# Private Equity Course Guide: [Your programme, term and section] > A course guide for the second-year MBA elective in private equity: how buyout and growth funds are organised and > paid, how limited partners measure their returns, how a deal is sourced, priced, financed, diligenced, governed, > improved and sold, and what the research says about where the returns come from. It is for second-year students > taking the elective, first-years planning their electives, and candidates recruiting for private equity. It builds > on the core corporate finance course and on mba/mba-paper-lbo, which it assumes you have mastered, and it links to > the four private equity cards of this library instead of repeating them. It gives the competencies the course > builds, prerequisites, a 13-session roadmap, a key concepts map, an original mini-case (Fund I and the buyout of > Target T) with exhibits, discussion questions and a teaching note, a grading rubric, an exam preparation plan, > common struggles, a reading list and a self-test with an answer key. Source basis: Jensen (1986, 1989), Kaplan > (1989), Kaplan and Schoar (2005), Metrick and Yasuda (2010), Kaplan and Stromberg (2009), Gompers, Kaplan and > Mukharlyamov (2016) and the other primary works listed under Sources, with dated facts on ILPA guidance checked on > the official pages. Session order and grading are typical of leading international programmes; your syllabus > decides. Replace every [bracketed] value and every row marked *Example*. This is a learning aid, not investment, > legal or tax advice. ## Document control | Field | Value | |---|---| | Programme, term and section | [Programme name, term, section] | | Learner | [Your name] | | Faculty and teaching assistants | [Names, office hours] | | Syllabus version used | [Date of syllabus] | | Deal team or study group | [Team name and members] | | Final memo or exam date | YYYY-MM-DD | | Reviewed by | [Team member, teaching assistant or industry mentor] | | Version | [0.1] | | Last updated | YYYY-MM-DD | ## Contents - [What the course is for](#what-the-course-is-for) - [Prerequisites](#prerequisites) - [The course in one page](#the-course-in-one-page) - [Session roadmap](#session-roadmap) - [Key concepts map](#key-concepts-map) - [Mini-case: Fund I and the buyout of Target T](#mini-case-fund-i-and-the-buyout-of-target-t) - [Teaching note](#teaching-note) - [Typical assignments and how they are graded](#typical-assignments-and-how-they-are-graded) - [Exam preparation plan](#exam-preparation-plan) - [Common struggles](#common-struggles) - [Reading list](#reading-list) - [Self-test questions](#self-test-questions) - [My notes and next steps](#my-notes-and-next-steps) - [Sources and further reading](#sources-and-further-reading) - [Answer key](#answer-key) ## What the course is for Private equity sits where three core courses meet: corporate finance (valuation, leverage, the cost of capital), strategy and operations (what makes a business more valuable), and organisational behaviour and governance (how owners, boards and managers are aligned). The elective asks four questions a private equity investor faces on every deal: **what is this business worth to us**, **how should we pay for it**, **what will we do differently as owners**, and **how will our investors judge the result**. A strong student leaves able to screen a deal in ten minutes, build and defend a full model, write an investment memo a committee could vote on, and read a fund's quarterly report as a limited partner would. The competencies the course builds, mapped to the competency list used across this library (see mba/mba-core-curriculum-map). The AACSB Global Standards for Business Education, ratified by AACSB members on 20 April 2026, leave each school to define its own learning goals, so check your programme's list (as of October 2026, see aacsb.edu): | Competency area | What you should be able to do by the end of the course | |---|---| | Analytical and quantitative reasoning | Build a multi-tranche LBO model, solve for the maximum price, compute fund IRR, TVPI, DPI and a public market equivalent | | Ethical decision making | Recognise conflicts between general partners (GPs), limited partners (LPs), lenders, managers and employees; judge fee and expense allocation, continuation fund and dividend recap decisions | | Communication | Write a two-page investment memo with the recommendation, price, return, key risks and the value creation plan on page one | | Leadership and teamwork | Divide diligence work in a deal team, challenge a colleague's assumptions, and present to a simulated investment committee | | Global perspective | Adjust for country risk, currency, local interest deductibility rules and different exit markets | | Technology, data and AI | Audit a model, use data for diligence (cohorts, pricing, customer concentration), and check AI-generated analysis against the source data | ## Prerequisites | Skill | Check yourself | Where to fix it | |---|---|---| | Paper LBO | Solve a five-year paper LBO with fees and a value bridge in 20 minutes | mba/mba-paper-lbo | | IRR, MOIC and NPV conventions | Explain why `=NPV` in Excel discounts the first value, and when IRR has two solutions | mba/mba-npv-irr-card | | Free cash flow from three statements | Derive free cash flow available to repay debt from EBITDA | mba/mba-three-statements-card, mba/mba-cash-flow-statement-card | | Capital structure theory | Explain the Modigliani and Miller propositions, tax shields and distress costs | mba/mba-capital-structure-card | | Valuation by DCF and multiples | Value a company by DCF and reconcile it with trading multiples | mba/mba-dcf-valuation-card, finance/comparable-companies-analysis | | Spreadsheet modelling | Build a debt schedule with a circularity switch, data tables and Goal Seek | mba/pre-mba-excel-modeling-drills | ## The course in one page **The fund.** A private equity fund is usually a limited partnership with a fixed life of about ten years plus extensions. LPs (pension funds, endowments, sovereign funds, insurers, family offices) commit capital; the GP calls it during an investment period of about five years, invests it in companies, and returns it as companies are sold. GPs are paid a management fee and a share of profits, the carried interest, often after LPs receive a preferred return. A long-standing reference point is a 2% fee and 20% carry above an 8% preferred return, but terms vary by fund size, strategy and bargaining power. Metrick and Yasuda (2010) estimate that about two-thirds of the expected revenue of the GPs in their sample came from fixed components such as management fees rather than from carry, and that buyout GPs earn more from scale than venture GPs. The waterfall, the order in which cash goes to LPs and GP, is covered in mba/mba-pe-fund-economics-card. **Measuring returns.** Funds report a net IRR to LPs and three multiples on paid-in capital $C$: $$ DPI = \frac{\sum D}{\sum C} \qquad RVPI = \frac{NAV}{\sum C} \qquad TVPI = DPI + RVPI $$ where $D$ are distributions and $NAV$ is the reported value of unrealised investments. IRR depends on timing and can be raised by early distributions or by subscription lines of credit that delay capital calls; DPI is the only measure that counts cash actually returned. Kaplan and Schoar (2005) popularised the ratio form of the public market equivalent (PME), which compares a fund with an index $M$ by compounding every cash flow to the same date: $$ PME = \frac{\sum_t D_t \frac{M_T}{M_t} + NAV_T}{\sum_t C_t \frac{M_T}{M_t}} $$ A PME above 1 means the fund beat the index with the same timing of cash flows. **What the evidence says.** Kaplan and Schoar (2005) found average fund returns net of fees roughly equal to the S&P 500, with strong persistence: GPs whose earlier funds did well tended to do well again. Phalippou and Gottschalg (2009) argued that average performance was below public equities once fees were deducted and stale valuations of unrealised investments were written down. Using cash-flow data from a large LP data provider, Harris, Jenkinson and Kaplan (2014) found that buyout funds outperformed the S&P 500 net of fees on average in most vintages they studied. The sources and vintages differ, which is itself a lesson: always ask which data, which benchmark and which period. **Why leverage.** Jensen (1986, 1989) argued that debt disciplines managers by committing free cash flow to interest and repayment, and that concentrated ownership with high-powered incentives can outperform the dispersed public corporation. Agency theory (Jensen and Meckling 1976) supplies the logic. Axelson, Stromberg and Weisbach (2009) explain fund structure and deal-by-deal leverage; Axelson, Jenkinson, Stromberg and Weisbach (2013) find that buyout leverage follows credit market conditions and that higher leverage goes with higher prices. Deal mechanics: mba/mba-paper-lbo and mba/mba-lbo-model-card. **Where value is created.** Kaplan (1989) found that 1980s management buyouts improved operating income and cash flow. Kaplan and Stromberg (2009) group sponsor actions into financial, governance and operational engineering. Guo, Hotchkiss and Song (2011) found smaller operating gains in later buyouts, with returns explained by a mix of operating improvement, tax benefits of debt and rising market valuations. Acharya, Gottschalg, Hahn and Kehoe (2013) relate deal-level outperformance to sales and margin improvements and to the operating background of the deal partners. Gompers, Kaplan and Mukharlyamov (2016) report that practitioners evaluate deals mainly on IRR and MOIC and expect most value from growth and operational improvements. Building the plan: mba/mba-pe-value-creation-card. **The LP's view and industry guidance.