Yale School of Management

MGT 635
Introduction 1
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Introduction, Goals and Course Outline

DMCromwell@aol.com
O

David Cromwell worked at JPMorgan & Co. for 30 years in a variety of job positions in
New York and London. He retired early in 1995 and began teaching at Yale in 1996.

During his years at JPMorgan, David Cromwell had trouble holding down any given job.
The Bank reassigned him to a new department almost every time he was just getting
the hang of his then current job. During 1966-1995, his job assignments included:
Year
1966
1967
1969
1970
1971
1973
1974
1978
1981
1983
1985
1986
1987
1989

Location
New York
New York
New York
New York
London
London
London
New York
New York
New York
New York
New York
New York
New York

Department
Credit Department
Credit Department
Securities Research
Corporate Research
Financial Analysis
Project Finance
UK Banking Dept.
Financial Analysis
Mergers & Acquisitions
Corporate Banking
Training & Adult Ed.
Banking Division
Investment Banking
JPMorgan Capital

Job Function
Financial Statement Analysis 1
Credit Investigations, Credit Analysis
Industry Securities Analyst Chemicals
Credit Analyst -- Airlines & Aerospace
Vice President & Unit Head -- London
VP Banker Energy & Mining Projects
VP & Unit Head Corporate Banking
Senior Vice President -- Dept. Head
Senior Vice President -- Dept. Head
Group Executive UK & Industries USA
Head of Corporate Training
Morgan Guaranty Senior Credit Officer
Managing Director, Head of Research
President & CEO Private Equity

During six years as head of JPMorgan Capital, that firm invested over $750 million in
about 75 companies, mainly in the USA but also in Europe, Latin America and Asia.
Investments included venture capital, buyouts, turnaround situations and privatizations.
Investments sold showed total gains of about $2 billion an IRR of 32% per annum.

When Cromwell arrived late in 1989, JPMorgan Capital reported a modest pretax profit
of about $17 million. By 1994, its reported pretax profit was $625 million, about one
third of JPMorgans total earnings for that year.

During 1989-95, the investment portfolio grew from 50 companies worth $500 million to
about 85 companies worth $3 billion. (Today, JPMorgan Partners is one of the larger
private equity investors in the world: portfolio = $7 billion.)

In addition to teaching, David Cromwell remains active in the field of private equity as a
private investor, an advisor to local startup companies and on the Board of Directors of
some local venture companies.

War Story: Bethlehem Steel: Statement Spreading and learning to round off the small change.

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Fall 2010

Yale School of Management

MGT 635
Introduction 2
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Course Goals
o Private equity investing is an apprenticeship business. One learns best by doing.
o Successful investors require a wide variety of skills and knowledge:

Ability to understand a business

Industry and country knowledge
Knowledge of information sources
Effective research skills
Ability to work with insufficient data
Ability to focus on the key issues
Drawing appropriate conclusions
Communication & presentation skills
Interpersonal and people skills
Ability to organize self and others
Creativity and flexible thinking

Knowledge of financial markets

Financial statement knowledge
Ability to do financial modeling
Knowledge of capital structure
Knowledge of legal concepts
Ability to work under pressure
Negotiating and selling skills
Teamwork skills, facilitation
Leadership and flexibility
Ability just to say, No.
Sense of humor

o This course aims to provide students a chance to develop these skills and knowledge.
Course Outline

(See Attached Schedule Summary)

The course contains both lectures and cases. Proper textbooks on the topic do not exist. 2
Actual private deals (that involved the professor) form the basis for all the cases.
The first third of the course contains most of the Lectures. Lectures attempt to provide
students with enough basic principles and techniques so that they can work on the cases.
o Attached is a list of 27 Lectures topics.
o The professor covers 15 lectures over the first five weeks of the course. Familiarity with
this material enables students -- working together as teams -- to tackle complex deals.
o Copies of the Lecture Notes are available in packets from the Mail Room (HUB). The
first packet is there now; the second packet will be available in about three weeks time.
The Notes will enable students to spend most of their time listening to the lectures,
rather than writing down what the professor says.
The Professor strongly recommends reading the Lecture Notes
after each lecture, rather than before.
o Students should buy a 3-hole binder for Lecture Notes and bring the notes to class. 3
2

If you find a proper textbook, please let me know. There must be one, somewhere
Probably because of the total lack of sentences with verbs in the passive voice, a number of former
students have said that they have continued to refer to the Lecture Notes long after graduation from SOM.

