LBO problem for PE. Any experts here? Need help!

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YoMama14

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Hi guys, I have an LBO problem and was wondering if there are any experts here that have worked in Private equity or leveraged finance. I would greatly appreciate your help if you could walk me through this. I need to create a simple table of sources and uses and exit analysis with IRR. How would you guys structure this? Thanks
Assumptions
EBITDA 100
Growth Rate 5% per year
Purchase Multiple 5X
Leverage 3X
Tax Rate 35%
Depreciation & Amortization 0
Working Capital Requirments 25
Interest rate on debt 10%
Existing Cash 0
Exit Multiple 5
Exit in year 5
Existing Debt 0
 
How to “structure” this? They already told you how to structure the transaction – it’s 60% debt and 40% equity. You can make your own assumptions on term loans and sub debt, but you can just go for 2x and 1x respectively to keep things simple.
Looks like a pretty straightforward request…they’re just asking you to construct a basic LBO model. I don’t know what specific questions you have about this – seems like you have all the information you need – unless you’re asking someone on this forum to build the model for you…
 
How about you let someone who knows how to build the model do the interview instead. You’re just wasting time.
Just sayin.
 
Hi numi how are you. Yes I am looking for someone to help build out the structure of the model. TY. Asset_Management if you can’t be helpful gtfo of here.
 
The reason I ask is to gain a deeper understanding and would like to see how an expert would handle this. Isnt the debt at 3x ebita too much for the company to handle? FCF is not enough to pay down interest and principal.
 
YoMama14, the context for ASSet_MANagement’s comment is that you’re essentially asking in so many words for someone to build the model for you. Is that correct? I mean, I guess we’d all love to be so fortunate so as to have a team of people do our work for us, and then take the credit/rewards for ourselves. Maybe you’ve made some attempt to understand this on your own, but that’s not evident from your first posting.
To your question about FCF, you don’t need it to be large enough to pay down both interest and principal. The goal is not necessarily to pay down ALL the debt; what you’re mandated to do as a PE firm is to *service* the debt first and foremost and grow the company; of course eventually you have to pay back the principal, but when you exit the investment, then you can pay down the remaining debt then and pocket the rest as equity. That’s how PE investors make money. You should know this if you’ve gotten to the point of an interview process where they’re asking you to build models.
Anyway, when you remember that FCF = EBIT*(1-tax rate) + D&A - CAPEX - change in working capital, you can see that there’s plenty left over to pay down at least the interest on the debt, as well as some of the principal if you’d like. Whether you decide to pay down principal depends primarily on the assumptions you’re making about pre-payment on the debt (which can be the case for revolver, sub debt or less senior tranches of term loans, but perhaps not for the most senior tranches).
 
This model is ridiculous. Assuming you can get a bullet note, you’ve got 70 left after debt service. Considering you’ve only got 200 equity in the deal, I smell a dividend recap, preferably with 15% PIK notes.
/2007’d
 
IRR with dev recap is around 20ish% isn’t it (based on my BOEC - back of envelope calc). Of course that’s assuming we can get bullet notes and all of the debt is paid back by the end of 5th year + all of the free cash flow is paid as dividend.
Not sure why the company would need a dividend recap, please enlighten me.
 
ozzie123 Wrote:
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> Not sure why the company would need a dividend
> recap, please enlighten me.
Need? When did need ever enter into the conversation? But since you asked, it’s needed because we only got 3 turns on the senior, and apparently no sub. We shouldn’t even have any equity in this deal. Maybe they own the headquarters and we can do a sale-leaseback at 3% cap rate?
 
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