Do we care about net debt or gross debt when we think about return in an LBO. For example, if we have gross debt of 100 initially, but that becomes 50 - but our net debt doesn't change at all, do we have any returns?
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Usually you'd have a minimum cash balance (used for general operations/maintenance of business) that is used to calculate the net debt. All excess cash is used to sweep/prepay the appropriate tranches. In effect, you wouldn't see gross debt going down without net debt also going down, unless you're reclassifying min cash as excess cash to sweep. If that's the case then there's no change to returns because at exit you're already selling the company and using net debt (which accounts for min cash) to extract the sponsor exit equity.
Could you be more specific and give an example?
Stop spreading this FAKE MINIMUM CASH principle please. Seen it over 10 times in last couple of months here. Every company has a RCF line with the bank to cover cash-seasonality, you are not keeping money on the BS because you need it 1 day a year. Balance sheet date is also way to arbitrary to define any 'minimum amount' of cash (keeping all current assets and liabilities in mind) for this.
To TS: please provide an example where gross debt goes down and net debt does not change. You start with a ton of cash and make 0 cash in the holding period? Very theoretical case, can't think of any real-life examples for this. But in general; if net debt remains the same (and so does EBITDA) than there is no value creation indeed.
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