Rollover Equity - LBO
Coming across some conflicting stuff online about how to model rollover equity in LBO tests for interviews, would appreciate some help here.
For simplicity, let’s say a company has a purchase EV of $100, no existing debt or cash (making purchase equity value also = $100), and PE firm is using $50 in debt to finance the transaction. No fees or any other uses except purchase equity value. Management rollover is 20%.
I’ve seen 2 different ways of calculating this:
1. Management rollover would just be 20%*Purchase Equity Value = $20.
2. To calculate management rollover, you set uses = sources=100. From here, in sources, you subtract out the debt used to finance the transaction to get to the transaction equity. (100-50=50). You multiply THIS value by 20%, and get management rollover of 20%*$50=10.
Obviously you get 2 totally different numbers here which would significantly impact initial investment from sponsor and therefore returns.
The first way makes more intuitive sense to me because if management is rolling over its equity, wouldn’t equity value be the management’s preexisting equity and not the equity used to finance the transaction (as is the case in method 2)?
Peak Frameworks seems to stick exclusively to Method 2, though. Maybe it depends on how the question is worded? I.e. if it says management rolls over 20% of its existing ownership, then it’d be method 1, but in other cases, it’d be method 2? Honestly don’t see any situations where method 2 would be accurate, but PF must have some rationale here…
Following
method 1 is the correct choice, the simplest way is almost always the right answer
Just do the first option
First method. Have to be careful here not confuse pre-Tx equity ownership and related rollovers with equity check of buyer.
Adipisci assumenda cumque quae aspernatur earum iste. Omnis autem nisi voluptatem commodi repudiandae quis nemo dolorem. Quos veniam sequi nobis praesentium explicabo occaecati. Nisi fugit ex qui.
A corporis repudiandae explicabo explicabo quia voluptas voluptates. Et pariatur voluptate optio quod quod cumque magni. Cum quia rerum quod ad voluptas dolorem. Voluptatem similique et odio error.
Sint ea et ex voluptatem possimus reiciendis eveniet quidem. Voluptatem nesciunt minus architecto vel. Aperiam delectus exercitationem quia voluptas ab.
Sed sequi molestias voluptates id. Odio ratione quas et molestias veniam. Et excepturi ut aut enim suscipit consequuntur quaerat et. Esse voluptas eos omnis ut.
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...