LBO Flashcards
Leverage ratio =?
Debt / ebitda
Interest coverage ratio =?
EBITDA / Interest expense
Principal repayment for high yield debt vs bank debt
Bank debt has principal repayment whereas HY does not
Collateral for high yield debt vs bank debt
HY- no
Bank- yes
Go through steps on CFDF basis for transaction for seller and buyer
EBITDA = 100
Multiple = 10x
Cash = 25
Operating cash =5
Debt = 200
Seller received EV.
1.Purchase price = EV = $1bn
2. Buyer owns excess cash and debt. Takes $1bn and pays off $180 of net debt
3. Buyer walks away with $820
Go through steps on not CFDF basis for transaction for seller and buyer
EBITDA = 100
Multiple = 10x
Cash = 25
Operating cash =5
Debt = 200
Seller received equity value
- EV = $1bn. Purchase price aka equity value = $1bn - $180 of net debt = $820
- Buyer walks away with $820
FCF=?
Tends to exclude debt repayment (bc goal is to look at how much cash is available for that)
=NI + DA + stock based company - increase NWC - capex
Exit multiple range compared to acquisition multiple
The same or a little below
IRR if you double money in 5 years
15%
IRR if you triple money in 5 years
25%
IRR if you double money in 3 years
26%
IRR if you triple money in 3 years
44%
IRR if you triple money in 3 years
44%
Walk through basic LBO
1) assume purchase price, debt/equity, interest rate, other (e.g. revenue growth, margins, etc)
2) create sources and uses to see how much investor equity is required
3) allocate purchase price to create new balance sheet
4) project company’s 3 FS and determine cash flow and how much debt is paid off each year
5) assume exit multiple and calculate final return to the firm
Purchase price allocations steps
Does PPE write down cause DTA or DTL?
DTA
GP and LP. Who is who and who pays a fee?
LP- investors
GP- PE
LP pay management fee ~1.5% to 2% of committed capital
Portfolio company also pays fees to GP (usually shared with LP)
PE firms keep how much of funds returns and what’s it called
15-20%
Promote or carried interest
Number of investments in a fund
~10
How much do GP usually commit for capital?
1-5%
Capital call?
Draw down from LPs on a pro rata basis once investment is made
Commuted capital is not drawn immediately but as needed, but it is legally binding
Hurdle rate
7-10% cumulative return prior to manager
Distribution waterfall - 4 stages
1) Return of capital (including some fees and expenses)
2) pref return: based on hurdle rate or whatever is left from gross proceeds
3) catch up: given all / major portion of gain until receive certain % of profits (what is left after capital return and pref return). E.G. is $100 * (1-20%)- $100
4) carried interest: remaining allocation between LP and GO
Best practice exit multiple to use…
Same as current multiple
M&A / LBO
Do you assume these auto vest? Options, RSU
Options and warrants: yes for outstanding and exercisable using treasury stock method
RSUs: yes for all
If you have extra CF what is the order of repayment
Revolver : use if short on repaying other debt’s mandatory repayment. Otherwise repay first if extra CF
Existing debt
Term loans
Senior notes
Walk through affects on FS for $100M debt, 5% cash interest, 5% PIK interest, and 10% amortization
I/S: 10 interest expense and 6 after tax assuming 40% T
CFS: add back 5 in CFO for PIK interest (non cash) so net -1 in CFO. Pay down 10 in CFF. Total 11
B/S: cash down 11, debt down -10, add 5 for PIK, and -6 in RE to balance at -11
Sources and uses buckets for CFDF deals
Sources: debt + equity
Uses: enterprise value + transaction fees + min cash after close
Sources and uses buckets for non CFDF deals
Sources: new debt, assumed debt, excess cash, equity
Uses: seller’s equity, assumed and refinanced debt, transaction fees
