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...

IRR stands for internal rate of return, and PE firms use this metric to judge the return on an investment. IRR is the annualized return of the equity investment, and is equal to the CAGR of the equity investment until exit, assuming no other interim cashflows before the sale of the company, such as ...

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...

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...

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 ...

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...

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...

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)...

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...

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 ...