1. What is private equity investing?

2. What features of private equity investing make it unique? How does it differ from public market investing? Why might a firm like Palamon play in the private equity space?

3. Should Palamon invest in TeamSystem? Why or why not?

4. How much is a 51% stake of TeamSystem worth?

5. What other factors (besides valuation) affect the attractiveness of this investment?

6. What should Louis Elson do?

7. Why does such an attractive investment opportunity exist?

In February 2000, a managing partner of a U.K.-based private equity fund, Palamon Capital Partners, faced the decision of whether to invest in an Italian software company, TeamSystem, S.p.A. The rationale for this investment was a belief in the rapid future consolidation of the Italian enterprise software industry, in combination with improvements in operating performance that were believed to arise from a stronger investor orientation after the transaction. The transaction entailed a leveraged recapitalization of the target that would significantly change its ownership, control, and leverage. The task for the student is to evaluate the attractiveness of the investment, based on a strategic appraisal, a valuation of the target with its new capitalization, and an assessment of the proposed deal structure.

This case was developed to support the following teaching objectives.

• Introduce the practice, goals, and process of private equity investing and provide a basis for comparing those attributes with public market investing.
• Consider the diffusion of private equity investing practices around the world.
• Exercise skills in valuing a business. The case offers the student a chance to perform both a discounted cash flow and a market multiple valuation of TeamSystem. The valuation tasks confront the realistic constraints that face many private equity analysts, a lack of detailed historical and forecast financial information and few publicly traded comparable firms.
• Consider the impacts of changes in leverage, control structure, and of a cross-border transaction with the attendant country risk and exchange rate bets.