Category Archives: Investment Banking

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What multiple of capital or money-on-money do private equity firms require?

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...
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How much is the coffee shop market worth in New York City?

Market sizing questions are usually asked in consulting interviews but may be asked in IB or PE interviews since industry analysis is part of the job. It’s more important to explain the logic behind your assumptions and less important to get the right number. It’s best to go with a top-down appr...
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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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Paper LBO: Revenue grows by $10 every year and EBITDA margins are constant. Company is bought at 10x at 5x debt, sold at 10x in 5 years. There’s a 10% interest rate and a 40% tax rate. D&A is flat throughout at $15/year, and capex is equal to D&A. There are no transaction fees or changes in net working capital. Assume no debt is paid off until the end, cash is accumulated until the final debt repayment at year 5 when the company is sold. Revenue in year 0 is $100, and COGS is $50 while SG&A is $20. Round all numbers. What’s the IRR?

EBITDA in year 0 = revenue – COGS – SG&A = $100 – $50 – $20 = $30 Since the company is bought at 10x:Enterprise value = EBITDA x entry multiple = $30 x 10 = $300 With debt of 5x, we borrow 5 x $30 = $150, so the other $150 is funded by […]...
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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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