1-hour LBO modeling test for PE analyst position, what to expect?
I have an upcoming LBO modeling test for a lower middle market PE analyst position. I was told they would email me the info and I would then have an hour to send it back to them.
Anyone know what to expect with a time constraint of an hour? 3-statement LBO model or would you expect it to be a short-form LBO? Was told it would be for a company they have already invested in.
Hey BuySellHold, I'm the WSO Monkey Bot and I'm here since nobody responded to your thread! Bummer...could just be time of day or unlucky (or the question/topci is too vague or too specific). Maybe one of these topics will help:
More suggestions...
Fingers crossed that one of those helps you.
An illustrative LBO model. You will likely have some basic assumptions, or a sheet that provides you with necessary numbers like entry multiple, LTM EBITDA, revenue growth rate, cost synergy dollar value, minimum cash, debt pricing and face value, etc. Then you built a model that flows like this:
1. Deal Entry, meaning assumptions and all the above info
2. Sources and Uses. Sponsor equity is your "plug" here, the amount of equity the PE firm needs to put in at the beginning
3. Simplified operating model or the income statement. This doesn't need to be comprehensive. Build something that goes to net income. Keep in mind that you haven't build the Debt Schedule yet so your EBITDA number and your Net Income numbers are inaccurate. After building the normal income statement, build a levered cash flow (LCF) schedule using EBITDA - interest expense + interest income (if any, probably 0) - taxes - capex - change in ONWC = LCF. Your LCF number is not accurate rn.
4. The debt schedule. You have beginning of period debt (BoP) balance, principal repayment, interest expense, and ending balance (EoP). BoP of next period is always equal to your previous EoP balance.You will have a priority of debt pay-down. The principal repayment formula is probably the only thing that requires some thinking in this 1-hour model. To avoid circular reference, use BoP debt balance to get interest expense.
5. Complete the operating model/income statement. Now you have a finished debt schedule, link interest expenses to reach your EBITDA, Net Income, and LCF numbers. Note that your interest expense would change due to those changes.
6. Residual Equity & Deal Exit. Now you have a realistic sense of what kind of cash flows you get can every year for the LBO transaction. You can now approximate the FCFs you will get each year as a financial sponsor. Assuming exit multiple = exit multiple (hence why no exit multiple assumption in the case study), you reach an exit value. After paying down existing net debt, you have a final stream of cash flows. Now you can also get your final year/exit year Exit Sponsor Equity Value, after subtracting any remaining EoP debt balance.
7. Returns Analysis. Pretty straightforward. You divide exit sponsor equity value by your entry sponsor equity value to get your MoM/Cash mutliple, and then you calculate your IRR.
Extra: there MIGHT be extra stuff like a management option pool. In that case, clarify if this % option pool is pre-deal or post-deal. That makes a difference between 5/100 and 5/(100+5). There MIGHT be a dividend recap. Basically sponsors borrow money to pay themselves a dividend. So you refinance your debt at some point, and then you have a cash inflow, because as a sponsor, this "borrowed dividend" makes your cash position go up. Remember to put this into your final stream of cash flows when doing the returns analysis.
That's pretty much all for a 1-hour LBO case study. Take this with a grain of salt since I'm only an Analyst 1 in a coverage group.
If it's 2-3 hours it might contain some 3-statement aspect. For the 1-hour model I won't worry about it.
Could I pm you or could you pm me? Had some questions about modelling in general and you seem to know your shit
PMed.
Extremely helpful, thank you. I did the test over the weekend and this was just about spot on. If possible, would you mind taking a look at it for me? Not sure I did too well on it and wouldn't mind seeing it completed the right way.
I don't mind at all. PMed you.
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