Hi fellow monkeys,
Just got out of a PE case last week where I needed to build an LBO from scratch (only historicals were given, as well as information on unitranche terms + teaser). I built out the model with an out-of-the-air entry multiple (exit multiple linked to that) and an assumed % split of debt to equity.
To find an adequate entry multiple we were willing to bid, I "backsolved" the entry multiple to find one that results in an IRR / MM that matches the fund's strategy.
In the discussion, I got the feedback that linking entry to exit multiple and "backsolving" that to an adequate return would defeat the purpose of the model. As I understand that, for example, hard-coding the numbers could be beneficial for the sensitivities, but how should you otherwise set an appropriate entry multiple if no other information / comparables are given?
Highly appreciate any insight!
They probably wanted you to build your own trading comp set
You should just have a rough framework in mind. If you’re a sector banker interviewing for a sector PE (same sector) you should definetely have a view. You can always caveat that you would have to look at more specifically comps etc but as a rough ballpark this is where you have seen things trade based on rough growth /margin
If you are not in sector or are interviewing for another sector, just look for some broad comps and have a view for each macro sector to keep in mind as it’s a better starting point. Eg IT services 10-12x, business services X-X etc. in general somewhere between 10-15x does the job
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