Private Equity 523 Spring 2013 Professor: Office: Gordon Phillips HOH 514

Office Phone: (213) 740-0598 (email contact however is best). E-mail: gordon.phillips@marshall.usc.edu

Lecture Class Tuesday or Thursday Office Hours Tuesdays Thursdays

7:00 10:00

Room:

4:00 5:00 1:00 2:00

Introduction and Course Objective FBE 523 uses a combination of lectures and the case method to introduce you to private equity. Private equity is a broad designation that includes venture capital, angel investing and also leveraged buyouts of existing private and public companies. This course is time-consuming and challenging. Do not take this course if you are not ready to work hard, learn and participate in class. The class periods will be a mixture of lectures and case discussion. Assigned readings must be completed prior to class. The major emphasis is how financiers (venture capitalists, investment banks and private equity partnerships) help growing firms using different types of securities at different points in the industry's and firm's life. We will study venture capitalists on the finance side, young start-ups and more mature firms that go private on the firm side. We will also study preferred stock, private financing arrangements, Initial Public Offerings (IPOs) as this is how entrepreneurs cash out, private equity funds and raising private equity during the recent financial crisis.

Learning Objectives Global Objectives: The objectives of this course are two-fold: 1. Provide an understanding of the institutions and economics of private equity. 2. To understand how to raise money for a businesses at different stages of their life. Detailed Objectives o Understanding fundamental private equity terms, concepts, principals, and theories. o Understand the securities used in private equity. o Developing critical thinking and communication skills related to private equity. o Evaluate a new company from a financial perspective. o Understand a financing term sheet.

Required Materials 1) Course packet consisting of the following articles.

1. Note on the Financial Perspective: What Should Entrepreneurs Know? Harvard Business School Note #9-285-087. 2. Method for Valuing High-Risk, Long-Term Investments Harvard Business School Note #9-288-006. 3. New Venture Financing #9-802-131 4. Deal Structure and Deal Terms 9-806-085 (includes venture capital term sheet) 5. How Venture Capitalists Evaluate Potential Venture Opportunities 9-085-019 4 interviews with venture capitalists. 6. Note on the Valuation of VC deals. (Stanford Case E-95) 7. Jensen, M., Eclipse of the Public Corporation, Harvard Business Review, Sept-Oct 1989..
2) HBS cases - of which you will be responsible for analyzing five (you will have 3 "passes") available in the course reader at the bookstore or from HBS at
http://www.hbs.edu/research/cases.html

3) Other articles I will post on blackboard including: 1) Fenn, Liang, and Prowse (1998), The Economics of the Private Equity Market (FLP).

2) Kaplan, Steven N. and Per Stromberg, 2003, Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts, Review of Economic Studies (Blackboard). 3) Ibbotson, I., J. Sindelar, J. Ritter, Initial Public Offerings, Journal of Applied Corporate Finance, VOLUME 1 NUMBER 2 SUMMER 1988, pp. 38-45, (Blackboard). 4) Klein, Zenner, Shivdasani, The Private Equity Revolution: Are You Ready?, Citicorp corporate and investment banking group, (Blackboard). 5) Kohlbert, Kravis, Roberts, Leveraged Buyouts, Journal of Applied Corporate Finance, VOLUME 2 NUMBER 1 SPRING 1989, pp. 64-72, (Blackboard). 6) Inselberg, I. and H. Kaufold, How to Value Recapitalizations and Leveraged Buyouts, Journal of Applied Corporate Finance, VOLUME 2 NUMBER 2 SUMMER 1989, pp. 87-96, (Blackboard).
4) Subscription to the Wall Street Journal online. 5) Some chapters from: Metrick and Yasuda (MY), Venture Capital and the Finance of Innovation, Wiley 2010 (VCFI), available at the bookstore but sometimes cheaper on Amazon.

