
settings. All potential issues must be uncovered because they affect the price investors will pay for the
company. This session discusses the challenges to due diligence in the private equity environment and
provides the framework and guidance to conduct private equity investment due diligence.
Background Note / Article:
“When to Walk Away from a Deal,” 2004, HBS Review publication R0404F
This article covers real-world examples of companies that have had varying levels of success with their
due diligence processes, including Safeway, Odeon, American Seafoods, and Kellogg's. Effective due
diligence requires answering four basic questions: What are we really buying? What is the target's stand-
alone value? Where are the synergies--and the skeletons? And what's our walk-away price? Each of these
questions will prompt an even deeper level of querying that puts the broader, strategic rationale for
acquisitions under a microscope.
Case:
“AIT Group Plc.” 2003, HBS Case # 9-803-104. A U.S. venture capital firm has just learned that the deal
structure for purchasing an illiquid U.K. software firm is unacceptable to institutional investors. The
group must decide if it still wants to go through with the deal. This decision hinges on whether the
investors are confident that their due diligence has uncovered all the issues that affect the price investors
will pay for the company.

Session 11 (August 1): PRIVATE EQUITY IN EMERGING MARKETS

This session provides a basis for discussing how private equity investments in developing markets differ
from those in developed markets. Covered are country-specific factors to consider in the investment
decision, which terms are of crucial importance, the availability of exits and adjustments to analytical
techniques when valuing companies in emerging markets.
Background Notes:
“A Note on Private Equity in Developing Countries,” Rev. 2015, HBS Publication # 9-811-102
“Private Equity Valuation in Emerging Markets,” 2012 HBS Publication # 2-913-043

 
 

Case:
“Capital Alliance Private Equity: Creating a Private Equity Leader in Nigeria,” 1999, HBS Case #
800104. This case describes the creation of the first private equity fund in Nigeria and the fund's potential
first investment in GS Telecom, a Nigerian telecommunication service company. The fund's managers are
keenly aware that a bad first investment could create a vicious circle for the fund. Thus, whether to invest
and under what terms is of crucial importance.

Session 12 (August 6): NEGOTIATION SESSION

In a team environment and students will participate in a mock negotiation session. Roles will be assigned,
and a format shall be distributed in advance describing the framework of negotiations.
Learning objective:
The negotiation session presents several private equity business and ethical dilemmas for students to
debate.
Case:
“Beroni Group: Managing GP- LP Relationships” Pub. Rev. Date: Mar 2015, Publication INS078
The case describes the issues arising in Private Equity Partnerships once multiple funds have been raised
and are being managed by the same set of partners

Session 13 (August 8): FINAL EXAM PROJECT

The final exam comprises a case study project for which the deliverable is written responses to a series of
questions covering information from the assigned case study, relevant text book chapter readings, the
session lecture notes and other cases covered in the course sessions.