Private Equity & Venture Capital Primer August 2022
Part 1: Private Equity
Using the PE Primer
▪ Use with IB Primer: The IB primer circulated by Beta contains the basics of valuation and financial concepts. Reading
the PE primer along with the IB primer would help in getting a holistic view. Usually, PE preparation encompasses most
preparation done for IB interviews. Additional elements are included in this primer.
▪ Other Sources: This primer is a start-point for your Private Equity preparation and is intended to point you towards the
right sources of preparation. Hence, use other sources extensively throughout your preparation.
De-construct top line
Revenue
Geography Channel Product Customer Segment
• This is used by • Buying behaviour
• This analysis is valid for • A similar product can be
companies with a wide changes with customer
companies with sold through different
& differentiated product segment. This
presence across channels and result in
assortment breakdown is typically
multiple markets different cost structures
• FMCG companies done at a product level,
• For instance, Godrej and margin profiles
usually break down or at a company level
Consumer reports • For instance, general
revenues by different for a company with a
revenue by Indonesia, insurers sell insurance
Products (HUL reports single product.
India and Africa through bancassurance,
personal care, home • Hotel companies
businesses for different agency, direct and via
care, refreshments, typically have different
products tie-ups
food etc.) customer segments
Referring to the breakup given in the company’s investor presentation could be a good indicator of the relevant criteria for the
company & the industry
Estimating volume growth for the company
Illustrative
Pick up an
• Cement/Ultra Tech
industry/company Illustrative
Look through the Revenue
annual report and • 4 main markets – North, South, West & Central
• The key customer segments in each market is
analyst reports to
housing (rural & urban), infrastructure,
identify key Product 1 Product 2 Product 3
commercial and others
products/segments
• The drivers for housing growth are EWS
housing schemes, availability of CLSS,
Understand government schemes such as IAY and PMAY Market 1 Market 2 Market 3
underlying growth (Estimate Cement MT/sq. ft construction)
drivers for each • The driver for infrastructure is Govt schemes
elements like freight corridors, Bharatmala project, metro
Segment Segment Segment
construction etc. (Estimate Cement MT/km of
1 2 3
road construction)
• Triangulate bottom up growth with growth in
Triangulate growth
macro variables (GSDP growth per region) to Understand growth drivers
with macro variables
close revenue projection
A useful check is to verify the growth projection with the historical growth rates of the company to see whether they are reasonable. In
case the short-term growth projection please adjust for the COVID related slowdown in the recent past.
Estimating price growth for the company
A list of illustrative (non-exhaustive) factors to be considered for estimating a change in prices are:
▪ Market share/ market positioning: Different peers may occupy different positions in the market and pricing growth will
depend on yield growth in segment rather than the overall market
▪ Product functionalities vs competitors: Product functionalities may vary across peers and the yield improvement
may depend on growth in customer segment rather than the overall market
▪ Capacity utilization: Higher utilization peers may command more pricing power than lower utilization players
▪ Inflation expectation: Inflation expectations can influence pricing indirectly by pushing costs up/down
▪ Margin based pricing: For non-differentiated products and services, the product may be priced on a cost + margin
basis. For those categories, cost drivers will explain margins
▪ Other factors: competitive dynamics, IP protection on innovation, demand sensitivity in market, number of
intermediaries in marketing chain
Try comparing your growth projections with analyst estimates available on Bloomberg/ Capital IQ/ other databases. They could help
in substantiating the growth projections assumed for the company
Key points to remember about revenue growth
▪ Be very granular while understanding growth
▪ Understand key drivers of growth; remember to keep those handy for interactions/buddy calls
▪ Focus on understanding historical/current state before projecting
▪ Avoid making unsubstantiated assertions: back your opinion with (multiple) data points. Try to triangulate the
numbers to show better understanding of your estimates
▪ Try comparing your growth projections with analyst estimates available on Bloomberg/ Capital IQ/ other
databases. They could help in substantiating the growth projections assumed for the company
Getting to the Bottomline
Costs
Sales and
Raw Material Labour Fuel/ Power Industry specific
Distribution costs
• Primarily for • In each industry
• Is a big factor for • In a manufacturing • Cost of delivering
manufacturing there are industry
services industry, set up, fuel costs the goods/services
companies, raw specific costs that
for example – IT for running the to the customers
material costs need to be
services production • In manufacturing,
make a difference benchmarked
• Good to process can make logistics cost make
• Can vary in case • For example – in
benchmark the a difference a difference
of industrials if the banking, we need
labour/unit of • Depends on fuel • In services, sales
raw materials is a to track interest
output across prices, electricity and marketing
natural resource, cost on deposits,
industry if it is a tariffs, fuel expenses can be
and the company claim ratios in
big portion of efficiency, etc. high
has mining rights insurance, etc.