_______________________________________________________________________
Fall 2010

Yale School of Management

MGT 635
Introduction 3
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Lecture Notes -- Content Summary 4

Part 1
1) Private Equity Jargon: EBITDA, pari-passu, P/E Ratio, Rule 144, vorpal blade
2) Private Equity Basics: Description, history, economics, players, risk concepts
3) Screening Deal Flow: Finding new opportunities, quick kills, the pursuit, criteria
4) Business Plans: Investment plays, unique strategies, secrets & lies
5) Macro Economic and Industry Analysis: Countries, industries, niches, competitors
6) Teamwork: Organization, techniques, Dos and Donts, performance evaluation
7) Financial Statement Analysis and Ratios: Definitions, key ratios, foolish traditions
8) Financial Plans: Projection models, key elements, sensitivity, standard format
9) Timing the Market: (Just say, No.) Investors folly, big egos, indexing, discipline
10) Equity Valuation: Simple math, VC jargon, IRR, tools, comparable companies
Part 2
11) Custom Financial Models: Assumptions, traps, startups, getting rich and famous
12) Deal Structure: Management incentives, instruments, governance, exit alternatives
13) Writing Style for Business Proposals: Goals, standard outline, reading ease index
14) Oral Presentations: Presentation tactics, handouts, slide shows and oral deliveries
15) Evaluation of Management: Judgment art, difficulties, soft research, private eyes
16) Leveraged Buyouts: Buyout concepts, capital structure issues, credit risk analysis
17) Legal Documentation: Key issues, boilerplate, lawyers, the taxman, boring samples
18) Negotiations: Positions, interests, getting to Yes, emotion, gremlins
19) Term Sheets: Investment proposals, outline of key provisions, standard examples
20) Investment Memos: Purpose, standard format, list of pro and con reasons
21) International Investing: Regions, regulations, language, culture, country & FX risks
22) Follow-On Investments: Good money after bad, down & dirty, a little poker math
23) Monitoring; Exits: Board reps, IPO, selling out, block sales, going bust gracefully
24) Common Obstacles: Insufficient research, valuation gaps and common death traps
25) Portfolio Management: Diversify, timing, rule of 20, discipline, portfolio accounting
26) Raising a Private Equity Fund: Types, finding investors, track record, key terms
27) Career Opportunities: In venture capital and the private equity investment industry

Copyright by David Cromwell. Revised in October 2010.

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Fall 2010

Yale School of Management

MGT 635
Introduction 4
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Key Features of the Course
o The professor hands out cases as we go. Major cases are rather complex and require
the use of multifarious skills. Cases require knowledge and techniques students have
learned in other SOM courses (or before coming to SOM.) Most of the opportunity to
learn -- comes from working on the cases, outside of class hours.
o The cases all contain financial projection models. Via email, students will receive
copies of the models in Microsoft Excel format.
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o Investing in the equity securities of private companies -- typically requires many steps.

