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What is Multiple of Capital or Money-on-Money?

Multiple of capital, also known as money-on-money, is calculated by dividing the ending equity by the initial equity invested. It shows you how many times the equity in the investment has grown. For example, if a company delivers 2x return, that means the ending equity received after the sale was tw...
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What is a dividend recapitalization and why do PE firms use them?

A dividend recapitalization is when a company borrows money to pay its investors a dividend. This happens when the company has paid down significant amounts of debt from the original LBO, there are limited growth opportunities to invest the debt proceeds into, and investors want to enhance their ret...
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Why do you have to project the financial statements without the impact of debt prior to building the debt schedule?

In order to calculate the cash flow available for debt repayment, we have to project the income statement and cash flow statement. Initially, we exclude debt items, such as interest expense on the income statement and debt repayments on the cash flow statement, since we need the debt schedule to pop...
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What would increase IRR the most: a $100M increase in revenue, a $100M decrease in costs, or a $100M decrease in net working capital?

A $100M decrease in net working capital would increase IRR the most. A $100M increase in revenue would typically come with an increase in COGS as well as an increase in taxes. If the increase in revenue came from an increase in prices, then COGS would not increase, but taxes would still increase. A ...
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Which industries are suitable for LBOs?

Usually, industries with stable cash flows and a tangible asset base are good for LBOs. For example, consumers, healthcare, and B2B services are common industries for PE. Software companies with recurring revenue who serve businesses could also be attractive; despite lacking a tangible asset base, t...
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What kind of covenants are used in an LBO?

A covenant is a requirement or metric on debt that is common in LBOs; this requirement or metric must be met or else the borrower will technically be in default. The details of the covenant can be found in the credit agreement. Maintenance covenants require the borrower to meet certain financial met...
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What are the key differences between senior debt and junior debt?

Senior debt is typically provided by banks and has a higher priority claim on assets and cash flows than junior debt. Given this higher priority, senior debt is safer and features a lower interest rate. The interest rate is based on a floating rate, which is a benchmark rate (typically 1-month SOFR)...
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Other than IRR, how else can you measure the return in an LBO?

Another common measure of return is multiple of capital, also known as multiple of invested capital, money-on-money, or cash-on-cash. It represents how many times you’ve multiplied your original investment, and can be calculated as ending equity divided by invested equity. Where are there multiple...
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Pitch me an LBO.

An LBO pitch is very similar to a stock pitch, in which it entails talking about your thought process and what you believe makes a good company. You can speak about how it meets the fund’s investment parameters, as well as its stable and recurring cash flows, being a market leader in a defensible ...
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