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Case Study: Phaedrus Capital currency risk management assessment

of Sibanye-Stillwater

Phaedrus Capital is one of the world’s leading Private Equity buyout funds with deep
expertise in the mining and precious metals sector. Phaedrus Capital supports experienced
management teams with capital to execute and complete their business plan, and strategic
advice to ensure their success. Phaedrus’ flagship fund, denominated in USD, is considering
a public-to-private buyout transaction of the South African mining company Sibanye-
Stillwater.

Sibanye-Stillwater is an independent global mining group domiciled in South Africa


(reporting in ZAR), which owns and operates a portfolio of high-quality gold operations in
South Africa the US. Sibanye-Stillwater is the third largest producer of palladium and
platinum and is one of the 10 largest gold producers globally.

The investment team at Phaedrus has worked extensively on modelling the investment case
and are making the following assumptions:

 Acquisition price: 20% premium to listed share price


 Sources of funds: Debt and Equity
 Hold period: 5 years (with 2 year extension if needed)
 Expected return: 3x MoIC

The investment team have made their assumptions on a constant currency basis, but are
very aware that currency volatility poses a serious risk to the performance of their
investment at several levels. They have asked for your assistance in evaluating the currency
risks involved in the transaction, and to come up with any possible solutions to mitigate
these. In particular, they have identified 3 key areas they want you to focus on:

 Funding Risk: After proposing final terms to existing shareholders of Sibanye-


Stillwater, Phaedrus expect to have to wait 2 months to find out if the offer has been
accepted or not. Phaedrus are worried that if ZAR strengthens against USD during
the 2 month period then they would have to use more dollars to fund the deal than
anticipated. They would like you to quantify the magnitude of this risk, comment on
whether or not it is material or even relevant to the investment case, and if so -
propose a way to mitigate it. If a proposal includes any hedging instruments then
they would also like to know what happens if the investment offer is not accepted
and the deal falls through.
 Valuation risk: While Phaedrus have confidence in Sibanye-Stillwater’s management
team’s ability to manage their own risks at the company level, they would like a high
level commentary on how market risks (currencies, interest rates, commodities) can
affect the EBITDA of the company over time and thus the exit valuation of Phaedrus’
investment. They would like you to provide some discussion points around how they
should view these risks, whether they pose a serious threat to their investment, and
whether the company should be thinking about managing these risks differently.
This section does not need to be overly quantitative in nature.

 Investment Risk: Phaedrus is worried about how the return profile of their
investment can be impacted by the USDZAR exchange rate over time, particularly as
they are funding a ZAR investment with USD. They are finding it difficult to measure
this risk given the relative uncertainty of both future exit timing and return profile,
and would like you to assist them in finding a way to quantify this in order to make
any meaningful observations. Please also advise whether or not this risk should be
mitigated, and if so – how you propose they should do that.

Deliverable
Your team should send a maximum 12 slide recommendation presentation (additional pages
may be included in the Appendix) by 2:00 pm on 23 February 2018 and be prepared to
present your findings on 2 March 2018 to the judging panel.

Please prepare a final recommendation for each section (Funding Risk, Valuation risk, and
Investment Risk). The tone and content of the materials should be consistent with
a recommendation to an investment committee. Teams will not be required to submit their
models.

NOTE: Please feel free to create a model for the investment case (you can determine a
realistic debt/equity split and make your own assumptions on the proceeds of funds and
investment strategy) in order to make your risk assessment more relevant. Please note
however that you will not be tasked with determining whether or not the investment makes
sense.

Competition Round Format


The 2018 Validus - LBS Private Equity Competition will consist of two rounds of
presentations. The first round in the morning will take place in 3 lecture theatres. Each team
will receive their room and time slot allocation closer to the competition date. Presentations
will last for 10 minutes with an additional 15 minutes for Q&A. Only the presenting team,
judges, and competition chaperone will be allowed into the lecture theatres for the first
round presentations.
The finalist teams will present again at 1:00 pm in the Dining Room to the combined judging
panel. All teams are welcome to join the audience for this round and observe the
presentations. Assessment criteria will be based on risk assessment, hedging strategy,
analytical analysis and overall quality of presentation.

Schedule for 2 March 2018


8:30am - 9:00am: Registration and Team Arrivals
9:00am - 11:30am: First Round Presentations
11:30am - 12:45pm: Break
12:45pm - 1:00pm: Announcement of Finalists
1:00pm - 2:30pm: Final Round Presentation
2:30pm - 3:00pm: Judges Deliberation
3:00pm - 4:30pm: Award Ceremony and Networking Reception

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