Half- Course: Active Investing - Management and Governance

Course Number 1595

Adjunct Professor Nabil N. El-Hage
Early Fall, 15 Session half-course
1.5 credits
Exam
Excludes enrollment in Private Equity Finance 1440

Career Focus

This course is suitable for anyone interested in active and activist investing, evaluating public or private investment opportunities, raising capital for such transactions, or seeking an intermediary role for such transactions. The future CEO of any business will also learn from the techniques used by active investors, be they Private Equity, hedge fund, or other active investors. We dig into the "nuts and bolts" of deal due diligence, deal structuring, fund raising, governance, adding value to portfolio companies, and exploring opportunities for realizing excess returns. We will also explore how the private equity business is likely to be transformed as a result of the current capital markets crisis.

Educational Objectives

This course introduces students to the analytical tools, techniques, and best practices used to evaluate, structure, and manage PE transactions. We look at this world through two lenses, a financial lens, and a general management lens.

Course Content and Organization

The course spans four modules.

Module 1. Deal Process, structuring, due diligence: Deal analysis, evaluation, due diligence, and structuring will be covered first. We will analyze prospective deals using a General Management perspective, and will also apply financial valuation techniques. We will study models of outstanding due diligence, as well as failed due diligence.

Module 2. Value creation through active management: The days of excess returns led solely by deal structuring and financial engineering are likely behind us. Here, we study how PE firms actively engage with their portfolio companies to create value. The Berkshire Partners' Holmes deal is a case in point, as is TH Lee's and Bain Capital's acquisition of Warner Music Group at a time when the music industry appeared to be in deep distress.

Module 3. Governance Issues in PE Transactions: The private equity business in particular prides itself on aligning the interests of owners and managers. Nevertheless, the business is fraught with conflicts of interests that must be managed. In this course, we study the myriad conflicts in the PE business. It should be noted that, while Module 3 is particularly dedicated to governance issues, hardly a day goes by in the course without the class identifying an important governance issue, and developing ways to manage it.

Module 4. Exit Strategies for the PE firm and its Founders: In the final module of the course, we explore the many mechanisms for realizing liquidity. From outright sales of portfolio companies, to leveraged recapitalizations, to "recycled" deals, we compare and contrast the mechanism and value implications of those avenues for liquidity. In a business where compensation is largely tied to liquidity, we also explore how incentives get aligned or misaligned as a result of this focus on realizing liquidity.

We also explore the question of liquidity as it relates to the founders and partners of the successful PE firm. Having created and nurtured highly successful organizations, how does the PE firm's founder exit their own investment in their firm? Our final case affords us an opportunity to take a forward-looking view of the PE industry's organizational structure.