even amongst MBA programs Wharton is known as the finance school and so today what I wanted to do is share in great detail what one of the most popular Finance classes at Wharton is like Advanced topics in private Equity what I thought was really cool about this class is that my professor was Dan zberman the former head of Europe and the current Global head of Capital Solutions at warberg kinkis so we were learning from an actual seasoned PE investor warberg is one of the top private Equity firms in the entire world and I recently L interviewed one of my classmates who worked at the firm which you can check out later if you're interested going over today's agenda I'll first provide an overview of the classes structure then go over five key lessons I learned about private equity and lastly walk you through the model that I built for the class okay so first up let me go over the class's structure what I immediately liked about this class is that during the entire semester we go through an actual deal that warberg has worked on when it acquired a company called the mutual fund store back in 2011 in one of the first few classes the professor brought in the former CEO of the mutual fund store who gave us a management presentation and overview of the company which is something that's very very common in the private Equity world as well the following class is then focused on how private Equity investors perform due diligence on a business and we were given data room access with tons of information on things like financials legal human capital Market sizing sales and marketing and a whole lot more we then used what we learned from our diligence to drive assumptions for financial models that we built and we built an lbo DCF and also comps and then at the end we put everything together in a PowerPoint presentation and went through a simulated kind of investment committee where we were defending our assumptions to our professor who really did not go easy on us intermixed amongst all these classes were also guest speakers who were extremely interesting to listen to including a partner from Helman and Freedman and the co-head of PE at centerbridge Partners so that was how the class was structured and I thought it was just a really interesting way to learn about private Equity as opposed to just having the professor just lecture us throughout the entire semester and if you're actually interested in breaking into private Equity you're definitely going to want to check out the recently announced private Equity certificate program being offered by Wharton and Wall Street prep this program is sponsored by top firms like Blackstone carel and KKR and over eight weeks you can learn at your own pace through this online course that's taught by Wharton professors Wall Street prep's PE program director and real PE investors including David Rubenstein the founder of carile and Martin brand the head of North America PE at Blackstone who will cover topics like the PE deal process valuation how to think like a private Equity professional and more by completing the program you also unlock access to the alumni member database fireside chats with PE investors and exclusive networking events with the world's top private Equity recruiters this program runs three times a year and if you're interested be sure to use my code rare liquid to get $300 off and also sign up by the early registration deadline to get an additional $200 off I'll leave a link to all of this in the description and I'll also be including a free lbo that you can download and practice around with if you're interested in modeling as well all right let's now go into the five things I learned about private Equity from this class the first lesson came up from one of our first few lectures where my professor said that one of the 30 secrets about the private Equity industry is that a lot of returns have been driven by the rise in exit multiples a lot of times 60% of your underwriting case aka the model that you build and the thesis you have the projections you have and all the assumptions 60% of all of that just could be wrong but you could still get a good return from your investment just because exit multiples have been increasing I thought this was such an interesting way to kick off the class because it showed a lot of self-awareness where my professor wasn't saying even the top private Equity investors it's not that they are just so good at Financial engineering a company or improving operations a lot of times it kind of boils down to luck which is that multiples have been expanding over the past few decades which is not really in an Investor's control the second lesson I learned about private Equity was also kind of a dirty Secret in that a lot of dry powder that private Equity firms are put into sometimes subpar or just average Investments because private Equity firms have to return their Capital to investors if they don't spend it for example if a private Equity Firm is able to raise $500 million on let's say December 31st 2024 and Promises to deploy the capital in 5 years the clock starts on January 1st 2025 and if by December 31st 2029 $100 million isn't used then that money is returned to investors given that PE investors earn a lot of their compensation through carry which is basically profits off of the Investments that they make this sometimes can lead to a lot of subpar investments in the private Equity industry and if you're confused about what Carrie is or if you want to learn how private Equity investors make their money then feel free to check out this video right here the third lesson I learned was that in my professors 25 years of private Equity investing his best ones were carve outs carv outs are when a typically large company decides to sell off one of its divisions or subsets of its business and so for example let's say that meta were to sell Instagram or Whatsapp that would be a carve out when a PE firm acquires a carve out they're able to unload a lot of capital and resources and management attention to this smaller business that potentially the larger company was just not really paying attention to and therefore unlock a lot of potential value car bouts are not typically that normal and can be a little bit harder to find because you're going to need to find a company that wants to sell off part of its business and that's not as common as companies that are just want to sell their entire business the fourth lesson I learned is to never never never fall in love with the company during the deal heat and how do you not fall in love proper due diligence during our class we got a frankly unrealistic and really fast-tracked experience with diligence where we were just handed a lot of the important relevant information right away in a real PE deal due diligence takes a lot of time and effort it means going through hundreds and hundreds of rows in Excel and hundreds of potential pages and speaking with Consultants lawyers customers and a lot of other stakeholders my professor said that in a five-week deal Sprint so let's say there are five total people bidding on a company four of them are going to burn millions and millions of dollars on