What is Private Equity: Two Examples of Leverage

This video is Part 2 of an introduction to private equity. In this video we will explore how leverage can both create and destroy value.
What is Private Equity?
Part 1: • Private Equity Defined...
Part 2: • What is Private Equity... (this video)
Part 3: • Private Equity Debt Ra...
Part 4: • Fundless Sponsor vs Pr...
00:16 Acquisition of Gibson Greeting Cards
00:27 Excel Visual
01:42 How Leverage Can Destroy Value
02:09 Raising Debt at the Fund Level
02:40 WSJ Article Quote: Largest Fund Loss to Date
Private Equity Training:
www.asimplemodel.com/PrivateE...
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[@write2yibo]

PE valuation is so not transparent. Would love to see studies on leverage ratio vs volatilities by sectors/regions etc thank you enjoy your channel :)

[@jd5787]

Debt makes the world go round 😉
I was thinking about debt in the context of a deal the other day. How would you treat seller notes? Would they be taken into consideration when calculating the credit metrics? Do you have a business valuation model that accounts for that and/or a model contract of a seller note on hand? Thanks

[@ASimpleModel]

Great question. I would definitely include it. While most (in reality all) creditors will require it be subordinate, the definitions in the credit agreement(s) are likely to include all debt service. The definition of Cash Interest Expense would reference Debt, which would include "all obligations of such Person for borrowed money" (or something similar). And Cash Interest Expense would also be referenced in the Fixed Charge Coverage Ratio, for example. So even if the remedies available to the Seller Note holder are toothless, you could still trip a financial covenant with another creditor. (Not to mention a Total Debt Ratio, which would also reference "Debt.") Hope that helps!

[@jd5787]

@@ASimpleModel thanks. It makes sense to add it as seller expects to be paid comes hell or high water I suppose. Good point on the interplay between the credit agreements. Would you have some of these seller notes contracts on hand you can in ASM by any chance?

[@ASimpleModel]

@@jd5787 I have officially started a list of "new content ideas" based on your questions. That's a great concept. I don't have anything at the moment, but will look at what it would take to produce.

[@garyarthurs]

What was the name of the company in the second example? I could not make it out.

[@mateuszobara7539]

it was EnerVest

[@CJohnson19121]

Good stuff

[@ASimpleModel]

Thanks!