Screen deal flow -- by reading Private Placement Memos from deal sponsors.
Do macro research on economics, industry, sectors, niches and competition.
Prepare and analyze financial statement projections, usually a custom model.
Do equity valuation work and compare the results to similar public companies.
Reach conclusions, make written and oral presentations.
Negotiate the price and other terms & conditions of a deal, sign legal documents.

o Except for negotiations, the first case takes each of the above steps, one at a time.
Students work in teams to learn the basics.
o All the other cases require combination of the steps. Students work in larger teams.
o Major cases include early stage venture capital, leveraged buyouts and turnarounds.
o The last two cases are international, cross-border investment deals. The final case is
extremely complex. It requires creativity, flexible thinking and a sense of humor.
o Effective teamwork is critical for the cases. Teams of 5-6 students play roles,
compete or join forces with each other -- to attempt to do the deal. Teams share the
heavy workload. One luckless team plays the difficult role of Management, trying to
raise capital. The professor rotates the teams for each case, so that people will work
with a completely different team each time, and with many members of the class.
Rotation also allows the professor to balance the teams with respect to skill levels.
o After each case, students receive feedback on perceived performance of both teams
and individuals. Feedback includes (a) things done well and (b) things students could
improve for the next time. This is how apprenticeship learning works.
o The professor will attempt to explain the key business learning points of each case.
These include a variety of general business principles beyond just equity investing.
There is a lot of feedback in this class.

_______________________________________________________________________
Fall 2010

Yale School of Management

MGT 635
Introduction 5
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Logistics and Other Features

o This course requires a heavy time commitment. In addition to class time, students
should allow up to 15 hour's time per week, especially during the last half of the course.
o Workload during the first week of the course is relatively moderate. Thereafter, the
work tends to expand to fill all the available time, as major deals get underway.
o Prerequisites Financial Accounting, Valuation / Corporate Finance and Options
o Some working knowledge of financial analysis is useful, but this is not required. Most
cases require the manipulation of detailed, company financial projections. Doing the
model is not that difficult, but does require lots of practice. In addition to class lectures,
optional training workshops on How to do research at SOM are available.
o There is no textbook reading.
o Performance on five major cases is 92% of the course grade, with 8% of the grade
linked to a minor case and feedback tasks. There are no exams.
Task
Screening Deal Flow
FSSNE
HigherOne, Inc.
Luck Industries, Inc.
Subtotal

Points
3
13
22
22
60

Major Teamwork Cases

Cinemex S.A.
Porco S.A.

Points
13
22

Team Reviews (5 of Them)

Subtotal

5
40

o For the five major teamwork cases, the instructor awards half of the points based on the
perceived performance of each team as a whole. Ones personal contribution to his/her
teams effort -- as perceived by other members of your team -- is the other 50%.
o After each case, all team members will complete a short Team Review report. This
review evaluates the quality and quantity of effort contributed by each team member.
Students make three brief comments about each of their teammates greatest strengths
and three remarks about areas needing improvement for the next time. The professor
keeps the sources of these student comments strictly confidential. The professor edits
this input for detailed feedback to each person, after each case.
o Judging skills, strengths and weaknesses of people is a business skill -- that is vital for a
successful private equity investor. If you cannot (or will not) judge performance of
people, then this course is not for you. 5

Business in general may not be for you, either, since managing and judging performance of people is a
fundamental business skill. If judging people offends you, you maybe could join FEMA or some other
government agency where performance does not seem to matter that much?

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Fall 2010

Yale School of Management

MGT 635
Introduction 6
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Logistics and Other Features

(Continued)

