LBO Model Test Caveats
What different things have you seen in LBO modeling tests for PE recruiting?
I’ll list a few I’ve seen/heard: Management roll / promote Minority or preferred investment Dividend Recap Add on Acquisition
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Partial IPOs and subsequent tranched sell-offs
Everything except the minority/pref is relatively common
PIK
This comes up in a lot of them. Good test if you’re tracking cash right
Revolver commitment fee, mandatory amort, OID
everything named above could be found in wall street prep's advanced LBO modeling guide online. hope that helps. just went through it myself
Correct me if I’m wrong but I don’t think the first comment on partial IPO and partial sell off is in there ? Do you have advice for where to find examples of that ? Agree wallstreetprep advanced test is insanely helpful and contains a ton of goodies
man, wtf is a partial ipo and partial sell off. i mean it's probably not a crazy new addition to the advanced lbos ive seen, but this is new lol.
Was really new to the entire LBO model test concept / process coming from consulting but like others have said, the free WSP standard and advanced guide really helped me learn the test format with multiple different features. Friend in my group pointed me to prorata.gumroad.com that has been posting a few new practice lbo tests every couple weeks. The free ones that were previously up were just okay but I got the paid tests for $25 and found it to be very helpful getting comfortable with different nuances and thinking through more difficult prompts, especially for software and tech PE tests which I could never seem to find.
Slightly nuanced but aside from the above, operational functionality / sensitivities can be a good differentiator. Lots of funds give a case study w/ a CIM or other metrics, and you can usually back into some super basic KPI-driven revenue and cost builds (I'm talking a few lines max) that are related to the business. If you can flex those assumptions in the forecast and talk about the most crucial drivers to focus on in DD (assuming you make it to the case debrief), that shows really well and might help someone overlook one or two dumb (non-egregious) errors
Can someone expand on the partial IPO and partial sell off piece?
It isn't something that will come up in on-cycle tests. Haven't heard of it coming up for anyone I know and certainly never had anything to that kind come up on-cycle for UMM/MF tests. I outlined below in the things that are very likely to come up and you should focus on. TLDR: really just be very confident on modelling out: PIK, financing fee, OID fees, non cash-free debt-free deals, management roll, management promote, and revolver commitment fee as they will account for ~80% of the "complexities" in your tests.
The added complexity is that in your returns section; projeting out IPO's timing since it has selling-out over time, so effects your IRR due to timing aspect. Just model this out in your returns section showing respective sell-offs as they happen across time periods. Partial sell-off is mechanically a similar idea in that you have some kind of early return to the sponsor by partially selling off an asset and then larger later cash flow / return when you sell off the whole business. Might be helpful buliding a mini-schedule for this with an if statement pulling that amount into your equity return to sponsor for every year including and past whatever year your partial stake sell happens.
Thanks for answering here.
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