Prerequisites: Corporate Finance Course Notes: Copies of lecture slides and other class information will be available through your Blackboard account. Grading Summary: Case writeups (4): 30% (7.5% each) Case presentation (1): 20% (different case than the ones written up). 2

Midterm exam: Final exam: Participation:

20% 20% 10%

I evaluate participation by the quality of your course comments on our case discussions and will keep track of participation. You are required to bring your name card to class. Attendance is not part of the course grade but missing more than 4 classes will result in a loss of 5% of the participation grade and of course missing classes may affect your test performance. Final grades represent how you perform in the class relative to other students. Your grade will not be based on a mandated target, but on your performance. Historically, the average grade for this class is about a B. Three items are considered when assigning final grades: 1. Your average weighted score as a percentage of the available points for all assignments (the points you receive divided by the number of points possible). 2. The overall average percentage score within the class. 3. Your ranking among all students in the class.

CLASS PROCEDURES AND ASSIGNMENTS DETAIL

Case Studies:
We will study 8 cases during the semester. While you will read them all, you will not have to analyze fully all of them as you will have 3 byes on the cases. Thus you only do 5 cases (4 with written case memos, including Dynatronics, and 1 with require a group presentation) from the list below. They will deal with venture capital, initial public offerings and private equity used in buyouts. Finally, the last case also has another different dimension. We will be analyzing a recent private equity deal from the recent financial crisis using online data. . The objective in using case studies is to provide examples of companies or individuals that have faced the topic at hand and to apply theoretical tools to real problems. I will distribute questions and ideas that you may use as guidelines for analyzing the case. In addition, for each case, I will assign study questions concerning the case. For most of the class period, we will consider these questions and the material in the case. You are allowed and encouraged, but not required, to meet in your groups outside of class to discuss and analyze the cases. I expect that these groups will complement class discussion well. In addition, you may discuss and analyze the cases with anyone you choose. Each student will submit a two-page memorandum of analysis and recommendations at the beginning of each case discussion. If you are working in a group, I will accept one memorandum from the group and count it for all students in the group. If you choose to do this, the group cannot exceed 4 students. Each memorandum should be typed and double-spaced. Do NOT write up the memo as answers to the study questions. Write these as if you were writing a executive memo with your recommendation to the major decision-maker in the case. The two-page limit is for text only. You may attach up to 4 pages of additional excel exhibits or graphs. Memoranda will not be accepted after the class has met. Emailed or faxed memoranda will not be accepted. Memorandum will be given a grade of 8,9 or 10 with a median grade of 9. In your memoranda, you should argue as if you are in a funding meeting rather than in a class. The process of arriving at the answer is as important as getting the answer. Students sometimes ask that instructors case analyses be handed out after the class has discussed the case. I will not do this, because there are usually no absolute right answers. The best cases are deliberately written to be ambiguous. While there are no right answers, there are good arguments and bad arguments. Among other things, this course is designed to help you learn to distinguish between sensible and senseless arguments. Handing out my analyses would reduce the ambiguity in the cases and partially defeat the purpose of doing cases. Handouts also tend to circulate which is a problem when I teach the case in another semester. If you are uncomfortable with ambiguity, do not take this class. Finally, if your name is on the report as part of the group, it means you participated in the analysis. You are on the honor code to observe this requirement. If for some reason you are not able to participate in the case write-up with the group, you can turn in a write-up on that case or a different case on your own. The content of the case memorandum is as follows: 4

1. Write up your analysis as an executive memo to the major decision maker in the case. Use an executive memo format with an introductory paragraph containing your executive summary and recommendation. Do not answer the questions with a 1. 2. 3. Format. The questions are merely designed to get you start thinking. 2. The case questions are designed to help you streamline the issues to be addressed. If you believe that these questions do not effectively address the problems in the case, feel free to go outside the parameters of the questions. 3. It is not necessary to rehash the case situation in your write-up. Do not, however, assume that I know every single number and detail. Use your best judgment on how much of the case to include in your write-up. 4. Most importantly, you must take a position regarding the problem in the case and make specific recommendations on how to solve it. Support your recommendation as succinctly and as effectively as you can. 5. The case write-up to be a double-spaced two-page (maximum) report with up to an additional 4 pages of exhibits for a maximum total of 6 pages. The case write-up should be double spaced, in 12 point type with 1 inch margins. *** I do not expect that you kill the case but rather that you show a thoughtful, well reasoned approach. I am looking for well structured arguments some mistakes are fine and will of course occur. ***