** The Institutional Limited Partners Association (ILPA) publishes guidance that many LPs use in negotiations and reporting. As of October 2026, ILPA dates its Principles 3.0 to 27 June 2019, organised around alignment of interest, governance and transparency (https://ilpa.org/industry-guidance/principles-best-practices/ilpa-principles/). Its updated Reporting Template, released in January 2025, covers fees, expenses and carried interest and is intended to replace the 2016 template for funds still in their investment period in Q1 2026 or starting operations on or after 1 January 2026; the new Performance Template comes in a granular and a gross-up version and is meant for funds starting operations on or after 1 January 2026 (https://ilpa.org/industry-guidance/templates-standards-model-documents/ilpa-templates-hub/). These are voluntary industry standards, not law; check the current versions before you rely on them, and see finance/lp-quarterly-report for the reporting format. ## Session roadmap | Session | Topic | Card to read | Case or exercise | Deliverable | |---|---|---|---|---| | 1 *(Example)* | The private equity industry: buyout, growth, venture, credit, secondaries | This guide: "The course in one page" | Map the strategies by risk, leverage and holding period | One-page industry map | | 2 *(Example)* | Fund structure, fees, carry and the waterfall | mba/mba-pe-fund-economics-card | Waterfall exercise: European against deal-by-deal | Problem set 1 | | 3 *(Example)* | Measuring fund performance: IRR, TVPI, DPI, PME, subscription lines | mba/mba-pe-fund-economics-card, mba/mba-npv-irr-card | Compute PME from a fund's cash flows | Problem set 2 | | 4 *(Example)* | Sourcing and screening; the paper LBO | mba/mba-paper-lbo | Three screening memos in one evening | Screening memos | | 5 *(Example)* | The full LBO model: tranches, sweep, circularity, credit statistics | mba/mba-lbo-model-card | Rebuild Worked example A from blank | Model file | | 6 *(Example)* | Debt markets: term loans, notes, private credit, covenants, rates | mba/mba-lbo-model-card, mba/mba-capital-structure-card | Lender case for a buyout | Credit memo (finance/credit-memo) | | 7 *(Example)* | Due diligence and quality of earnings | finance/due-diligence-request-list, finance/quality-of-earnings-scope | Diligence plan for an assigned target | Request list | | 8 *(Example)* | Integrative deal case | This guide: mini-case | Fund I and the buyout of Target T | Individual investment memo | | 9 *(Example)* | Value creation: operations, pricing, buy-and-build, digital | mba/mba-pe-value-creation-card | Hundred-day plan for a portfolio company (finance/m-and-a-integration-100-day-plan) | Value creation plan | | 10 *(Example)* | Governance, boards and management incentives | mba/mba-corporate-governance-card, mba/mba-deal-structuring-card | Design a management incentive plan | Term sheet for management equity | | 11 *(Example)* | Growth equity and minority deals | mba/mba-venture-capital-guide, mba/mba-deal-structuring-card | Minority investment with preferred terms | Structuring memo | | 12 *(Example)* | Exits: sale to strategic, secondary buyout, IPO, continuation funds | mba/mba-mergers-acquisitions-guide | Exit options for a mature portfolio company | Exit paper | | 13 *(Example)* | The LP's perspective: manager selection, ILPA guidance, responsible investment | finance/lp-quarterly-report | Simulated investment committee | Team presentation | ## Key concepts map | Concept | One-line meaning | Card | |---|---|---| | Limited partnership, commitments, capital calls | How a fund raises and deploys money | mba/mba-pe-fund-economics-card | | Management fee, carried interest, hurdle, catch-up, waterfall | How the GP is paid and in which order | mba/mba-pe-fund-economics-card | | Net IRR, TVPI, DPI, RVPI, PME | How LPs judge a fund | mba/mba-pe-fund-economics-card, this guide | | Sources and uses, MOIC, IRR, value bridge | The deal-level return | mba/mba-paper-lbo | | Tranches, amortisation, sweep, revolver, PIK, circularity | The financing mechanics | mba/mba-lbo-model-card | | Leverage and interest cover, covenants | The lender's view | mba/mba-lbo-model-card, finance/credit-memo | | Maximum price at a target return | How sponsors set a bid | mba/mba-lbo-model-card, this guide's teaching note | | Quality of earnings, normalised EBITDA | What the starting EBITDA really is | finance/quality-of-earnings-scope | | Operational, governance and financial engineering | The three sources of sponsor value | mba/mba-pe-value-creation-card | | Management incentive plan, rollover, ratchet | Aligning managers with the sponsor | mba/mba-deal-structuring-card | | Buy-and-build, multiple arbitrage | Growth by add-on acquisitions | mba/mba-pe-value-creation-card, mba/mba-mergers-acquisitions-guide | | Exit routes and continuation funds | How and when value is realised | mba/mba-mergers-acquisitions-guide | ## Mini-case: Fund I and the buyout of Target T **Situation.