StreetOfWalls Flashcards
What is an LBO?
An LBO, or Leveraged Buyout, is a financial transaction where a company is acquired using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired, along with the acquired company’s cash flow, are used as collateral for the loans.
Walk me through the mechanics of an LBO model.
In an LBO model, the process involves estimating the purchase price, determining the capital structure, forecasting the financial performance of the target company, calculating debt repayments, and ultimately evaluating the returns for investors. The key components include assumptions, projections, debt schedules, and valuation metrics.
How do you assess credit risk?
Assessing credit risk involves evaluating a borrower’s ability to meet its debt obligations. This is done by analyzing financial statements, cash flow, debt ratios, credit ratings, industry conditions, and macroeconomic factors. Credit risk assessments help determine the likelihood of default and inform decisions on lending or investment.
What are the different types of PE firms?
PE firms can be categorized into venture capital (early-stage investments in startups), growth equity (investments in companies with proven business models but still in the growth phase), buyout firms (acquiring controlling stakes in mature companies), mezzanine funds (providing subordinated debt with equity features), and distressed debt funds (investing in financially distressed companies).
What makes a good LBO investment candidate?
Good LBO candidates typically have stable and predictable cash flows, a strong market position, opportunities for operational improvements, potential for cost synergies, and the ability to generate significant free cash flow for debt repayment.
What are the different ways to find the valuation of a company?
Valuation can be determined using various methods, including Comparable Company Analysis (CCA), Precedent Transaction Analysis (PTA), Discounted Cash Flow (DCF) analysis, and precedent deal analysis. Each method has its strengths and weaknesses, and a combination of methods is often used for a comprehensive valuation.
Company A has a potential IRR of 23% and Company B has a potential IRR of 30%. What 2 questions would you ask before you decide which one to invest in?
Questions might include understanding the assumptions behind the IRR calculations, assessing the associated risks, evaluating the exit strategies, and considering the alignment of the investment with the fund’s overall strategy and goals.
What are the 4 main drivers of the change in IRR for an LBO scenario?
The four main drivers are the entry multiple (purchase price), exit multiple, holding period, and leverage. Changes in these factors directly impact the IRR of the investment.
How do you model in PIK notes?
Payment-in-kind (PIK) notes allow interest to be paid with additional debt rather than cash. Modeling PIK notes involves including the PIK interest in the debt schedule and accounting for the compounding effect over time.
Walk me through the calculation of Free Cash Flow.
Free Cash Flow (FCF) is calculated by subtracting capital expenditures from operating cash flow. It represents the cash generated by a company that is available for distribution to investors, debt repayment, or reinvestment.
Why would a private equity firm use a convertible preferred note?
Convertible preferred notes provide a blend of debt and equity financing. They offer the flexibility to convert the debt into equity, allowing investors to benefit from potential future appreciation in the company’s value.
How do you calculate amortization of intangible assets?
Amortization of intangible assets is calculated by spreading the cost of the intangible asset over its useful life. The annual amortization expense is determined by dividing the total cost by the asset’s useful life.
What are the uses of excess cash flow?
Excess cash flow can be used for debt reduction, dividends, share buybacks, acquisitions, capital expenditures, or retained for future investments. The decision depends on the company’s strategy and priorities.
What makes for a good management team?
A good management team demonstrates leadership, strategic vision, industry knowledge, effective communication, the ability to execute plans, adaptability, and a track record of success.
What 3 questions would you ask a CEO of a company you were looking to invest in?
Questions might include inquiries about the company’s growth strategy, competitive positioning, risk management, key challenges, and the CEO’s vision for the future.
