How to model prexisting PE ownership in an LBO ?
Hi all, Would be incredibly grateful for any advice. I’m doing an exciting analysis into a take private but noticed the PE fund had let’s say 20% existing ownership. If there are 100 shares:
This means they only need to buy 80% of existing shares - ie 80 shares.
My question is how to model the sources and uses and also rollover equity.
What I’ve done so far is put the purchase equity as based on 100% of shares but then I’ve taken the existing 20% ownership and rolled over. This means they contribute the same market value of equity now as in the sources.
My only issue with this being correct is: 1. The IRR comes out very low as I’m presuming the additional equity causes the leverage ratio to drop. This means there isn’t as much debt financing this.
- Is IRR calculated on total equity contributed (ie the rollover AND new equity) or the new equity only?
Would be incredibly grateful for any advice as spinning my wheels for a few days. Thank you
You'd probably show both; for the purposes of the take private itself, your first analysis should be the return on the new equity contributed by the sponsor.
It'd also be useful to see what the overall return (old + new equity) is, and how much the new equity impacts the existing returns across the extended hold period.
Thanks a lot for the response!
So that clarifies that my IRR at least somewhat makes sense.
But for the sources and uses I definitely do put 100% of the shares up and roll over right?
Otherwise my FCFs would be for 100% of the business but the equity and EV wouldn’t?
Thanks once again for your help!
You want two rows in the equity section of S&U. One with rollover, one with new equity. Both are your capital.
FCF is typically modeled at the company level. Any dividends / equity proceeds are divided based on ownership split.
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