Could someone please, please explain how PE houses target an IRR to value a company. Really don't yet know the basic steps for an LBO valuation. Would be grateful if someone could please explain.
Many thanks.
| +59 | Working on Juneteenth | 35 | 19h |
| +25 | Hardest time I have ever seen to be a GP | 3 | 1d |
| +20 | How to Get on Career Track / Stay Post ASO years | 6 | 6h |
| +19 | Weighing exit from LMM PC/PE | 3 | 6h |
| +15 | Healthcare PE | 6 | 2d |
| +14 | KKR comp for Principal | 12 | 6h |
| +12 | LMM groups within larger platforms? | 1 | 6d |
| +11 | Reality of the move from LMM to MM | 2 | 4d |
| +9 | MBA and Private Equity | 3 | 1d |
| +9 | Free LBO calculator: value bridge, sensitivities, formula-linked Excel export | 0 | 6d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Very Basic:
An LBO is like an triangle where you plug in two sides to get the third side.
The three sides are IRR, Entry EV and Exit EV
Thanks for that. That triangle analogy does help.
So if we want to get Entry EV (for valuation purposes), we need a target IRR and Exit EV. How would you get the Exit EV though? That I'm assuming would depend on cash flows and an exit multiple (which people say is normally similar to the purchase multiple). Do you determine the exit multiple using what comps?
Thanks.
The exit EV is often estimated by taking an exit multiple (EV/EBITDA) multiplied by forecast EBITDA. PE firms will aim to exit via either an IPO or trade sale (sale to a competing company or another PE firm). The comparable exit multiple can be based on listed multiples if aiming for an IPO, or trade sale comparables. The listed comparables will generally have higher multiples, which is why you see a lot of ‘roll ups’ where PE firms buy smaller privately held companies in the same area for 5-9x EBITDA, grow the group and cut costs, before listing it and selling it at a 10-12x EBITDA.
Perfect. Thanks for that sean833!
So would these be the steps to value a company using LBO approach.
Could you (or someone else) please confirm that these are the steps for an LBO valuation.
Thanks so much
That sounds like you've got the right idea. Although, generally the buyer will identify the EV they need to pay first. Then after this determine the potential exit value and the resulting IRR.
Buyers will often need to pay a higher amount and accept a lower IRR if there is a competitive bid. So in reality you would consider an IRR range based on the initial price and then a range of potential exit multiples and EBITDA results.
Also, don't forget that the IRR is calculated on the equity invested (equity value not enterprise value) and equity returned to the PE firm after paying off any remaining net debt on exit. In the IRR calculation you also have to include any distributions made to equity during the investment term.
Yeah makes full sense, thanks for that.
In order for the PE house to identify the purchase EV, they will have to value the company right?
Could you please explain how an LBO Valuation works? How would they value the company to get to the purchase EV?
Thanks
Laudantium harum cumque quam nesciunt possimus sunt. Dolorem iure voluptatem nostrum. Harum officiis est sequi unde. Delectus incidunt cum aut cupiditate eius suscipit numquam odit. Asperiores et culpa ut velit voluptates quos in.
Cumque perspiciatis dolor odit qui fugiat eum. Esse magnam laudantium dolorem qui. Ipsam et natus nobis est. Cupiditate rerum eos est dolorum quidem et cum consequuntur.
Voluptas ut dolores sit quia. Quis cupiditate dolores quo et qui possimus. Maiores dolore vitae quod laborum et reprehenderit sunt ducimus. Nobis dolor ut sit quo. Rerum et fugit quas in nulla.
Eum et nam dolor aperiam. Rerum enim repellendus et voluptates. Adipisci laudantium iste eum voluptatem praesentium dolores.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...