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4 Core Packets > LBO > Flashcards

LBO Flashcards

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1
Q

What is a leveraged buyout (LBO)?

A

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2
Q

Explain the basic concept of an LBO to me using a real-life example?

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3
Q

What is the intuition underlying the usage of debt in an LBO?

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4
Q

What is the typical capital structure prevalent in LBO transactions?

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5
Q

What are the main levers in an LBO that drive returns?

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6
Q

What attributes make a business an ideal LBO candidate?

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7
Q

What types of industries attract more deal flow from financial buyers?

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8
Q

What would be the ideal types of products/services of a potential LBO target?

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9
Q

What is the relationship between debt and purchase price?

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10
Q

How is the maximum leverage used in an LBO typically determined?

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11
Q

Why might a private equity firm not raise leverage to the maximum leverage, even if it had the option to do so?

A

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12
Q

What determines a company’s debt capacity?

A

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13
Q

In the context of an LBO, what is the “tax shield”?

A

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14
Q

Since senior debt is cheaper, why don’t financial sponsors fund the entire debt portion of the capital structure with senior debt?

A

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15
Q

How do financial sponsors exit their investments?

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16
Q

What is the one caveat of an IPO exit?

A

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17
Q

What is a secondary buyout?

A

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18
Q

What is a dividend recapitalization?

A

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19
Q

How might operating a highly levered company differ from operating a company with minimal or no debt?

A

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20
Q

How can a private equity firm increase the probability of achieving multiple expansion during the sale process?

A

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21
Q

Why is multiple expansion viewed as a less-than-ideal lever for value creation?

A

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22
Q

Can you name a scenario when multiple contraction is common?

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23
Q

What are some risks you would look out for when assessing potential investment opportunities?

A

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24
Q

If you had to pick, would you rather invest in a company that sells B2C or B2B?

A

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25
Q

Imagine that you’re performing diligence on the CIM of a potential LBO investment. Which questions would you attempt to answer?

A

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26
Q

What is a management buyout (MBO)?

A

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27
Q

What is roll-over equity and why do private equity firms perceive it as a positive sign?

A

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28
Q

When might a PE firm prefer to use term loans rather than subordinated notes in an LBO?

A

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29
Q

Would a PE firm prefer high growth or stability in revenue?

A

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30
Q

Why might a higher average selling price (ASP) or average order value (AOV) not always be better?

A

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31
Q

Can a highly capital-intensive industry be appealing to PE investors?

A

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32
Q

When might customer concentration be considered being at a manageable level?

A

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33
Q

Explain the strategic rationale behind add-on acquisitions and how it creates value.

A

100

34
Q

How can value be created during a consolidation play?

A

100

35
Q

What does “multiple arbitrage” in a roll-up acquisition scenario imply?

A

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36
Q

A private equity firm has tripled its initial investment in five years, estimate the IRR.

A

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37
Q

How many years would it take to double a $100,000 investment at a 9% annual return?

A

101

38
Q

If an LBO target had no existing debt on its closing balance sheet, would this increase the returns to the financial buyer?

A

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39
Q

Where do financial sponsors typically get their capital?

A

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40
Q

In the private markets, what does “dry powder” mean?

A

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41
Q

What is proprietary deal sourcing and how does it compare to intermediated deals?

A

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42
Q

From a limited partner’s perspective, what are the advantages/disadvantages of the private equity asset class?

A

101

43
Q

Explain the “2 and 20” compensation structure in private equity.

A

102

44
Q

What is the distribution waterfall schedule in private equity?

A

102

45
Q

In the distribution waterfall in private equity, what is the catch-up clause?

A

102

46
Q

What is a clawback provision?

A

102

47
Q

What is the difference between a recapitalization and an LBO?

A

102

48
Q

Why do some portfolio companies pay sponsor consulting fees?

A

103

49
Q

What is the impact of the 2017 tax reform on the private equity industry?

A

103

50
Q

For private equity funds, the limited partnership is called a “blind pool.” What does this mean?

A

103

51
Q

In private equity, what is a capital call?

A

103

52
Q

Walk me through the mechanics of building an LBO model.

A

104

53
Q

What is the purpose of the “Sources and Uses” section of an LBO model?

A

104

54
Q

How would you measure the credit health of a pre-LBO target company?

A

104

55
Q

Why is LBO analysis used a floor valuation when analyzing company value using several valuation methodologies?

A

105

56
Q

When analyzing the viability of undertaking an LBO, how do private equity firms estimate the company’s value in the exit year?

A

105

57
Q

If you had to choose two variables to sensitize in an LBO model, which ones would you pick?

A

105

58
Q

What are the capex and net working capital considerations for a private equity firm looking at a potential investment?

A

105

59
Q

If management decides to rollover equity, how would you calculate their new ownership stake and proceeds received at exit?

A

105

60
Q

What are the two most common return metrics used by private equity firms?

A

106

61
Q

If you’re given the multiple of money (MoM) of an investment and the number of years the investment was held, what is the formula to calculate the internal rate of return (IRR)?

A

106

62
Q

What levers have a positive/negative impact on the IRR of an investment?

A

106

63
Q

When measuring returns, why is it necessary to look at both the IRR and the MoM?

A

107

64
Q

Tell me how you would calculate IRR in Excel.

A

107

65
Q

What is the difference between gross IRR and net IRR in private equity?

A

107

66
Q

Tell me about the J-curve in private equity returns.

A

107

67
Q

If a business that underwent an LBO has been operating as intended, why does the private equity firm not hold on to the investment for a longer duration (eg. 5-10 years)?

A

107

68
Q

In the situation when a private equity firm has the option to exit within a 1 to 2-year time frame, why might the firm be reluctant to proceed with the sale?

A

108

69
Q

How would you calculate the levered free cash flow yield for a private equity investment, and when would it be used?

A

108

70
Q

If we had not deducted interest and the mandatory debt amortization in calculating free cash flow above, what metric would we be measuring?

A

108

71
Q

How does the accounting treatment of financing fees differ from transactions fees in an LBO?

A

108

72
Q

If an acquirer writes-up the value of intangible assets of a target, how are goodwill and amortization impacted?

A

109

73
Q

What does a cash sweep refer to in LBO modeling?

A

109

74
Q

What is the purpose of the minimum cash balance in an LBO model?

A

109

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