PE Case Study - LBO with CIM
Hey guys, I looked for a clear answer to the following case study in the old discussions, but I couldn't find any: what's the best way to approach a LBO exercise with a full (50+ pages) CIM and no assumptions given in terms of sources (including type and cost of debt) and entry/exit multiples? The task is simply to get to an IRR and discuss the returns in a short investement memo.
I dont understand the question. Read the CIM and come up with operating assumptions. Use basic transaction assumptions and make an LBO.
I'm sure the firm gave you instructions...
What do you mean by "basic transaction assumptions"? If you have no idea about the sector (i.e. you don't know at which ev/ebitda company are trading), what are your entry and exit multiples going to be? What about cost and maturity of debt? Just putting a random 5 years bank debt at 7%? Thank you!!
Do a quick comps to find out current trading multiples and assume entry equals exit (unless you can very reasonably argue otherwise). Similarly you could also look at debt / ebitda ratios of public peers and (depending on the size of the target) discount that to account for risks associated with smaller firms. Although I'm not entirely sure you should be fine staying away from mezz and using a senior A (yearly 5 year amortization) and senior B (bullet in year 6) at 4%-5%.
The main issue is that you aren't given any comps set and you haven't got any internet connection (i.e. you have ONLY the CIM), hence there are no benchmarks or peers. And I don't think that the fact that they specify they want a LBO for valuation purposes will change anything as you would need exit and entry as well as debt assumptions. Am I missing anything? Thanks!
In that case I would argue that they are trying to test your reasoning. Try to get a grasp of multiples of major industries and what drives valuation in those industries, then apply that to the CIM you are presented with. As far as debt is concerned, try to think like a bank; a company that has a clean balance sheet or a company that has successfully grown and consistently paid down debt over the years is more likely to be able to attract higher multiples (north of 3x ebitda) than a company with a relatively unproven business model in a highly complex industry. Hope this makes sense, just my two cents!
I tend to agree, if you come out with like 5x Rev you should provide a reasonable explanation for that, but without data and little/no knowledge of industry/sub-sector (or even more if you don't have info about it - though not the case) if you say 1x or 1.5x or 2x Rev that is clearly not the point of the whole valuation. The reason why they ask you to model an LBO is to test your reasoning as well as your modeling skills. At the end of the day, if you build a working, effective lbo model and it turns out the proper multiple is 5x Rev for whatever reason, it's a matter of a second to change it.
I definitely agree that without a valid reason you have to use the same multiple both entering and exiting.
As for the debt - the point is to check if you have any rough ideas about how the banking world works - in this case, you can't end up with a D/E of 5 or 10 as banks will not lend that much to a firm. You can use some kind of metric to determine how much (e.g. D/E or multiple of EBITDA, they are both a starting point... Remember: valuation is both a science and an art, so there's not 100% right response).
PE Case Study - Model & Presentation with CIM (Originally Posted: 04/02/2018)
I have an upcoming case study round where I will be given a CIM to build a model and prepare a few slides that I will have to present incl. Q&A. This will be my first full case study, so my question is how do you approach this most efficiently? I will have 2-3 hours for the whole exercise. How would you divide up the time and what are the most important areas to cover in the slide deck? I would have thought to include 1 page exec summary upfront, 1 slide about the market developments, 1 page business overview incl. historic performance, 1 page forecasts of key financials / business plan, 1 page transactions overview / assumptions + IRR sensitivities, 1 page potential risks / further ares for DD.
Does this sound reasonable for the time / is there anything major missing that you would include?
In terms of the operating assumptions for the model - is this usually just replicating the business plan assumptions from the CIM and making necessary downwards / upwards assumptions based on the industry outlook? Also, how often is it required to build a full three statement model? I would assume time is pretty limited and the full 3 statements might be a bit too much?
Hey mirus, I swear if I had a silver banana for every lonely thread I posted too I'd be richer than @compbanker ...
If we're lucky, the following pros may have something to say: EuroGorilla bule @Radu-Georgescu"
I hope those threads give you a bit more insight.
Think your intuition is right - I wouldn't build in a balance sheet just do I/S, working capital and debt schedule. And DO NOT worry about formatting, just make sure the valuation you arrive at makes sense and focus all additional time on the qualitative part
30mn reading + business understanding (what is the USP, product etc) 1h preparing commercial slides 1h LBO (i guess it depends on the background whether you need 1h for your LBO/commercial work) 30mn check + formating (primarily slides)
from experience, focus on 3-4 key value creation/DD items with a more detailed answer; in the end: it doesnt matter whether you got an IRR of 14% or 22% , more importantly you need to demonstrate critical thinking, business acumen as people want to see whether you can have a smart discussion over the company
All great comments so far.
Personally, I think it's a tough one. I did this SaaS LBO case study, a full 3-statement with LBO features --- multiple debt tranches, cash sweep, rollover equity, option pool, dividend recap, etc. --- and with the b/s balanced and all formulas correct, somehow I ended up with a 9x MOIC over a 5-year horizon. It's obviously too high for pretty much any company, but it'd be really helpful if I have some SaaS specific knowledge (I don't have that much) to know if that number is not THAT weird.
The hypothetical Co. is a SaaS company who just started to generate revenue in transaction close year.
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