I recently had a PE case study at a fund and on the debt schedule I realized, that the amount of cash generated every year was exceptionally high given the chosen debt structure.
On most other tests (and cookie cutter online preparation tests) I always needed to sweep all the cash to pay down the debt and beginning cash would always be end of cash on balance sheet.
If this happens that there is too much cash would you advise to either choose a more aggressive leverage or pay out the cash as dividends? If it just sits around it is not generating any return.
Ya seems like a good indication that you can juice up the leverage . Not sure on the strategy, but also could mean you have more of a cushion to do M&A.
But yes short answer is unless there’s a specific reason you’re holding more cash (eg if the business is particularly risky, revenues are lumpy etc), you probably want to increase leverage
I’d also make sure your operating case isn’t busted or overly aggressive as realistically, this situation is uncommon. If there’s that much FCF, you probably would’ve levered the business more (to juice returns) and/or paid more for the company (through debt and equity).
If indeed just high FCF, agree with the above. You’d dividend out or do a dividend recap on the business mid-hold.
What’s dividend out? Just issuing as cash accrues?
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