the costs
Express the costs in % terms while explaining to the interviewer so that it is easier to comprehend for the interviewer
Estimating changes in margins for a company
Illustrative
Pick up an
• Cement/Ultra Tech
industry/company Illustrative
Look through the Revenue
annual report and • 3 main cost heads – raw material, fuel, logistics
• Identify the cost heads that cover 70-80% of the
analyst reports to
costs, and see how they vary across companies Raw
identify key costs Fuel Labour
in the industry Material
heads in the P&L
• Drivers of raw material cost can be – presence
of limestone mine within the plant, source of fly
Fuel Per unit
ash and slag, source of gypsum, etc. Fuel mix
efficiency cost
Understand • The drivers for logistics and fuel costs are
underlying drivers primarily the crude prices, and the efficiency of
for each cost head company’s processes. These can be reduced by
initiatives like Waste Heat Recovery, better Quality of
Technology Processes
network planning, etc. fixed asset
Identify sources of • By benchmarking, identify cost heads where the
cost reduction company is performing worse compared to its
(margin competitors – analyse the reasons for the
improvement) for the difference, and see if the company can close the
company gap
Split each cost head into the maximum level of detail available and compare it with industry figures to identify key differences in cost
structure between various companies. This could point to a sustainable competitive advantage for the company
Key points to remember about cost structure
▪ Be very granular while understanding cost structure
▪ Understand key drivers of each cost head; remember to keep those handy for interactions/buddy calls
▪ Try to benchmark each cost head with the competitor companies, and see what is the source of difference, and
whether the company can close the gap
▪ Look at per unit margins both in terms of percentage and rupees (difference can arise due to differences in prices
across companies)
Estimating the Unit Economics of a Company
A good way of summarising the business model of the company is to estimate unit economics of a company wherein one
establishes profitability at the unit level. The unit could differ based on the industry. For illustrative purposes, unit
economics for cement industry is given below:
Unit Economics (per Bag of Cement)
350 Key Pointers
300
▪ In addition to estimating the profitability per unit, do
33 estimate the unit Return on Capital employed
250
based on estimates of capital investment required
for setting up capacity of 1 tonne/ bag of cement
35
200 65 ▪ Triangulate it with other metrics like NPV, IRR and
50 payback period at a unit level, which would help in
150 331
furthering your business understanding
233 56
100 ▪ Analyzing differences in unit economics between
52 competitors could help in quantifying the
50 competitive advantage enjoyed by the company in
40 relation to its competitors
0
MRP Dealer's GST Net Raw Power & Freight Gen. & EBITDA
Margin Realisation Material Fuel Admin Exp
Source: CRISIL Analyst Presentation – Nov 2019
Other important factors to consider
▪ Working capital – understand the working capital cycle of the industry (in terms of receivables, inventory and payable
days) – see how the company can improve the cycle. Understand how much investment in working capital is required
each year
▪ Fixed assets – understand the committed and likely investment in fixed assets by the firm, and also the nature of the
expenditure – whether it is replacement capex or capex for expansion
▪ Leverage – understand the extent of leverage by the firm in terms of – Debt to Equity, Debt to EBITDA, Interest
Coverage and DSCR – this can show if there are chances that company can come into immediate distress, and if the
company has the capacity to expand by leveraging more
▪ Dupont Analysis – This tool is a way to break down the Return on Equity and helps in identifying the return drivers of
the company
Fig: Dupont Analysis
Return on Equity
(Net Profit/ Equity)
Return on Assets
Assets/ Equity
(Net Profit/ Assets)
Net Profit Ratio Asset Turnover Ratio
(Net Profit/ Sales) (Sales/ Assets)
Preparation Checklist (1/4)
Overall, the candidate needs to demonstrate a strong grasp on both the operational and financial side of business,
especially how the two relate to each other (eg. How would an asset-light strategy show up on a P&L). Elements of both
PE and IB preparation are recommended. Other specifics are detailed below:
Technical/Industry Knowledge
▪ Detailed understanding of all drivers for an industry and company. Granular understanding of what moves revenues,
costs and multiples for the chosen industry and how firms are positioned within the industry
▪ Strong grasp on FRA, FM and Corporate Finance (be on top of Damodaran videos at the very least)
▪ A structured response to “How to Evaluate an investment opportunity”
▪ What-if scenarios – similar to a consulting case (in shorter form)
About the Industry
▪ Different stages and rounds
▪ Difference between Angel funding, VC Funding and PE funding
▪ Difference between PE, VC, Asset Reconstruction Companies, etc.
