Asset Liability Management

Below is the question to be answered - Under 2000 words The fund has a legacy private equity investment in a small regional grocery chain, Kelly’s Groceries. A private equity manager transferred the investment to the Fund in the process of winding up one of its vehicles in which the Fund was invested. Three years ago the private equity manager replaced the CEO of Kelly’s Groceries, whose family had sold out to the private equity firm. The financial statements for the last seven years are included. An investment bank has proposed selling the investment through an IPO. This may be a good idea depending on the price achieved. • Comment on the competitive situation of the grocery chain using the Porter framework and your general knowledge of the grocery business. • Analyse the financial statements to make observations on how well the business is performing, and the impact of the recent management change. • Determine a guidance valuation of the Fund’s equity ($ per share) in Kelly’s Groceries using a FCFF discount method. Assume an indicative capital structure of 25/75 debt/equity. Base the cost of debt on the latest RBA BBB ten year indicative rate, and cost of equity on an ERP of 5% relative to the ten year government bond yield. Compare dividend yield and earnings yield based on your valuation, to listed grocery companies. Qualify your valuation by highlighting any uncertainties you have about the company’s situation. A broker anticipating the upcoming IPO has approached your father suggesting this would be a good dividend paying stock to include in his retirement portfolio. The broker has prepared a dividend discount valuation basing his growth forecast on the company’s dividend history. His valuation is somewhat more optimistic than yours. Comment on the difference.