Huge apologies if this is a repeat question, but is it often that a company with enterprise value exceeding the sum of its projected unlevered free cash flows is still a good buy? Is the sum of ufcf's an irrelevant quantity to private equity analysts?
| +50 | Everyone Seems Perfect in PE | 20 | 2d | |
| +28 | To all associates coming up on the 2 year mark, how bad is it to have no deals done? | 7 | 1d | |
| +27 | Easiest way to make about $2mm/y | 19 | 3h | |
| +26 | VP Level - when to follow up after final round | 10 | 7h | |
| +26 | What's Next? | 4 | 4d | |
| +22 | What happens if you go for on-cycle and don’t land an offer? | 23 | 4d | |
| +17 | Thoughts on KKR Infra? | 8 | 1d | |
| +14 | What do you hate the most about second round diligence? | 9 | 3d | |
| +14 | EBITDA walkdown to cash flow for debt service | 10 | 4d | |
| +13 | Why is Blackstone so dominant? | 9 | 2d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Anyone have any thoughts?
In theory, no. In practicality, it can be still a good buy.
Most importantly you will have to do loads of returns analysis anyways and as long as you can meet your firm's hurdle with a good margin of safety, it can still represent a strong investment case.
That's super fair.
In PE - generally speaking, you should focus on Unlevered Free Cash flow (UFCF) yields.
In many ways the UFCF yields are representative of the earnings power or ROIC for the business, which is very important to understand overall business quality. Varies depending on the type of business / industry, but if a business can ideally hit 10-12% UFCF yields, there's probably enough levers through cost of financing, leverage %, value creation plan, etc to generate 20%+ IRRs which is the standard for PE.
You could also take this a step further to calculate the Levered Free Cash flow (LFCF) yields for the business if you have a view of the capital structure at buyout. I think in the old days of PE (pre-ZIRP), a good rule of thumb for traditional value PE investors was to buy businesses at ~10% LFCF yields, but with the amount of capital raised and deployed by PE funds in the past 5-10 years which has driven overall valuation multiples considerably up, the buy-in yields have definitely fallen <10%, which has large implications for whether PE can continually generate 20%+ returns.
It would be interesting to see how this trend moves over time, hope this was helpful.
This makes so much sense, thank you. I think UFCF yield in some ways is more intuitive too because it's not necessarily relying on some sum of a bunch of uncertain projections (some potentially 3 - 10 years in future) that are all, as you're also pointing out, really subject to change.
Maxime possimus harum omnis accusamus. Unde non et veritatis fuga. Fugit consequuntur et provident et minus molestiae sit laudantium. Aut laudantium quaerat at porro deleniti accusantium aut. Voluptatem labore pariatur officiis quia a.
Voluptatem quo explicabo pariatur maiores tempora vero facilis modi. Dolorem incidunt in sequi ullam pariatur similique nostrum non. Sed et ut eum ullam. Molestias aut incidunt consequatur autem.
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...