** It is a Monday in early spring, and the deal team of Fund I, a USD 1.5bn mid-market buyout fund in the third year of its investment period, has ten days to submit a second-round bid for Target T. Target T makes replacement filters, seals and service parts for commercial kitchen ventilation systems. About 70% of its revenue comes from parts that customers must replace on a schedule set by fire-safety inspections, which makes revenue steadier than the restaurant industry it serves. The company was founded by the Haddad family thirty years ago; the founder's children, none of whom work in the business, want to sell. A professional chief executive, Marta Kowalczyk, has run the company for six years and wants to stay. The seller's adviser has made clear that first-round bids clustered around 10.0x last-twelve-month EBITDA of USD 36.0m and that a strategic buyer, Rival B, is still in the process. Rival B makes ventilation hoods and could cut overlapping sales and distribution costs; Fund I's partners estimate Rival B's synergies at about USD 6.0m of EBITDA a year once integrated. Priya Raman, the partner leading the deal, has asked the associate, Daniel Osei, for an investment committee paper by Thursday. She wants three answers: what return Fund I earns at 10.0x under its own operating case, the most the fund can pay for its target return, and whether a more aggressive financing package would close the gap. She has also reminded Daniel that the fund's partnership agreement limits any single investment to 15% of commitments without the consent of the LP advisory committee, and that the fund has used co-investment from two LPs on earlier deals. Management has presented a plan (Exhibit 1) with 8% annual revenue growth and margins rising from 15.0% to 18.0% over five years through price increases, a new e-commerce channel for small restaurants and a move of part of production to a lower-cost plant. Daniel's diligence work so far supports steady growth near the historical rate and some margin gain from pricing, but he is less sure about the e-commerce channel and the plant move, both of which Marta has proposed before and the family did not fund. Daniel's sponsor case therefore assumes 5% growth and a margin gain of 0.3 points a year. Two lenders have offered financing (Exhibit 2). The first offers a term loan of 4.0x EBITDA. The second would add a second-lien loan of 1.0x EBITDA, which would reduce the equity cheque but raise interest costs. Fund I's investment committee usually asks for a gross deal IRR of at least 20% and a gross MOIC of at least 2.5x in the sponsor case, measured after the management incentive plan, and for a downside case that does not lose money. Marta has asked for an incentive plan worth 8% of the equity gain for the top fifteen managers. She told Priya that she would not stay under an owner who cut the e-commerce investment. Daniel must now decide what to recommend: the price, the financing, and the conditions under which Fund I should walk away. **Exhibit 1. Target T financials and cases (USD m, fictional).** | *Example* | Year -2 | Year -1 | Last twelve months | |---|---|---|---| | Revenue | 212.0 | 226.0 | 240.0 | | EBITDA | 30.7 | 33.0 | 36.0 | | EBITDA margin | 14.5% | 14.6% | 15.0% | Revenue grew 6.4% a year over the two years (`=(240/212)^(1/2)-1`). | *Example* projection assumption | Management case | Sponsor case | |---|---|---| | Revenue growth a year | 8% | 5% | | EBITDA margin | +0.6 points a year, 18.0% in year 5 | +0.3 points a year, 16.5% in year 5 | | Capital expenditure | 3% of revenue | 3% of revenue | | Depreciation and amortisation | USD 6.0m a year | USD 6.0m a year | | Net working capital | 15% of revenue | 15% of revenue | | Tax rate | 25% | 25% | **Exhibit 2. Financing offers (fictional, all-in fixed rates for simplicity).** | *Example* option | Tranches | Terms | |---|---|---| | Option 1 | Term loan 4.0x EBITDA (USD 144.0m) | 8.0% all-in, 1% a year amortisation, 100% cash sweep | | Option 2 | Option 1 plus second-lien loan 1.0x EBITDA (USD 36.0m) | Second lien 11.0%, repaid at exit | | Both | Financing fees 2.5% of debt; transaction fees 2% of enterprise value; minimum cash USD 5.0m | Exit assumed after five years | **Exhibit 3. Fund I and process facts (fictional).