Craig Capital Corporation

Linzhi Shao, 2010

I had a private equity internship at Craig Capital Corporation in Burlington during the J-term.  This internship was offered by Dan Bryan, alum of Middlebury College.  It was a great opportunity for me because I had always enjoyed conducting research and analysis of industries and companies.  Since private equity firms usually do not offer internships to undergraduates, I treasured this great opportunity and made the best use of it to learn about the deal process of private equity.

Craig Capital Corporation differs from many other private equity firms in the way that it adopts a “contrarian investment philosophy.”  Private equity firms that invest in growth companies usually prefer industries that are experiencing fast growth.  However, Craig Capital invests in companies that are underappreciated probably because they are in out-of-favor industries or missing a crucial member of senior management.  As current economic recession forces a lot of good companies to experience great difficulties in running business and to put themselves on sale at low price, there are more targets in the market that Craig Capital can buy at reasonable purchase price multiples.

On the first day of my internship, I was given a book to read – Pat Dorsey’s “That Builds Wealth”, since it is the strategy of searching for “economic moats” described in this book that has been guiding Craig Capital in making profitable investments in the past. Economic moats refer to a company’s ability to maintain competitive advantages in order to prevent its competitors from taking its profits and market share in the long run. This is a very important concept and the first factor to consider when deciding whether a company is a good buy.  I finished the book within two days and used what I learned from the book in my industry and company analysis. I first looked at the company’s historical performance of return on invested capital. If the company has historically generated high EBITDA margin, return on assets, return on equity and return on invested capital, then there is a possibility that the company in question has some economic moats.  The next step is to dig into the company’s business model and the industry dynamics to find out whether the company has economic moats and how sustainable these moats are in the long run. Some examples of economics moats are intellectual properties and patents, high switching costs, large network effect, and cost advantages. These steps gave me a very clear and organized framework whenever I was asked to analyze the attractiveness of a company.

After I found a company with economic moats and future growth potential, the next important step is to create a LBO model, from which we can find the internal rate of return (IRR) to see whether investing in this company can generate decent returns. The process of learning how to build a LBO model is one of the greatest lessons learned from my internship, as my financial modeling skills were largely enhanced. Although I took Corporate Finance and Accounting at Middlebury in the first semester of my sophomore year, I did not have many chances of practicing my accounting skills and learning financial modeling before I interned at Craig Capital Corporation.  As financial modeling skills are crucial to any finance jobs, I spared no effort in learning LBO models from scratch.  When I first played with the models that Dan created for a previous portfolio company, I was amazed by the complexity of the model and unsure whether I could create a similar one for a new company.  With Dan’s guidance, I first built the three financial statements by copying the actual data from the offering memorandum to Excel sheets, i.e., income statement, balance sheet, and then cash flow. Then based on current economic situation and my forecast of industry trend, I created assumptions for the company’s future earnings / costs structure and operating efficiency, and then made forecast for the company’s financial statements in the next five years. Then I built in debt repayment schedules, sources and uses of funds and pro forma balance sheets. Initially my balance sheet was always not balanced and I couldn’t find out the reason. Then Dan taught me a method of comparing the items in balance sheet with those in cash flow statement in a particular year to find out the reason of imbalance. Under Dan’s guidance, I finally created a complete LBO model, which was then used by Craig Capital to bid for the company. It gave me tremendous satisfaction when my hard work made a very important contribution to the deal.

In the last week of my internship, I learned how to find a deal that suits the firm’s investment criteria.  I was given numerous websites where companies for sale were listed. If the company has at least $4 billion EBITDA, then I looked at its description to see whether it has any competitive advantages, a strong market position, products and services with relatively stable demand, moderate capital expenditure requirement and a reasonable purchase price multiple.  I collected a list of twenty companies which satisfied at least two of the abovementioned acquisition criteria and gave the list to Dan.  We then had a discussion about the companies on my list. We eventually decided to pursue further interest in only three companies in my list. I realized that it is indeed not an easy process of finding a suitable deal.

This internship provides me with wonderful opportunities to understand a wide range of industries and further enhances my interest in private equity. I have done my best to learn and contribute. I firmly believe that the market research and financial modeling skills obtained from this internship provide a great platform for me to pursue my career in the finance industry.

Contact the Career Services Office for more information on this internship.