Private Equity

Question 1

What is a financial sponsor?

Answer 1

Question 2

What is an LBO?

Answer 2

Question 3

What is the typical capital structure in an LBO model?

Answer 3

60/40 in more recent years

Majority of debt raised will be senior secured from banks and institutional investors

Question 4

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

Answer 4

Question 5

Walk me through a paper LBO

Answer 5

Question 6

What types of LBO deals are there?

Answer 6

Question 7

What are the advantages and disadvantages of high leverage in an LBO?

Answer 7

A smaller contribution of equity (and higher proportion of debt) means the equity holders benefit more from increases in the enterprise value of the company ASSUMING that the debt is paid down

Question 8

What is the most important deal metric that PE firms use in evaluating deals?

Answer 8

The IRR is the discount rate at which the NPV of a project = 0 - it is the expected return