** | *Example* item | Value | |---|---| | Fund I commitments | USD 1,500m | | Single-investment limit without LP advisory committee consent | 15% of commitments | | Investment committee hurdle (sponsor case, after incentive plan) | 20% gross IRR and 2.5x gross MOIC | | Exit multiple assumption | 9.0x, one turn below entry, for prudence | | First-round price guidance | 10.0x LTM EBITDA | | Rival B estimated synergies | USD 6.0m of EBITDA a year | **Exhibit 4. Management incentive proposal (fictional).** 8% of the equity gain above Fund I's entry equity, paid at exit, shared among fifteen managers; Marta's condition is that the e-commerce channel is funded. **Discussion questions.** 1. Build the sources and uses at 10.0x with Option 1. Does the equity cheque fit the fund's single-investment limit? 2. Compute the sponsor-case MOIC and IRR at 10.0x with exit at 9.0x. Compare the management case and an exit at 10.0x. Draw the value bridge. 3. What is the maximum entry multiple for 20% IRR and for 2.5x MOIC in the sponsor case? In the management case? 4. Does Option 2 close the gap? Compare returns, credit statistics and a downside case in which revenue falls 15% in year 2. 5. How should Fund I think about Rival B? Can it, and should it, outbid a strategic buyer? 6. Write the recommendation: price, financing, conditions and the walk-away point. What would you need to believe to pay 10.0x? ## Teaching note **Q1. Sources and uses (USD m).** Uses: enterprise value 360.00 (`=10*36`), transaction fees 7.20 (`=2%*360`), financing fees 3.60 (`=2.5%*144`), minimum cash 5.00, total 375.80. Sources: term loan 144.00, sponsor equity 231.80 (61.7% of sources). The fund limit is 225.00 (`=15%*1500`), so the cheque exceeds it by 6.80: Fund I needs LP advisory committee consent or co-investment. Note the low leverage: at 10.0x, 4.0x of debt is only 40% of the price, so the deal depends far more on equity value growth than the paper LBO examples do. **Q2. Returns in each case.** | *Example* case | Year 5 EBITDA | Year 5 term loan | Exit equity | Incentive plan | Sponsor proceeds | MOIC | IRR | |---|---|---|---|---|---|---|---| | Sponsor case, exit 9.0x | 50.54 | 56.15 | 403.72 | 13.75 | 389.97 | 1.68x | 11.0% | | Sponsor case, exit 10.0x | 50.54 | 56.15 | 454.26 | 17.80 | 436.46 | 1.88x | 13.5% | | Management case, exit 9.0x | 63.47 | 39.73 | 536.55 | 24.38 | 512.17 | 2.21x | 17.2% | Sponsor case year 1: revenue `=240*1.05` = 252.00; margin 15.3%; EBITDA 38.56; capital expenditure 7.56; increase in working capital 1.80 (`=15%*(252-240)`); interest 11.52 (`=8%*144`); tax 5.26 (`=25%*(38.56-6-11.52)`); cash available 12.42, of which 1.44 amortisation and 10.98 sweep. Exit equity `=9*50.54-56.15+5` = 403.72; incentive plan `=8%*(403.72-231.80)` = 13.75; IRR `=RRI(5,231.8,389.97)` = 11.0%. Value bridge in the sponsor case (equity before the incentive plan): EBITDA growth 145.41 (`=(50.54-36)*10`), multiple contraction -50.54 (`=(9-10)*50.54`), debt paydown 87.85 (`=144-56.15`), fees -10.80; equity gain 171.92. Even the management case misses the hurdle at 10.0x. ```vega-lite { "$schema": "https://vega.github.io/schema/vega-lite/v5.json", "description": "Target T: sponsor IRR after the incentive plan against the entry multiple, exit at 9.0x, Option 1 financing, computed example", "width": 420, "height": 240, "data": { "values": [ {"entry": 8.0, "case": "Sponsor case", "irr": 19.4}, {"entry": 8.5, "case": "Sponsor case", "irr": 16.9}, {"entry": 9.0, "case": "Sponsor case", "irr": 14.7}, {"entry": 9.5, "case": "Sponsor case", "irr": 12.7}, {"entry": 10.0, "case": "Sponsor case", "irr": 11.0}, {"entry": 10.5, "case": "Sponsor case", "irr": 9.4}, {"entry": 11.0, "case": "Sponsor case", "irr": 7.9}, {"entry": 8.0, "case": "Management case", "irr": 26.2}, {"entry": 8.5, "case": "Management case", "irr": 23.5}, {"entry": 9.0, "case": "Management case", "irr": 21.2}, {"entry": 9.5, "case": "Management case", "irr": 19.1}, {"entry": 10.0, "case": "Management case", "irr": 17.2}, {"entry": 10.5, "case": "Management case", "irr": 15.5}, {"entry": 11.0, "case": "Management case", "irr": 13.9} ] }, "layer": [ { "mark": {"type": "line", "point": true}, "encoding": { "x": {"field": "entry", "type": "quantitative", "title": "Entry multiple (x LTM EBITDA)", "scale": {"domain": [8, 11]}}, "y": {"field": "irr", "type": "quantitative", "title": "Sponsor IRR (%)"}, "color": {"field": "case", "type": "nominal", "title": "Case"} } }, { "data": {"values": [{"hurdle": 20}]}, "mark": {"type": "rule", "strokeDash": [4, 4]}, "encoding": {"y": {"field": "hurdle", "type": "quantitative"}} } ] } ``` **Q3. Maximum price.