Case Presentation: Each team will be assigned to present one case. For each case, one to two teams will present their case presentation with their analysis to the class. Note case teams will have a maximum of 5 members. The presentation should consist of 20 powerpoint slides MAXIMUM with 30 minutes maximum presentation time. These guidelines are strictly enforced. Your grade will be based on both presentation skills (25%) and also content (75%). Each team member is required to speak and be responsible for covering a minimum of 4 slides. Please come early to class the day of your presentation so you can load your slides onto the computer. You are also required to bring a printed copy of your slides for me. Non-presenting teams will be asked to bring several slides of their excel spreadsheets and I will take a volunteer from the team to share their solution and methods. I have found that this aids in focusing the discussion. What is ideal is that the teams bring one slide that states their assumptions used and 1-2 slides of the application of the solution to the case.

CLASS GUIDELINES

Add/Drop Process The class will remain open enrollment (R-clearance) for the first three weeks of the semester. If there is an open seat in an FBE Undergraduate classes, students will be freely able to add a class using Web Registration throughout the first three weeks of the term. If the class is full, students will need to continue checking Web Registration to see if a seat becomes available. There are no wait lists for these courses, and professors cannot add students. There are no centralized wait lists for Marshall undergraduate courses. Although there are no wait lists, the Undergraduate Advising Office provides a system by which students can indicate their interest in enrolling in classes that are currently full in order to track demand and manage classroom space effectively. If you do not attend the first two class sessions or the first class session of the semester for a oncea-week class, I may drop you from the course without any notification. This procedure is so that students from any wait list can be accommodated and to ensure the class forms teams and works constructively together. In addition, if you are absent six or more times prior to the last date to withdraw from the course, I may ask you to withdraw by that date. These policies maintain professionalism and ensure a system that is fair to all students. Retention of Graded Coursework: Final exams and all other graded work which affect the course grade will be retained for 1 year after the end of the course if the graded work has not been returned to the student; i.e., if I returned a graded paper to you, it is your responsibility to file it, not mine.

523 Technology Policy Laptop / tablet use is not permitted during academic or professional sessions unless we are working on a case and then the use is solely for analyzing the case and no internet browsing is permitted. Use of other personal communication devices, such as cell phones, is considered unprofessional and is not permitted during academic or professional sessions. ANY e-devices (cell phones, PDAs, I-Phones, Blackberries, other texting devices, laptops, I-pods) must be completely turned off during class time. Upon request, you must comply and put your device on the table in off mode and FACE DOWN. You might also be asked to deposit your devices in a designated area in the classroom. Videotaping faculty lectures is not permitted, due to copyright infringement regulations. Audiotaping is permitted in 423. Use of any recorded material is reserved exclusively for USC Marshall students.

Statement for Students with Disabilities Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to me (or to TA) as early in the semester as possible. DSP is located in STU 301 and is open 8:30 a.m.5:00 p.m., Monday through Friday. The phone number for DSP is (213) 740-0776.

Statement on Academic Integrity USC seeks to maintain an optimal learning environment. General principles of academic honesty include the concept of respect for the intellectual property of others, the expectation that individual work will be submitted unless otherwise allowed by an instructor, and the obligations both to protect ones own academic work from misuse by others as well as to avoid using anothers work as ones own. All students are expected to understand and abide by these principles. SCampus, the Student Guidebook, contains the Student Conduct Code in Section 11.00, while the recommended sanctions are located in Appendix A. http://www.usc.edu/dept/publications/SCAMPUS/gov/ Students will be referred to the Office of Student Judicial Affairs and Community Standards for further review, should there be any suspicion of academic dishonesty. The Review process can be found at: http://www.usc.edu/student-affairs/SJACS/ Failure to adhere to the academic conduct standards set forth by these guidelines and our programs will not be tolerated by the USC Marshall community and can lead to dismissal.