due diligence and not acquire the company but my professor said that he would much rather burn millions and then not acquire the company versus potentially paying too much for and or realizing that after spending not enough on due diligence that there are a lot of problems with the company and that's the last thing you want to avoid is actually acquiring a company and then having it being a really really bad portfolio that can really drag returns for the overall fund the fifth lesson I found really interesting was that from my professor's words there's only one thing that will ever be true about your financial model and that is that it will always be wrong now don't get me wrong models are super super important in that they help you understand the key drivers of a business and also the financial levers that you can kind of utilize to affect your returns including things like your valuation leverage and your interest rates with that said you just never really know how a company is going to perform over the next 5 years and also what kind of macro challenges will be presented to you and so my professor mentioned that it's always important to have two things when making an investment one is a large Tam or Target addressable market and second is high margins these two things provide a really nice cushion for you just in case things go wrong all right now next up let me walk you through the financial model that our team built for our final project so here is the model that I want to kind of give you guys a peek into and I want to be also really clear that this model I changed up all the numbers both for the historicals and projections just to make sure that I'm not kind of giving away any important information and I just want to show you the structure of what we built because it is a little bit more detailed than I actually expected that we would go into uh and that's mainly because a lot of the people who take this class may not actually have Finance experience so they not may not have modeled before and this is something that I built with a bunch of my classmates and I will say that the people with Finance experience were the ones who really built this model even though there were about six of us I think like three people never even really touched this model so with that said here are instructions I changed up some of the important information here as well and then we're also given like a rubric for how this will be graded and then starting off with the assumptions tab this was the most important tab that we worked on and I'm not going to go into really what the mutual fund store company does because that's not really the point of this video and I just want to show you the structure of this model as well mainly but anyway so a lot of the diligence that we did went into creating these assumptions so things like company store openings franchise store openings and as we go down there's this thing called Market appreciation analysis that we had to do expenses and then as we go down more balance sheet assumptions so as you can see pretty there are a lot of assumptions in here and each time we adjusted any of the assumptions we basically had to rely on our diligence and the data we were able to look at in order to kind of justify our assumptions and a lot of this kind of built up to this tab which was the asset under management buildup essentially another set another tab of a bunch of assumptions that we had to put together in order to ultimately Drive our operating model which is the next tab but before we go to that I know there's like a lot of rows here but essentially a lot of this information or a lot of the formulas in here once you set it up correctly you kind of copy paste it down so it's not as hard as it may look here and then we had our operating model which if you're not really sure what that means it's basically just your financial statements and so as you can see here we basically have an income statement and projections and then we have our balance sheet here and then if we go down more our cash flow statement and then because we built built out an lbo we also needed a debt schedule and that all fed into our lbo tab where we had a lot of different kind of sections here so we had the assumptions which include things like our entry and exit multiple our leverage all of that stuff purchase price calculation go down more seller proceeds Goodwill calculation sources and uses table performa capitalization table and then as you can see here our 5-year return analysis and as I mentioned don't focus on the numbers our IR is like 70% to 80% because I really fudged up the numbers but I just wanted to show you guys again what this model kind of looks like sponsor cash flows key kpis and then IR data tables and then we had a very highlevel simple DCF where we just plugged in our projections from our operating model in order to eventually get to our Equity value and then we had comps so as you can see a pretty thorough assignment and it took us a few weeks to kind of work through all of this and hopefully this is helpful for you to kind of see how all of the work that we put into our diligence and then kind of the classes where we learned about private equity and how to due diligence all of that kind of fed into this model which we eventually turned into a PowerPoint presentation and then presented to our professor all right so that was the model and I wanted to also let you guys know something interesting from going through this entire class and diligen in this company the mutual fund store so when we looked at this company basically every single group because we kind of watched each other's investment committee presentations all thought that the company was a great company basically just a slam dunk to invest in but what actually happened was warberg pinkis did acquired the company and it did perform well for them but there were a ton of issues with the company that we just didn't foresee and so while it seemed like a slam dunk just from kind of the financials there were a lot of ups and downs with the company and so I just thought it was super interesting that even if you think that a company is a slam dunk from your due diligence and your modeling there are so many things that can go wrong and so it's just never you can never really fully be sure about an investment okay so that wraps up the video and let me know what you guys thought and if you enjoyed this video because I'm happy to go over the other classes that I really enjoyed during my time at my NBA at Wharton and on that note I actually recently announced a how to get into NBA course that I think is a super great resource if you're interested in getting into a top MBA program I'll leave a link to it down in the description below there's a free trial and a money back guarantee you can check all of that out and lastly in the next screen you're going to see a video about The Good the Bad and the Ugly aspects of private Equity you can check that out if you're interested in learning more about the industry with that said Thank you guys all so much for watching hope to catch you all in the next video thanks guys and peace out he he hey he hey