** Solving the model (Goal Seek on the entry multiple, debt fixed at 4.0x EBITDA): 7.89x for a 20% IRR (enterprise value 283.95, equity 154.22) and 7.87x for 2.5x MOIC (enterprise value 283.22, IRR 20.1%) in the sponsor case; 9.27x for a 20% IRR in the management case. The gap between the seller's 10.0x and the fund's 7.9x is about 76 of enterprise value (`=360-283.95`): no financing trick closes a gap that size. **Q4. Option 2.** The second lien cuts the equity cheque to 196.70, inside the fund limit, and raises the sponsor-case IRR only from 11.0% to 11.5% (MOIC 1.72x): after tax the second lien costs 8.25% (`=11%*(1-25%)`), only a little below the roughly 9.4% the deal earns with no debt at all (pay 372.20 in cash, keep all free cash flow, receive 582.00 at exit: `=RRI(5,372.2,582)`), so the smaller cheque adds little. Credit statistics worsen: year 1 total leverage 4.42x against 3.41x, interest cover 2.49x against 3.35x. In the downside (revenue down 15% in year 2, then 5% growth, margins on plan) the IRR is 5.3% with Option 1 and 4.8% with Option 2 at a 9.0x exit, and 2.5% against 1.4% at 8.0x; with Option 2, leverage peaks at 4.66x in year 2 with cover of 2.27x. The downside does not lose money in either option, partly because a smaller business releases working capital (5.67 in year 2), but it leaves almost no return. More debt adds risk without fixing the price problem. **Q5. Rival B.** Synergies of 6.0 a year capitalised at 9.0x are worth about 54.00, or 1.5 turns of LTM EBITDA (`=6*9/36`). If Rival B values the standalone business as the seller's 10.0x guidance suggests, it could pay up to about 11.5x, before integration costs, and still create value for its own shareholders if it delivers the synergies, so it can rationally outbid Fund I. A financial sponsor should not try to match a strategic buyer's synergies; it should either find its own edge (a credible add-on strategy, a better operating plan, speed and certainty of closing) or let the strategic buyer win. See mba/mba-synergy-valuation-card on why acquirers often overpay for synergies. **Q6. Recommendation.** Do not bid 10.0x. A disciplined answer bids where the sponsor case is at or near the hurdle and the management case clears it comfortably: about 8.0x, and no more than 8.5x (sponsor case IRR 19.4% to 16.9%, management case 26.2% to 23.5%), with the condition that confirmatory diligence supports part of the margin plan (pricing, plant move). To pay 10.0x the committee would need to believe the full management case and an exit at entry multiple, which still gives only 19.7% (MOIC 2.46x); the e-commerce channel and plant move would carry the whole deal. Retain Marta: fund the e-commerce pilot with a stage gate, tie part of the incentive plan to the margin milestones, and keep 8% of the gain, which costs about 1.1 to 1.2 points of IRR at 8.0x to 8.5x. If the seller insists on 10.0x, walk away and record why; a missed deal costs less than an overpaid one, and Axelson et al. (2013) show that the deals bought at the highest prices in easy credit markets tend to earn the lowest returns. ## Typical assignments and how they are graded Common assessment forms in leading programmes: individual and team investment memos (30% to 50% of the grade), modelling assignments (10% to 20%), class participation (15% to 25%), and a final exam, a simulated investment committee or a live deal project with a sponsor (20% to 40%). Your syllabus decides the weights; record them here: [weights]. | Criterion | Excellent (4) | Adequate (2 to 3) | Weak (0 to 1) | |---|---|---|---| | Recommendation | Price, structure, return and walk-away point on page one | Recommendation stated but no price discipline | No clear decision | | Investment thesis | Three to five specific, testable reasons the deal works | Generic thesis ("market leader", "growing market") | None | | Model | Multi-tranche, auditable, with cases and a circularity switch | Works but hard to audit or with hard-coded numbers | Errors in cash flows or returns | | Risks and downside | Downside case with credit statistics and mitigations | Risks listed without numbers | Risks ignored | | Value creation plan | Linked to EBITDA bridge with owners and timing | Ideas without quantification | None | | Fund perspective | Concentration, co-investment, fit with fund strategy | Mentioned | Ignored | | Writing | Two pages, numbers consistent with exhibits | Long or repetitive | Unclear | Use finance/private-equity-investment-memo for the memo structure and finance/investment-committee-memo for the committee version. ## Exam preparation plan | Week before exam or committee | Focus | Method | |---|---|---| | 4 | Fund economics and performance measures | Redo problem sets 1 and 2 without notes; compute a PME from a cash-flow table | | 3 | Paper LBO and full model | Two paper LBOs in 20 minutes each; rebuild the Target T model from blank in 90 minutes | | 2 | Value creation, governance, deal structuring | Write a one-page value creation plan for a case; design an incentive plan | | 1 | Integrative practice | One full past exam or a mock committee with a classmate as chair | | Final 2 days | Formula sheet, error log | Review mba/mba-formula-sheet and mba/mba-error-log; sleep | Retrieval practice and spacing beat re-reading (Dunlosky et al. 2013); mix question types so you practise choosing the method, not only executing it. ## Common struggles 1. **Gross against net.