I'm preparing for PE interviews and re-learning my deal specifics. Only issue which I'm just now realizing is that I worked on a PE deal for quite some time and have no idea what the IRR was. Which is troubling. The main issue is that it was a bolt on transaction.
example.
Carlyle buys Playboy. Along the next 3 years, Playboy acquires Hustler and Penthouse to form Playman. Playman then tries to acquire Vivid Entertainment. So I was involved in Playman acq. Vivid. Since NewCo will involve all the previous roll-ups, and there is no exit which quantifies the return on the Vivid acquisition, how do you determine an IRR on this? Obviously there is significant value creation from synergies, to exit Vivid through a carveout would obviously destroy the value created through those synergies, so a craveout exit is not an accurate proxy... correct?
Not sure if this is how its actually done in house, since I've never seen a PE shops work product in assessing an investment... but I would...
Look at Playman as a standalone and model it out to exit.
Look at the NewCo LBO and model it out to exit.
Take NewCo net proceeds from exit, and subtract Playman net proceeds from exit. This leaves you with the value of Vivid Entertainment+value created from the NewCo LBO (NewCo Value Created).
In calculating IRR... look at the investment in Vivid and the exit CF should be the isolated NewCo Value Created. That should give you an IRR that isolates the investment in Vivid Entertainment. This is assuming no cash out/in-flows between acquisition and exit; but obviously the principle stands regardless of future distributions/investments.
Can anyone actual experience/knowledge comment/clarify my proposed calculation.
Comments: Playman = Playman sans Vivid Acquisition NewCo = Playman after Vivid Acquisition NewCo Value Created = Vivid Entertainment + Synergy Value Created
Anybody else?
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