o People who do not do their share of the teams workload also are in the wrong class.
Student colleagues and the professor will slam Free Riders -- who coast along on the
work of others. Insufficient effort hurts your colleagues and it limits your learning
experience. Slackers will end up at the bottom of the class, or worse. The professor
does give grades of less than proficient to slackers and free riders.
o Quiet People -- who almost never say a word in meetings -- tend to do rather poorly.
The major cases involve active discussion and debate. Talking to your colleagues is
important in making a useful contribution to solving the tasks. If you feel you cannot or
will not speak up, ever, no matter what -- then you should give this class a miss.
o The professor does not permit Audit of this class, since it does not work. Much too
much of the learn by doing is off-line, outside of class, in team meetings and in long
negotiating sessions with other teams.
o Waiting List. If you are on a waiting list to get into the course, come to class and do
the homework -- until your status finally is clear. Those who turn up for the class and do
the work will receive priority when openings occur. We will keep an attendance list.
(There is too much content at the front end of the course to easily catch up, later on.)
o The class size limit is 36 mostly second-year students. The course will work with
less than 36 people, but not with more. This large class size restricts active in-class
discussions. As part compensation, there are active off-line team discussions, plus the
professor has a tendency to inject side comments and feedback wherever possible.
o We will set up a free Hotmail account for each student around mid-way -- and use free
Microsoft Messenger and Microsoft Netmeeting software. This will allow students to
chat with the professor and each other online, negotiate, and to share and edit
documents or models online.
o There will be workshops for (1) How to do research -- Library, Lexis/Nexis, Bloomberg
and the Internet and, if requested, on (2) How to run the Simplex model.
o The professor always is looking for ways to make this class better. There will be a
custom survey and an official end-course survey to collect your ideas and suggestions.
If you discover something that looks wrong or out of date, please let me know right
away, so I can fix it.

Registrar Generals Warning: This course carries a heavy workload and

requires a large commitment of time. This VC Class may threaten all of
your spare time and can cause serious damage to your social life.

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Fall 2010

Yale School of Management

MGT 635
Introduction 7
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1.

Monday

October 25, 2010

Lectures:

Introduction, Course Goals and Outline (See Handout)

(Logistics, Heavy Workload and Other Requirements)
2. Private Equity Basics (Start, Part 1)

Assignment:

Read: Lecture Note 1: Private Equity Jargon

For Next Class

2.

3.

Wednesday
Lectures:

October 27, 2010

2. Private Equity Basics (Continued, Part 2)
3. Screening Deal flow

Assignment:

Screening Deal Flow

For Next Class

Training: Macro Research (Several Dates: Optional)

Monday
Lectures:

November 1, 2010
4. Business Plans

(E-mail answers before 8 AM Monday)

5. Macro Research / Industry Analysis (Information Sources)

4.

Discussion:

Screening Deal Flow

Assignment:

Read Case: Fire Security Systems of New England, Inc.

Wednesday

November 3, 2010

Lecture:

6. Teamwork, Hints, Team Reviews

Assignment:

FSSNE 1: Continue Macro Research

For Next Class

5.

Monday

November 8, 2010

Lectures:

7. Financial Statement Analysis

8. Financial Plans & Financial Models

Assignment:

FSSNE 2: Model -- Build High, Low and Base Cases

For Next Class

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Fall 2010

Yale School of Management

MGT 635
Introduction 8
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6.

Wednesday

November 10, 2010

Lectures:

9. Timing the Market (Just say, No)

10. Equity Valuation Techniques

Assignment

FSSNE 3: Do Equity Valuation

For Next Class

7.

Monday

November 15, 2010

Lecture:

11. Custom Financial Models

Complete FSSNE Team Reviews (In class)

Assignment:

Read Case: HigherOne, Inc. (New 6-Person Teams)

For Next Class

8.

Wednesday

November 17, 2010

Lecture:

12. Deal Structure

Discussion:
Assignment:

FSSNE Case Review

HigherOne: Start Research, Do Financial Model

For Next Class

9.

Monday

November 22, 2010

Lectures:

13. Writing Style for Business Proposals

14. Oral Presentations

Breakout:

HigherOne: Team Discussions (In Class)

Assignment:

HigherOne: Team Discussions / Make Decisions

For Next Class

Thanksgiving Recess: No Classes from Nov. 25-29

10.

Monday

November 29, 2010

Lecture:

15. Evaluation of Management

Assignment:

HigherOne: Prepare Presentation for Investors

For Next Class

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Fall 2010

Yale School of Management

MGT 635
Introduction 9
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11.

12.