** Deal IRR, fund gross IRR and LP net IRR are different numbers; label every return. 2. **IRR worship.** IRR rewards early cash and can be managed with subscription lines and dividend recaps; always show MOIC and, for funds, DPI and a PME. 3. **Price discipline.** Students solve for the return at the seller's price instead of solving for the maximum price at the fund's return. 4. **Plugging the exit multiple.** An exit above entry should be argued, not assumed. 5. **Generic value creation.** "Operational improvements" is not a plan; name the lever, the owner, the cost and the year it shows in EBITDA. 6. **Leverage as a fix.** More debt raises the base-case IRR a little and the downside risk a lot (Q4 above). 7. **Ignoring the LP.** Concentration limits, co-investment, fees and reporting shape what a fund can do. 8. **Ethics and stakeholders.** Employees, suppliers and lenders are affected by buyouts; committees increasingly ask about them, and a strong memo addresses them directly. ## Reading list - Classic works: Jensen and Meckling (1976); Jensen (1986, 1989); Kaplan (1989); Kaplan and Stein (1993); Kaplan and Schoar (2005); Axelson, Stromberg and Weisbach (2009); Kaplan and Stromberg (2009); Phalippou and Gottschalg (2009); Metrick and Yasuda (2010); Guo, Hotchkiss and Song (2011); Acharya, Gottschalg, Hahn and Kehoe (2013); Axelson, Jenkinson, Stromberg and Weisbach (2013); Harris, Jenkinson and Kaplan (2014); Gompers, Kaplan and Mukharlyamov (2016). Full references are under Sources. - Textbooks (by name only): Metrick and Yasuda, *Venture Capital and the Finance of Innovation*; Rosenbaum and Pearl, *Investment Banking: Valuation, LBOs, M&A, and IPOs*; Berk and DeMarzo, *Corporate Finance*; Koller, Goedhart and Wessels, *Valuation*. - Industry guidance: ILPA Principles 3.0, ILPA Reporting Template and Performance Template (see "The course in one page" for dates and links). - Open resource: OpenStax, *Principles of Finance* (CC BY-NC-SA 4.0). ## Self-test questions 1. A fund has called 100, distributed 60 and reports a NAV of 90. What are its DPI, RVPI and TVPI? 2. What does a PME of 0.9 mean? 3. Why can a subscription line of credit raise a fund's IRR without changing its MOIC much? 4. Name the three groups of sponsor actions in Kaplan and Stromberg (2009) and give one example of each. 5. What did Kaplan and Schoar (2005) find about persistence, and why does it matter to an LP? 6. In the Target T case, why does the second-lien option barely raise the IRR? 7. A deal returns 1.8x in four years with no interim flows. What is the IRR? Give the Excel formula. 8. At an 18% IRR over five years, what MOIC does a sponsor earn? 9. Why can a strategic buyer often pay more than a financial sponsor? 10. What is the purpose of a single-investment concentration limit, and what are two ways a GP can exceed it with LP support? 11. According to Metrick and Yasuda (2010), where does most of the expected revenue of GPs in their sample come from? 12. Name two reasons a downside case can preserve capital even when EBITDA falls. ## My notes and next steps | Item | My entry | |---|---| | Weakest topic after week 4 | [ ] | | Questions for office hours | [ ] | | Memos and models completed, with grades | [ ] | | Mistakes logged in mba/mba-error-log | [Date and short description] | | Recruiting link (mba/mba-recruiting-plan) | [Firms, modelling test dates] | | Next review date | YYYY-MM-DD | ## Sources and further reading - Jensen, M. C. and Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. *Journal of Financial Economics*, 3(4), 305-360. - Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. *American Economic Review*, 76(2), 323-329. - Jensen, M. C. (1989). Eclipse of the public corporation. *Harvard Business Review*, 67(5), 61-74. - Kaplan, S. N. (1989). The effects of management buyouts on operating performance and value. *Journal of Financial Economics*, 24(2), 217-254. - Kaplan, S. N. and Stein, J. C. (1993). The evolution of buyout pricing and financial structure in the 1980s. *The Quarterly Journal of Economics*, 108(2), 313-357. - Kaplan, S. N. and Schoar, A. (2005). Private equity performance: returns, persistence, and capital flows. *The Journal of Finance*, 60(4), 1791-1823. - Axelson, U., Stromberg, P. and