Overpaid in PE Case Study
I did a short take home case study for an LMM PE and was asked to perform a short paper LBO calculation. I had to estimate key inputs like entry/exit valuation, interest rate, and leverage. The instructions stated that a full Excel LBO model wasn’t required—just simple calculations and assumptions were enough.
After some quick research, I used a multiple-based approach and arrived at an 8.0x multiple. I did my calculations and submitted the case study.
However, a friend at another PE firm (which actually acquired the target) told me they only paid 4.4x. I've been asked to schedule an appointment to discuss my case study, but I’m unsure if they reviewed it before requesting the meeting, despite me asking them to.
Do you think this will be an issue? It’s for an LMM PE associate role.
As long as you know where your 8x is coming from and you have some comps to back it up, it should be alright I would say. Given you've had time between the case study and the debrief, I think it would be seen as a positive if you show you did some research in-between (don't brag about it but let it know by showing you have a great understanding) and can confidently say why you picked said assumption and how you would change it with more time. As I understand this case study is about a real company, spend time thinking about how you justify the BP and the potential upside (market growth, AI impact, build-up potential, etc.).
The things that could get you dinged is using the correct reference EBITDA or if the comps really are in a complete different range. If you know the acquirer well you might as well spend time discussing their rational, mostly ask them which EV they used because ultimately, that's what matter as there might be some EBITDA adjustment you don't know about, some kind of distress (debt maturity, provisions, huge replacement CAPEX needs, etc.).
4.4x seems very low but without knowing the industry hard to say, could be that the company is in a CAPEX-intensive industry therefore using EBIT or EBITDAX rather than EBITDA as a valuation metric.
Hope that can help
Truth is I just straight up asked Chat GPT about the multiple without having done proper research due to time constraint
Well for the love of god find some suitably overpriced comps.
@Isthisanonymous Wdym by correct reference EBITDA, is this just unadjusted? - and why would it get you dinged using it?
Depending on the business model and when you are doing the valuation the year EBITDA you are using can change. For example if you are valuing the company in novembre 2024, in some case you would use FY24 as your reference EBITDA, or FY25 or an average depending if the business is very recurring and how much visibility you have on FY25.
This can be very material in a semi distressed deal, I had to look at some deals in which NFY EBITDA was 3x LFY EBITDA so you can clearly see the impact on the "EV/EBITDA" if we don't specify which EBITDA we are talking about... EV/EBITDA is just a way to reassure your committee, the only thing seller care about is the price lol (and how you treat the people, what you plan for the business, blablabla you believe it or not)
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