Private Equity LBO vs Real Estate LBO
What are the main differences between both models?
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Both have sources and uses, similar multiple expansion / cap rate compression or vice versa, debt schedule, etc.
Main difference would be real estate would have detailed rent roll, asset roll up (unless a single asset model), potentially lease up / mtm/ etc depending on type and context. PE would have income statement and balance sheet (whereas RE is all cash, basically no accruals minus maybe some PIK and tax stuff) and everything else that is corporate (options calcs, ebitda adjustments, balance sheet adjustments after purchase etc)
Helpful
I think the one other difference in the S&U is "peak equity" which I see frequently in the models I have. Care to explain how this works? Understand this comes up if there is negative levered FCF
Just a first year analyst so keep me honest if off base.
Peak equity is the maximum value of the accrued balance of the LP account. It starts off with just the LP equity committed and increases as required returns accrue (based on the waterfall structure. So this is pref plus all the accrued distributions above the hurdle). It then peaks at a certain point and starts to decrease as distributions come in (as assets are sold + rent is collected).
So as long as levered FCF is negative, this balance is increasing. One FCF turns positive you get distributions which reduces the account balance. So think peak equity is reached in the period right before cash flow turns positive but not sure if there may be exceptions to that
So just basically tracking LP equity’s contribution + accrued pref + Subsequent return in the waterfall they receive - any distributions ?
Thanks helpful.
I also noted in models 100% cash sweep doesn't apply compared to normal LBOs. Any idea why?
Excess cash is usually distributed instead of used to pay off debt
Believe this is mostly because real estate was historically very income heavy (vs returns being driven by cap rate compression) but curious to hear what others think why. Also I usually see interest only debt / PIK notes / debt that can’t be prepaid so no sweep like the PE model.
Interesting to know - so this goes into the distribution waterfall as returns?
Also, in a typical LBO there is a tax shield on interest and D&A. Does this not apply in a Real Estate model?
What exactly is cash sweep?
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