Weisbach, M. S. (2009). Why are buyouts levered? The financial structure of private equity funds. *The Journal of Finance*, 64(4), 1549-1582. - Kaplan, S. N. and Stromberg, P. (2009). Leveraged buyouts and private equity. *Journal of Economic Perspectives*, 23(1), 121-146. - Phalippou, L. and Gottschalg, O. (2009). The performance of private equity funds. *The Review of Financial Studies*, 22(4), 1747-1776. - Metrick, A. and Yasuda, A. (2010). The economics of private equity funds. *The Review of Financial Studies*, 23(6), 2303-2341. - Guo, S., Hotchkiss, E. S. and Song, W. (2011). Do buyouts (still) create value? *The Journal of Finance*, 66(2), 479-517. - Acharya, V. V., Gottschalg, O. F., Hahn, M. and Kehoe, C. (2013). Corporate governance and value creation: evidence from private equity. *The Review of Financial Studies*, 26(2), 368-402. - Axelson, U., Jenkinson, T., Stromberg, P. and Weisbach, M. S. (2013). Borrow cheap, buy high? The determinants of leverage and pricing in buyouts. *The Journal of Finance*, 68(6), 2223-2267. - Harris, R. S., Jenkinson, T. and Kaplan, S. N. (2014). Private equity performance: what do we know? *The Journal of Finance*, 69(5), 1851-1882. - Gompers, P., Kaplan, S. N. and Mukharlyamov, V. (2016). What do private equity firms say they do? *Journal of Financial Economics*, 121(3), 449-476. - Dunlosky, J., Rawson, K. A., Marsh, E. J., Nathan, M. J. and Willingham, D. T. (2013). Improving students' learning with effective learning techniques. *Psychological Science in the Public Interest*, 14(1), 4-58. - Institutional Limited Partners Association. ILPA Principles 3.0 (dated 27 June 2019); ILPA Reporting Template (January 2025) and Performance Template (2025), https://ilpa.org (checked 2026-10-28; check the current versions). - AACSB International (2026). Global Standards for Business Education, ratified 20 April 2026, aacsb.edu (checked 2026-10-28); context for the competency map. ## Answer key 1. DPI 0.60 (`=60/100`), RVPI 0.90, TVPI 1.50. 2. With the same timing of cash flows, the fund's distributions and NAV are worth 10% less than the same contributions invested in the index would be: the fund underperformed the benchmark. 3. The line delays capital calls, so LP capital is outstanding for a shorter time and the IRR rises; the profit in USD barely changes (it falls slightly by the interest on the line), so MOIC is about the same. 4. Financial engineering (leverage and capital structure), governance engineering (board control, management equity), operational engineering (pricing, cost, working capital, add-on acquisitions). 5. GPs whose earlier funds outperformed tended to outperform again, unlike mutual funds; manager selection and access to top GPs matter for LPs. 6. After tax the second lien costs 8.25%, only slightly below the roughly 9.4% unlevered return of the deal at 10.0x, so the smaller equity cheque is almost offset by the extra interest: IRR rises only from 11.0% to 11.5%. 7. `=1.8^(1/4)-1` or `=RRI(4,1,1.8)`, 15.8%. 8. `=1.18^5`, 2.29x. 9. It can count synergies (USD 54m, or 1.5 turns, for Rival B in the case), it often has a lower cost of capital than a fund's target return, and it has no fixed holding period. 10. To limit the fund's exposure to one company; the GP can seek LP advisory committee consent or syndicate the excess to co-investors. 11. About two-thirds from fixed components, mainly management fees, rather than carried interest. 12. Debt repayment from cash flow before the fall, and the release of working capital when revenue falls (5.67 in year 2 of the Target T downside); a lower entry price also leaves a margin of safety. ## Revision history | Version | Date | Author | Change summary | |---|---|---|---| | 0.1 | YYYY-MM-DD | [Your name] | Guide set up from the template, syllabus loaded | | 0.2 | YYYY-MM-DD | [Your name] | *Example:* Target T model built, teaching note compared, memo drafted | ## Standard and licence note Structure aligned with the private equity electives common to leading international MBA programmes, with competency areas mapped to learning goals of the kind accredited schools set under the AACSB Global Standards for Business Education (2026) and with ILPA industry guidance summarised in original words and dated. The text, the Target T mini-case, its exhibits, its teaching note and all questions are original; no published case, textbook or industry training material is copied or paraphrased, and Fund I, Target T, Rival B and all people are fictional. The template is independent and not affiliated with or endorsed by any private equity firm, ILPA, business school, accreditation body or publisher. Check your syllabus and the current official versions of any guidance before you rely on it. Template licence: MIT.