The other side of the investing process is represented by deal making. If decision making was positive, where positive means a green light from the board of the AMC or the board of general partners. Another story starts, and this is the story of deal making. If you want to say what is deal making in a nutshell, deal making means to write, and hopefully, to sign a contract between the PEI and the company where together they find the right balance between the need of money of the company and the expectation of IRR and capital gain for the PEI. As you can imagine, to find this balance is not easy. That's the reason why we say deal making. We have to make the deal: Together. The deal making activity is based on three pillars in a certain sense, or three activities. The first pillar is represented by the concept of targeting, the second pillar is represented by the concept of liability profile, and the third pillar is represented by the concept of engagement. Targeting means what target we invest in? Liability profile means what is the liability profile of the company which we are going to invest? Engagement, what are the rules of corporate governance that qualifies the presence of the PEI within the equity of the venture backed company? Let's start with the concept of targeting. Targeting basically is based on different decisions we have to negotiate with the company. The first one is the vehicle we use to invest and the second one is the percentage of shares. What's the meaning of the vehicle we use to invest? In many cases, the PEI is going to invest in the equity of the target company, but also in other cases the PEI could make the decision to invest, not in the company, but in an SPV. For example the usage of an SPV is mandatory if we did the replacement financing cluster we run an NPO but also if we decide to finance a company for a M&A transaction we could decide to create an SPV. To create an SVP is not an easy decision because using an SVP also means to decide to use debt, that means convincing the banking system to give money to the vehicle. The two issues and decisions we have on the table are if it makes sense to run a direct investment, directly in the company, or to run a non-direct investment using an SPV to invest in the company itself. If the decision was positive so we selected a way in which we are going to invest. We have another issue of targeting and the other issue is the amount of shares. The amount of share means what is percentage of equity the PEI would like to receive. The issue is not simple because there are some aspects that we would have to avoid. For example, to have a small amount of shares, 1%, 2%, or 3% in many cases, is completely useless because you don't have the tools to properly stay in the company. On the other hand, having much more than 50% means that you are the most important shareholder. You are the owner of the company and not necessarily is that a good position because you need an entrepreneur as the owner of the company that has the right motivation to drive the company. The percentage of shares is not easily negotiated and identified. However, if the rating activity was done, we enter the second area of activity, or the second pillar, which is represented by the liability profile. The liability profile is the liability side of the balance sheet of the company in which you are going to invest. If we discuss about the liability profile, we have to make two different decisions again. The first one is related to the concept of syndication strategy, the other one is related to the concept of debt issuing. What is syndication strategy? Syndication strategy means that the PEI is going to syndicate the business with one or more other PEIs. It may sound a bit strange because the PEI spent a lot of money to screen the market, to investigate a company, and to evaluate a company, so why would a PEI give a business to another PEI? There reason could be related to the fact that there is a shortage of money for PE, or the deal is so big that the PEI doesn't have enough money to go on to the investment, and the smart decision could be, let's try to syndicate the business together with another PEI. The second decision is related to the concept of debt issuing. Debt issuing means to use a very hands-on approach and help the company or the SPV issue debt, where issuing debt means issuing bonds on the market, for example, for very large deals, or on the contrary to negotiate, with the banking system, Loans for example, mortgages to finance the company or SPV again. If the liability profile is done we have the last phase. The last phase is named engagement. Engagement means we have to set up the rules that qualify the presence of PE within the equity of the company. This last pillar is based on three different activities. The first one, categories of shares, categories of shares means what are the rights that the PEI receives buying the shares of the company? One option could be to issue ordinary shares, this is very common but what can happen, for example, is PEI may want to receive preferred stocks. Preferred stocks are qualified by more rights related to the shares, for example, a right could be represented by a put option where the PEI can sell the shares to the PE. Another very common preferred stock is related to the possibility to have more voting rights. For example, if a PEI has 20% of the company, but if these stocks are preferred, this 20% of shares could represent 40 - 49% of rights to vote in the board of directors. The second aspect is represented by the paying policy. The paying policy means the PEI can only buy only new shares or also has to buy shares of the entrepreneur, that means existing shares. If we come back to lesson number one, PE is based on financing. That means that private equity is based only on the buying of new shares. But in some cases if the entrepreneur is very powerful or the deal is very important what can happen is the PEI also has to buy shares of the entrepreneur to give back money, basically, to the entrepreneur. The last decision is related to governance rules. Governance rules means to negotiate the functioning of the board to ensure and announce the capability of the private equity investor to interact and to drive the company. Just to give an example, number of directors the possibility to have the chairman in the board, the scheduling of the meeting of the board, these are examples qualifying corporate governance rules.
