Paper LBO model
I've heard in some interviews of candidates being asked to construct a paper lbo model, where they are given a bunch of information and have to walk through the LBO math.
Could someone provide an example of how this plays out? What information will you be given, what are you asked to calculate, and what are examples of tricky follow-up questions?
I imagine this wouldn't be too difficult, if you're given a few simple assumptions, asked to calculate FCF, and assume an entry and exit at a certain multiple. Can't imagine this being too hard but wanted to hear from someone who has gone through the interview process. Thanks.
TA Associates asked me to do this in an interview a few years backs. We mutually agreed on a target company that we both had some familiarity with and then I wrote down LTM revenue on a piece of paper and we talked through assumptions for gross margins, EBITDA margin.
After agreeing on those margins and a 5 year revenue growth CAGR, he then asked me to layer in a new capital structure based on a purchase multiple, market debt multiples. From there you can calc the annual amortization and interest expense and make assumptions around capex, change in working capital, etc.
At this point you essentially have a proxy for annual FCF and a terminal equity value. Then you can calc the cash on cash return and do a rough approximation of the IRR.
The math is the easy part. The true test is walking through all of the assumptions and not missing steps.
Thanks. Silver banana for that
Paper LBO in Credit Fund Interview - Why? (Originally Posted: 02/25/2016)
Can someone help me understand why a Credit Fund would ask how to walk thru a paper LBO (and any other typical PE questions for that matter) during an interview? Should you answer the question any differently?
What I dont understand is that the paper LBO question and related PE technicals are all about the equity upside, implied purchase price @ desired IRR, etc - how is this relevant for a credit fund? It feels odd to say "in 5 years @ x exit multiple you would realize an IRR of 25% / MoM of 3x.", etc. I get that they want to see that candidates understand how they work, but to talk about equity returns in a debt fund interview makes absolutely no sense to me and this process remains a puzzle because of this.
Is there a specific way you are supposed to answer these PE-type questions from the debt investor perspective?
Did they specifically ask for you to discuss equity returns?
A lbo model is also used to determine debt capacity. Approach it from a debt point of view rather than equity. Taking the projected financials work out both key leverage and coverage multiples to determine if the company is a good credit and can sustain the level of debt.
From the perspective on an interview, and LBO model is used to determine returns...
Use their assumptions to do your sources and uses -> project Income statement, cash flow, etc. -> model debt paydown -> determine returns
MOM multiple is literally just equity return divided by equity input for a paper LBO...
I understand that...... What are you talking about ? Read my question. That is from the equity perspective.. This is a DEBT fund. It doesn't make sense to talk about equity returns for a debt fund, nor do I understand why they care...
Superday w/ Paper Modeling (Originally Posted: 08/02/2015)
Hi everyone,
I am currently interviewing for RBC Houston and will be having a super day next week. I have two years experience in investment management so I'm assuming this isn't an entry-level role (at least one year in finance required). I've been told that I will have to do some paper modeling for about 2 hours. When I asked about the details, the recruiter answered "oh you know, given xyz what happens to the financials".
Does anyone have a clue to what this might mean? I've been preparing through the BIWS courses but unsure if this means modeling out a DCF, an operating model or just accounting questions.
Any help would be very appreciated.
Thanks.
Thanks, maybe I am overthinking why they are calling it a "modeling test" and telling me it will take 2+ hours. If anyone else has direct experience with something similar I'd like to hear as well.
Hmm depends, is this for associate or analyst?
Yeah it will most likely be something like "If depreciation increases by $10,000, what happens to the 3 financial statements?"
From there you would just have to find a good way to visually represent that on a piece of paper
This is for an analyst position with at least 1 year in finance experience. Well it's tomorrow so let's see what I get, I'd appreciate any comments from people who have been in a similar situation.
How did this turn out?
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