Wednesday

December 1, 2010

Discussion:

Presentations to Investors
HigherOne

Special:

Best Presentation Contest (Class Vote)

Complete HigherOne Team Reviews (In Class)

Assignment:

Read Case: Luck Industries (New Teams)

Monday

December 6, 2010

Lecture:

16. Leveraged Buyouts

Assignment:

Luck: Team Discussions -- Logistics

Time: 10:00 AM-12:30 PM

Extended Class Time

For Next Class

13.

Wednesday

December 8, 2010

Lecture:

17. Legal Documentation

Discussion:

HigherOne: Case Review

Breakout:

Luck: Team Discussions

Assignment:

None

For Next Class

Winter Break: No Classes Until January 10

14.

Monday

January 10, 2010

Lectures:

18. Negotiations

Breakout:

Negotiate Deal (In Class)

Assignment:

Luck: Team Discussions, Negotiate Deal

For Next Class

15.

Wednesday

January 12, 2010

Lecture:

19. Terms Sheets

20. Investment Memos

Breakout:

Negotiate Deal (In Class)

Assignment:

Luck: Prepare Presentation For Investment Committee

For Next Class

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Fall 2010

Yale School of Management

MGT 635
Introduction 10
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16.

Friday

January 14, 2010

Time: 10:00 AM-12:30 PM

Extended Class: 6 Sections

Discussion:

Investment Committee Meetings

Luck Industries

Assignment:

Luck: Negotiate Final Deal

Deadline: 8 PM Mon. Night

For Next Class

17.

Wednesday
Discussion:

January 19, 2010

Luck: Final Deal Description vs. Actual Results
Complete Luck Team Reviews (In Class)

Assignment:

Read Case: Cinemex (New Teams)

For Next Class

18.

Monday
Lecture:

January 24, 2010

21. International Investing

Discussion:

Luck: Case Review

Assignment:

Cinemex: Team Discussions

For Next Class

19.

Wednesday
Lecture:

January 26, 2010

22. Follow-On Investments (Poker Math)

Assignment:

Cinemex: Prepare Presentation For Investment Committee

For Next Class

20.

Monday

January 31, 2010

Time: 10:00 AM-12:30 PM

Extended Class: 6 Sections

Discussion:

Investment Committee Meetings

Cinemex

Assignment:

Cinemex: Negotiate Final Deal Deadline: 8 PM Wednesday

For Next Class

21.

Wednesday

February 2, 2010

Discussion:

Cinemex: Final Deal Description vs. Actual Deal

Complete Cinemex Team Reviews (In Class)

Assignment:

Read Case: PorcoComasas S.A. (New Teams)

For Next Class

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Fall 2010

Yale School of Management

MGT 635
Introduction 11
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22.

Monday

February 7, 2010

Lectures:

23. Monitoring Portfolio Companies, Exits

24. Common Obstacles

Discussion:

Cinemex: Team Performance & Case Review

Assignment:

Porco: Team Discussions

For Next Class

23.

Wednesday

February 9, 2010

Lectures:

25. Portfolio Management

Special:

Try to Solve Legal Language Puzzle (In Class)

Assignment:

Porco: Negotiate

For Next Class

24.

Monday

February 14, 2010

Lectures:

26. Raising a Private Equity Fund

27. Career Opportunities in Private Equity

Assignment:

Porco: Prepare Presentation For Investment Committee

For Next Class

25.

(Search for the vorpal blade)

Wednesday

(Watch Out For Gremlins)

February 16, 2010

Time: 10:00 AM-12:30 PM

Extended Class: 6 Sections

Discussion:

Investment Committee Meetings

PorcoComasas S.A.

Assignment:

Porco: Negotiate Final Deal

For Next Class

26.

Deadline: 8 PM Sunday

(Cash in Solar Credits, Find the Wine Bar)

Monday

February 21, 2010

Discussion:

Porco: Final Deal Description; Case Review

Complete Porco Team Reviews (In Class)

Special:

Official Course Evaluation

Final Exam Week NO EXAM

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Fall 2010