Hi fellow monkeys (and humans) - what's a good source (website / book) to get a hold of examples of LBO paper model type questions asked of candidates in interviews? A forum for lbo models was created earlier, with the view point of helping candidates, however, there was no response. Any help would be greatly appreciated. Thanks.
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It's not all that different than building a quick LBO in excel, perhaps easier since there tend to be a lot of simplifying assumptions. Paper LBO's aren't meant to test your mental math skills so much as they are there to test that you can understand and do an lbo model in an unfamiliar setting.
For example, many times you'll be told to assume that cash just accrues and isn't sweeped to amortize debt principal (so that you have the same interest payments each period).
Thanks for that. What is a good source to find LBO paper examples, preferably with solutions?
There's one in the Vault guide, but there is a slight error in it. I don't know if they ever corrected it.
"Conceptual Fundamentals - LBO Modeling" on Udemy. Well worth the $20, brushed up on my modeling in Excel too. The guy is also in PE which helps.
http://www.streetofwalls.com/finance-training-courses/private-equity-tr…
Also, p.94 - 98 of Vault Guide's PE and HF Interview books has another paper LBO example. The guide is pretty good and costs like $30 which lets be honest is 10% of WSO's cost...
Many thanks!
Many thanks!
As one of the posters above said, paper LBO questions aren't necessarily meant to test your mental math skills - it's more about testing whether you understand the mechanics of an LBO and how the different variables/levers are connected.
Questions can be based on either a hypothetical example or one of the deals on your resume.
A sample question could be as follows: "Imagine you purchase a business at 9.0x EBITDA multiple and you believe you can sell it in 5 years at the same 9.0x EBITDA multiple. Your required IRR is 25%. Assume that you can get 4x leverage and half gets repaid through year 5. How much do you need to grow EBITDA by in this time to achieve your desired IRR?
You can then test yourself by solving for different variables in similar questions (e.g., what is the max you can afford to pay for a business to achieve a specific IRR given certain cash flow, exit multiple, and leverage parameters; what exit multiple is needed in order to achieve a specific IRR given certain cash flow, entry multiple, and leverage parameters; etc.)
One helpful tip is to memorize the IRR-to-MOIC conversion table (i.e., knowing what IRR is implied for a certain MOIC and exit year) since this will help you approximate IRRs quickly.
Hi ASM_123, thanks for your response. In your example, is it correct to say that EBITDA would need to increase by approx 125% (or by 1.25x). I'm not sure how the leverage pay down will impact EBITDA here and my calculation is simply 25% increase in EBITDA over 5 years. If not correct kindly explain.
Also, where can I find similar questions and answers or material to gain a better understanding and prepare myself for this interview? Your help is much appreciated. Thanks.
9x with 4x leverage = 5x equity
9x 2x lev = 7x equity
But 25% irr = 3x return
So let x be new Ebitda and y old; 7x = 15y; x = 15/7y
Therefore Ebitda increased a bit more than 2x, or about 16% cagr
Let's walk through the example in steps given the provided information (which will alway dictate where you should start and what you need to solver for)
1.a We need to first understand what our equity check will be at entry 1.b We know our entry multiple is 9x. Let's assume that EBITDA at entry is $100M (it doesn't matter what number you assume for the starting EBITDA - the math will work the same way - but using $100M will make the calculations easier during the interview), which means our purchase price will be $900M 1.c We know our leverage will be 4x EBITDA, which is $400M 1.d. This means our equity check at entry will be $500M ($900M - $400M)
2.a We next need to understand what our exit equity value needs to be to satisfy the 25% return threshold 2.b Based on the IRR-to-MOIC conversion (which you should have memorized), we know that this equates to a 3x cash-on-cash return 2.c We can therefore multiply our entry equity check of $500 by 3 to get to an implied exit equity value of $1500
3.a Now we need to know what the implied exit enterprise value will be in year 5 3.b We know that our debt will be paid off in half by the time of exit, which means our debt will be $200M at the end of year 5 3.c If we add this $200M to our $1500 exit equity value, we get to an implied exit enterprise value of $1700
4.a Lastly, we now need to know what the year 5 EBITDA needs to be in order to square the 9x exit multiple with the $1700 implied exit enterprise value 4.b Divide $1700 by 9 to get to an implied year 5 EBITDA of $189M 4.c If we divide our exit EBITDA of $189M by our entry EBITDA of $100, we see that we need to grow our EBITDA by roughly 89% to get our 25% IRR
Thank you ASM_123 for that detailed explanation - very much appreciated.
Sorry for reviving an old thread, but I think the EBITDA of $189M should be year 6 EBITDA? Since when you calculate exit price you always use a forward 1 year EBITDA?
Thanks - I agree.
Phenomenal. Logical and concise. Also referred me to the MOIC and IRR table, which will certainly come in handy moving forward. Thanks!
Examples of a successful and unsuccessful LBO? (Originally Posted: 06/10/2011)
Preparing for a potential phone interview and I was told to watch out for this question. Can anyone give a prominent example of a successful and unsuccessful LBO (i.e. an example in which the PE firm was able to pay off its debt 100% and sell the firm for a profit and one in which the decision nearly sunk the firm).
