Paper LBO - Interest Circularity Question
For the people who've interviewed for PE roles and were asked to do paper LBOs, are you typically required to factor in that interest payments decrease as Debt is payed down during the holding period? Or is it fine to just put the same interest payment each year e.g if 500mm debt financing is taken out to lever the transaction at interest of 10%, interest expense each year is 50mm
most debt are assumed to be bullet, hence principal+interest is constant
Interesting question
In the BIWS guide they have this interest payments circular reference in their paper LBO which does not make sense to me, any insights people could shine on that would be much appreciated.
In my experience, you don’t have to worry about it. Frankly if someone is asking you to account for circularities on a paper LBO then they’re just a dick. The whole point of a paper LBO is whether or not you can think about drivers/returns for 5 minutes and then quickly model out an investment in another 5. It should be about big, round numbers so if your interest is off by a bit then it doesn’t change the result. Just acknowledge that in reality it’s a little more circular and keep moving.
Agreed on all above comments - you don’t have to do this in a paper LBO.
you just take beginning of period debt as the base to calculate interest.
if you want to be bullet proof in interviews, you can say this upfront and flag that you recognise this
gotcha, thanks for the insight appreciate it
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