Emergency Preparedness/Course Continuity In case of emergency, and travel to campus is difficult, USC executive leadership will announce an electronic way for instructors to teach students in their residence halls or homes using a combination of Blackboard, teleconferencing, and other technologies. Instructors should be prepared to assign students a "Plan B" project that can be completed at a distance. For additional information about maintaining your classes in an emergency please access: http://cst.usc.edu/services/emergencyprep.html Please activate your course in Blackboard with access to the course syllabus. Whether or not you use Blackboard regularly, these preparations will be crucial in an emergency. USC's Blackboard learning management system and support information is available at blackboard.usc.edu.

Incomplete Grades Explanation: In incomplete (IN) grade may be assigned due to an emergency that occurs after the 12th week of classes. An emergency is defined as a serious documented illness, or an unforeseen situation that is beyond the students control, that prevents a student from completing the semester. Prior to the 12th week, the student still has the option of dropping the class. Arrangements for completing an IN course should be initiated by the student, and negotiated with the instructor. Class work to complete the course should be completed within one calendar year from the date the IN was assigned. The IN mark will be converted to an F grade should the course not be completed.

Assignment Submission Policy Assignments must be turned in on the due date/time electronically via Blackboard. Any assignment turned in late, even if by only a few minutes, will receive a grade deduction (for example, if your work is a B+ grade, you will be given a C+ grade). If your internet breaks down on the due date, you must deliver a hard copy at the beginning of class on that day. If you are unable to attend class on that day, make arrangements for it to be delivered to the classroom or to my box by the start of class. Late or not, however, you must complete all required assignments to pass this course.

Evaluation of Your Work 7

You may regard each of your submissions as an exam in which you apply what youve learned according to the assignment. I will do my best to make my expectations for the various assignments clear and to evaluate them as fairly and objectively as I can. If, however, you feel that an error has occurred in the grading of any assignment, you may, within one week of the date the assignment is returned to you, write me a memo in which you request that I re-evaluate the assignment. Attach the original assignment to the memo, and explain fully and carefully why you think the assignment should be re-graded. Be aware that the re-evaluation process can result in three types of grade adjustments: positive, none, or negative.

All grades assigned by faculty members are final. Students have the right to seek explanation, guidance, counsel and reasons for the assignment of a grade. Students may appeal a grade according to university policy as set forth in SCampus. Faculty may initiate a change in grade if there is an error in the calculation of a grade. However, a faculty member may not change a disputed grade outside the formal appeals process. In response to a disputed academic evaluation by an instructor, a student is entitled to two levels of appeal after review by the instructor: first to the chairperson of the department and then to the appropriate dean of the school. The full university policy can be found on page 125 of SCampus and at: http://www.usc.edu/dept/publications/SCAMPUS/gov/disputed_academic_evaluation_procedures. html

COURSE READINGS/CLASS SESSIONS Daily Activities Week 1 Dates Week 2 Dates Week 3 Dates Week 4 Dates Week 5 Dates Week 6 Dates Week 7 Dates Week 8 Dates Week 9 Dates Week 10 Dates Week 11 Dates Week 12 Dates Week 13 Dates Week 14 Dates Week 15 Dates FINAL Date Introduction / Class Overview Lecture on security issuance / Case 1 Lecture on security issuance Dynatronics case: Part 2 / Lecture on VC Lectures on Venture Capital (VC) Lectures on VC continued Venture capital case 1 Case 2 / Industry Speaker Midterm Lecture on scenario analysis and simulation / Review Crystal Ball Case on biotechnology Lecture on Initial Public Offerings Case on IPOs Part 1 / Lecture / Lecture on convertible bonds Part 2 of IPO case. Lecture on private equity and LBOs Private LBO case Industry Speaker Lectures on Convertible bonds and warrants Financial Crisis cases Tu/Th: Turn in case, date depends on which case you are assigned to present. Th: Do Crystal Ball tutorial Tasks, Readings, and Due Dates Th: Readings: MY Chapter 1-2 Tu: Read MY, Chapter 3-4 Th: Turn case 1 Tu: Read MY, Chapter 5-6 Th: Turn in case 2

Tu/Th Read MY, Chapter 7-10

Th: Turn in case Tu: Turn in case

Tu: Turn in case Tu: Turn in case Tu: Turn in case Tu: Turn in case