Conceptual LBO Questions

Hey guys, I have a couple questions regarding lbo models and how they are actually built on the job.

1) I have seen some models from actual Analysts at BBs in NY, and I never see IRR being a major component of the model, although Wall Street Prep and this website makes it seem like IRR is the major output.

From what the analysts tell me, IRR is for the PE firm's model, and since the bank model is only used to get the deal passed by the internal committee, IRR is irrelevant. In fact, they said showing IRR in a model to your credit team would actually hurt the transaction because if you are showing a high IRR, the credit committee might ask why there is so much financing being required and they might lower leverage on that basis.

I was told that the ONLY thing the credit committees care about is your summary statistics at the output of the model. For example, debt paydown over the course of 5-years or so, and how leverage decreases per annum.

2) It also seems that if you are building an lbo model for a Sponsor transaction, the Sponsor will usually provide the bank a thorough model that the bank will just take and build sensitivities for. I understand that not all sponsors do this, but the KKRs and Carlyle's of the world seem to be more receptive to this (from what I have heard).

So why does everyone make it seem like you build these models from SCRATCH? I mean, you still have a lot of work to do even when a Sponsor sends you their model, but it is never built from scratch, and a lot of the working assumptions are provided via the model being sent.

I am just trying to clear up some confusion that WSO and other websites create about this stuff. Also, this is more for a Leveraged Finance team or something related (not talking about building an LBO to back into a valuation figure).

 
Best Response

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Those who can, do. Those who can't, post threads about how to do it on WSO.

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