PE firms want to realize an IRR of > 20%, using a lot of leverage. This can be executed through an LBO. If a firm has stable (free) cash flows, it can repay its debt obligations. At the same time, equity will rise, because debt is declining. Given the time horizon (usually 5 year), the IRR can therefore be calculated by the difference in equity value from the starting point to the exit point, adjusted for the time horizon. Starting point and exit point can be determined through an multiple analysis btw.

 
Best Response

Everything said above is correct, our models always include a waterfall tab to account for the various equity participants (common, pref, etc.) and there is always a hurdle rate that must be taken into account.

Below is a simple example of a standard XIRR calc (assumes an exit in 2013)

LTM EBITDA $200M Exit Multiple 8x EV = $1600M

Less Debt -$200 Equity Value $1400

Investor 1 IRR (Owns 50%) Cash Flow 1/1/2008 1/1/2009 1/1/2010 1/31/2013 (80.0) (50.0) (50.0) 700.0 (700=.5*Equity Value)

XIRR = 36.6% Investor 1 equity invested = $180M Equity Proceeds at exit = $700M Equity multiple 3.89x

 
Hebbes84:
Marcus Halberstram stfu noob. The IRR is a time-weighted return expressed as a percentage. You calculate this annualized return over your invested equity. That is why I said beginning and ending.

I hope you're atleast in the industry.

 

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