Case: Martin Smith: January 2002

Private Equity: Leveraged
Buyouts
Intro Case:
Martin Smith

Martin Smith—Case Objectives
• Examine components of PE compensation and their relative weight
– Case Exhibit 4 (difference between Salary and Total is
Carried Interest)

• Evaluate difference between IRR and
Multiple on Investment (two return metrics)
– Case Exhibit 6

• Begin to explore differences among funds as an employee and investor
– trade-offs include compensation, track record, strategy, focus, reputation, risk, sustainability, etc.

Martin Smith
• Multiple offers: Nice dilemma!
– Excellent background for PE
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Economics background
Banking experience
Financial operating experience
MBA

Martin Smith, cont’d
• Effective job search strategy:
– Target groups that match background
• Avoiding VC, where engineering and longer term operating experience is more highly valued

– Focus on more credible groups
• As opposed to first-time funds—Avery search fund excepted – Extensive research
• Lots of (too much?) due diligence

Martin’s Dilemma
• Differences between firms/funds:
– Brand name/reputation
– Background of partners
– Deal flow strategy
– Industry focus/investment strategy
– Investment track record
– Organizational structure (number of partners, offices, etc.)
– Capital under management: today and growth of funds in the future

Martin’s Dilemma
Differences between firms/funds, cont’d
• Track record:
– IRR
– Multiple of money invested
– Realized vs. Unrealized
– Vs. Benchmark
– Within Vintage
– Consistency
– Longevity

Martin’s Dilemma, cont’d
• Differences in compensation
– Current base salary
– Bonus potential
– Opportunity to share in carried interest
• now and in the future

– Division of carried interest and management fee among partners (and others)
– Opportunity for co-investment
• firm loans to co-invest?

Martin’s Dilemma, cont’d
• Building personal reputation in “brand name” firm early in career