LBO Levered FCF Yield Calculation
How do I calculate LFCF yield in an LBO - which equity do i use?
My understanding: taking LFCF and dividing by entry equity value in each year? or taking the sum of lfcf generated over the course of the investment an dividingf by entry equity value? or by the equity in the sources? thank you
I would do LFCF divided by entry equity value (basically your ticket)
Bump. What is generally considered an attractive levered FCF yield? What about unlevered?
Not sure why you would calculate yearly FCF yield. The whole point of a LBO is that you fix your required return (20-25% IRR on equity for buy outs of > 100m EV is quite common) and then use the price as the plug. FCF is completely irrelevant as it is driven by your amortization schedule of the debt facilities (so completely different if you fund the deal with a bond or with armotizing term loans), while the value generation could be very similar.
And what is driving your 20% annual return? LFCF provides an idea of how much debt repayment can realistically happen...
LFCF is AFTER debt repayment, mate. That's why it's called 'free'.
Yea this is wrong. I’ve seen a number of top tier funds in their ic processes heavily focus on lfcf yield on equity. Eg apollo.
Have you heard of any minimum thresholds that need to be met for IC to take the deal seriously?
Can we please agree on the following:
- In its definition, LFCF yield would be calculate BEFORE debt repayment. You would sum these up throughout the holding period and divide by the sponsor equity from the Sources.
Rover-S you are correct, that it should be named Cash flow available for debt service, but for the sake of LFCF yield, all textbooks/ google says BEFORE debt repayment
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