A positive covenant is when the company agrees to take certain actions for the duration of the loan. This can could include maintaining adequate insurance plans, performing plant and equipment repairs and upgrades, disclosing audit reports, or achieving a certain threshold in key financial ratios. A...

A revolving credit facility is like a credit card or line of credit. It can be drawn anytime as long as the maximum limit is not reached. It’s commonly used to cover cash shortfalls, net working capital needs, and acquisitions. For example, if the maximum limit is $100M and if the company is short...

Larger PE funds and / or PE firms executing LBOs in non-cyclical industries with recurring cash flows aim for a 2.5x multiple of capital over a 5-year period before selling the company, which is a 20% IRR. For growth equity investments in more cyclical industries with higher growth rates, a 3x multi...

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...