I suggest that you try to figure this out on your own, it's not that hard as there are many, many examples of both.
I will also point out that paying down 100% of the debt is not necessarily required for a successful (or profitable) LBO.
"Give a man a fish and you feed him for a day. Don’t teach the man to fish, and you feed yourself. He’s a grown man. Fishing’s not that hard."-Ron Swanson
Take a look into Terra Firma/EMI/Citi and see what you find.
THL and REFCo
txu
LBO Case Study examples? (Originally Posted: 03/02/2012)
Does anybody have a case study with the lbo model worked out so I can prepare for this interview? I know wallstreetoasis has a PE/VC guide, but does it include a case study with an LBO model?
Thanks.
bump
Are you currently in banking? If so, you should be able to get several from your colleagues or other banker friends. I'd send you something, but I like my online anonymity.
The Breaking into PE / VC WSO guide does not have an LBO model, but our new Tech PE interview guide which should be coming out within a few months will have one.
When is the new tech PE guide coming out!?!?
WHEN IS THE TECH PE GUIDE COMING OUT!>?!??!
I used the one in the book Leveraged Buyouts a Practical Introductory Guide. Aces. Good luck!
Thread - LBO Modeling Test Examples & Other PE Recruiting Fundamentals (Originally Posted: 07/19/2014)
Fellow WSO Members:
Can we use this thread as a resource to those looking to practice and master different examples of LBO case studies that are often used in private equity interviews?
Feel free to post links or copy-paste examples of common PE LBO case studies, and the answers or corresponding model if available. I'm sure this thread can be useful for many incoming 1st years looking to strengthen their modeling skills.
Interview stories and prep tips are also encouraged.
Bump
http://www.wallstreetoasis.com/guide/private-equity-interview-prep-ques…
Need 3 examples of PE's LBO (household names preferred) (Originally Posted: 07/23/2014)
Repackaging: PE firm buys out a company, tweaks something with management or corporate strategy, then tries to cash out big by starting an IPO. What's a famous/recent example of this?
Split-UP: PE firm buys out a company, knowing that the sum of the parts is greater than the organization as a whole. It cashes out by selling spin-offs.What's a famous/recent example of this?
Savior: PE firm buys out a company, knowing that current management is struggling. It turns the company around and gets it back to profitability. The example I was going to use (and correct me if I'm wrong) was Bain Capital and how they turned around Burger King.
Repackaging would be KKR with safeway.
Why wouldn't you list Safeway as a savior play? Wasnt the company struggling and about to get taken over by a competitor?
Blackstone and Hilton is the best recent example that comes to mind.
Didn't 3G turnaround Burger King? Bain did Dunkin' Donuts.
BX of Equity office. It's a little different because they bought a REIT but they sold a lot of those properties off.
Hertz was bought by Carlyle and if I remember correctly they did a quick flip IPO.
Bain bought Clear Channel and broke it up but I'm not sure that was on purpose because it was a horrible deal. We were invested in a company that had a large relationship with CC and once that deal went through CC became a clusterfuck.
Bunch of stuff online with examples.
Repackaging/turnaround: BX's acquisition of Hilton, an iconic name that had since fallen behind Starwood, Marriot and others and became better known for its heiress's sex tapes than managerial excellence. BX brought in new management team led by Chris Nasetta, moved headquarters from Beverly Hills to Virginia and vastly expanded its mid tier properties on a global basis. This is such a classic example as BX closed this deal at the absolute top of the market, loaded the company with debt and then still managed to make it all work out in the end with the successful re-IPO and great stock performance since.
Hilton was a pretty tremendous job for them because, like you said, they overpaid and overlevered at the exact wrong time but still knocked it out of the park.
split-up: carl Icahn, twa.
Give me some rope here. I found http://blog.pmarca.com/2014/03/18/when-carl-Icahn-ran-a-company-the-story-of-twa/
Is it still considered a successful split up if the original owners lose money?
Where do you find more detailed information on these deals?
Search engines. For specifics on the above deals, just search for some of the names of the companies, the firms, etc and you'll find a ton of info. These are all really high profile deals.
Savior: - Company: Grohe - Investor: TPG and CSFB Private Equity
The OP didn't specify successful. That said, I believe that Icahn made a metric ton of money on the TWA deal, just at every other stakeholder's expense.
All kinds of examples:
PE Case Study / LBO Model (Originally Posted: 01/30/2010)
So I have a case study I am doing for a PE firm which I have about a week to work on. It's one of those thing where they give you a CIM and basically tell you to write an investment memo and support it by building an lbo model to come up with appropriate leverage, pricing, equity purchase price, etc. and then you discuss your findings.
Wondering if someone has a very clean, concise LBO model they've built for something like this that they would be willing to share. If so please PM me. Also, if anyone has any general advice it would be much appreciated.
Thanks in advance
In my opinion you are far, far better off building it from scratch. If you do so, not only will you ensure that you understand it, but you can customize it in the way you want.
Build it from scratch.
All standard LBO models circulate on the street, I personally have seen standard LBO templates from all BBs except for Goldman Sachs, Morgan Stanley and Credit Suisse, plus a few elite boutiques. Therefore, if you take the shortcut to use a template, there is a good chance that the PE shop has seen the model from someone or somewhere. Not good.
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