Paper LBO
Hi all, I have an interview soon for a intern position at a MF. I was told to have pen and paper ready, so I'm expecting a paper LBO.
Two questions:
1. Interest shortcut. To save time and avoid carry-forward mistakes, is it acceptable to calculate interest on the initial debt balance each year (fixed), and get exit debt as initial debt minus the sum of all FCF? I'd state it out loud as a conservative simplification. Is this generally fine, or do interviewers expect interest on the declining balance year by year?
2. Complexity. For a trainee/intern-level paper LBO, how complex do they usually get? Specifically, should I expect:
• Dividend recaps mid-hold, and how IRR is handled with the interim cash flow
• Reverse calculations, i.e. what entry price/equity to pay to hit a target MOIC or IRR
• Multiple debt tranches with mandatory amortization and a cash sweep
• Minimum cash, PIK, or management rollover
Or is that more associate level?
Also, could i get other cases aside from a Paper LBO? I already did math exams and stuff in previous rounds
Thanks
If a cash sweep is the case, I wouldn't simply calculate interest for five years on the initial debt balance. With that you do save time, but then your debt decreases every year while interest acts like nothing happened. Rather go for the respective opening balance. If the debt according to the task formulation is constant, sure, then you can save yourself the whole roll-forward.
With an intern paper LBO, I would first of all really be able to do Entry EV, Equity Check, FCF, Debt Paydown, and Exit Returns blindly. Reverse IRR/MOIC I would also practice. Dividend recap, PIK, multiple tranches with cash sweep? Can come, but there you are already significantly further away from the bare paper LBO basic framework.
Pen and paper also doesn't necessarily have to mean that you calculate a complete LBO from top to bottom. Can just as well be that they change individual assumptions and look whether you can grasp the effects on returns quickly.
Thanks for the reply. Do you know of other types of tests they might make aside form an LBO?
Sorry it’s taken me so long to reply. As well as a paper LBO, there might also be a short valuation case. In that case, you might be given EBITDA, net debt and a valuation multiple, and have to calculate the equity value from these figures. However, they might also change individual assumptions and want to know how this affects the IRR.
For a MF, I’d definitely expect a brief discussion on investment as well. A company with a few key figures, plus the question of whether it would be an interesting buyout candidate. Cash flow, debt or the risks associated with the business model.
the fixed-interest shortcut changes your debt paydown too, not just the interest line. simple example: 100 debt, 10% interest, 30 cash flow before interest each year, no taxes, and all remaining cash swept at year-end. year 1: 10 interest, 20 paydown, 80 debt left. year 2: 8 interest, 22 paydown, 58 debt left. keeping interest at 10 leaves 60 instead.
that's using opening debt for interest and year-end repayments. if the prompt says no paydown until exit, fixed interest is consistent; don't combine that with a cash sweep. i can't tell you what else that fund will test from the pen-and-paper instruction alone.
I've done probably done about 6-8 different paper LBOs in my life with a bunch of different funds starting from my associate years to post-MBA recruiting.
For all the paper LBOs the assumption was no paydown of debt but your case study company will generate cash flow and will ultimately de-lever some of the debt at exit. The goal of a paper LBO is just for people to check that you know broadly what an LBO is and the main components that drive return
I certainly wouldn't ding a candidate if they just assume flat-line interest expense with no-debt pay down. Even 10% interest for $x starts getting absurd Year 5. Only time where you'll need to play with debt assumption is if its PIK but even then many examples will be more along the lines of "assume $5 PIK (on $100 debt)" so its easier to model on paper
Consequuntur consequatur sequi et. Totam ipsa magnam quis nostrum porro dolores dolorem sit. In tenetur tempore ut est. Et nesciunt aut quam sed.
Et quis voluptatem architecto ut reprehenderit accusantium in facere. Autem sunt voluptas distinctio ea nisi. Cumque alias itaque veniam tenetur sit.
Ut iure voluptas sapiente id aliquid. Tempore odit ratione omnis assumenda sit delectus. Odit id enim perspiciatis culpa consequatur est.
Qui unde delectus deleniti doloribus consequatur corporis vero. Id quibusdam alias ipsa aliquid et. Voluptatibus id molestiae aut velit est explicabo quis. Sed quos aut sint et minima quis ut. Sequi et quia doloribus sequi neque sit eum. Quis aperiam est consectetur esse cum est in.
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...