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Preparation Checklist (2/4)
Stock Pitch
▪ Candidate is expected to present structured long-term view of the company as opposed to mere trading tips published
in newspapers
▪ Expect detailed pushbacks on company fundamentals like product mix, poor margins or return ratios, etc.
▪ Strong industry understanding of the stock you’re pitching
General Awareness
▪ Major PE funds in India and their investing philosophy. Their recent deals (form a view)
▪ Latest Deals and Funding rounds (optional but preferable)
Company-specific Questions
▪ Portfolio of the company and recent deals
▪ One portfolio company you would invest in, one portfolio company you would not invest in
▪ View on the PE’s sector (in case of a sector-specific PE)
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Preparation Checklist (3/4)
HRQs
Few Practice Questions
▪ Why PE?
▪ Do you invest. (If not) How can we trust you to manage investors’ money if you are not confident investing your own
money?
▪ Strong probing questions on company/industry where you have worked in the past. Be on top of financials of key
players in the industry
▪ What are your key weaknesses/strengths?
* Ability to do quick mental math is appreciated in PE interviews.
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Preparation Checklist (4/4)
Sources
▪ Bloomberg (Analyst Reports)
▪ CRISIL (Industry Reports)
▪ The Ken
▪ Inc42
▪ Venture-Intelligence (Deal Database)
▪ Mint – Especially the deal page
▪ Earnings call transcript of last few quarters
▪ Discussion with Analysts if possible
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Venture Capital
VC Primer
The VC Process1
1. Deal Origination: There may be various sources of origination of deals like referrals or active search through
networks, incubators, conferences, seminars, etc.
2. Screening: VCs undertake preliminary scrutiny of all projects on the basis of certain broad criteria, such as technology or
product, market scope, size of investment, geographical location and stage of financing.
3. Evaluation: After a proposal has passed the preliminary screening, a detailed evaluation of the proposal takes place. A
detailed study of project profile, track record of the entrepreneur, market potential, technological feasibility, future turnover,
profitability, etc. is undertaken.
4. Deal Negotiation: Once the venture is found viable, the venture capitalist negotiates the terms of the deal with the
entrepreneur. Terms of the deal include amount, form, price and seats on the board.
5. Post-Investment Activity: VCs track the performance of their portfolio companies and assist the founders by
leveraging their network.
6. Exit Plan: The last stage of venture capital financing is the exit to realise the investment so as to make a
profit/minimize loss. Exit can be through selling its stake to another VC/PE, acquisition by a corporate, or an IPO.
1. [Link]
How to analyse (due diligence) a start-up?
VCs look at companies which are in the earlier stages (start-ups) of their business cycle. Therefore, VCs would be betting
more on emerging technologies and new business models. Since most of these businesses would not have any reliable
financial history, the conventional evaluation techniques are futile. The following are the key aspects that should be
assessed:
1. Huge market potential
2. Differentiating technology/product
3. Founding team pedigree
These criteria are quite logical. If the market is too small, it doesn’t matter how great the product or service is, it just won’t
have a big impact. If the technology is too similar to other competitors, then the odds of breaking away from the pack are
low. Finally, without incredible people, neither of the other two criteria matter.
Framework for Evaluation of Start-ups
Market Potential Product Team
• Market size • Product market fit • Experience/skills
• Market forces and trends • Differentiation • Founder dynamics
• Market readiness • Customer feedback • Passion
• Regulations • Legal defensibility • Vision for the business
• Evolution
Competitive landscape &
Economics & scalability Funding and Exit potential
defensibility
• Alternatives • Unit economics • Investment required
• Degree of competition • Operating margins (current & • Strategic vs financial
• Scale and funding of competitors steady state) • Potential exit value
• Competitive and sustainable • Traction and adoption potential • Time frame
advantages • GTM strategy and business model
• Capital efficiency
20
Preparation Checklist
1. Know your VC: Understand the investment philosophy, current portfolio and latest investments. Try to understand
what stage the VC prefers investing in and the average ticket size of funding.
2. Basic HRQs: An illustrative list:
i. Why do you want a job in Venture Capital?
ii. Why do you want to work for our firm?
iii. What is happening in the industry currently? Which are the themes that you are bullish on? (Refer Additional
Reference Material point number 1 to track latest trends/developments)
3. Start-up pitch/evaluation: Analyze at least one start-up based on the following criteria:
i. Founding team
ii. Market potential
iii. Growth drivers
iv. Product/Technology differentiation
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Additional Reference Material
1. Latest developments: Andreessen Horowitz blogs & podcasts, TechCrunch, Inc42, YourStory, The Ken, etc.
2. VC and start-up databases: Crunchbase, Tracxn, PitchBook, CB Insights, etc.
3. Valuing a start-up: [Link]
4. Unit Economics: [Link]
All the Best!