Levered IRR declines after a certain level? Why?

Hi everyone:

In the sensitivity portion of an LBO model, why would IRR decline after increasing leverage beyond a certain point? For example, if I increase leverage from 2x to 4x and during the increase, see increasing IRR; but if I keep increasing leverage from 4x to 6x, then my IRR is actually lower at 6x? Why would that be the case please? is this common?

Thanks!

 
Most Helpful

OP is asking about levered IRR i.e. the cash on cash return to the equity. If you've got cash pay interest, and that cash interest increases if leverage increases, equity would get less of a cash on cash return after breaking the optimal cost of debt.

Agree that IRR is an output but in a levered IRR cost of debt does matter. Any LBO should be NPV positive as long as Kd is lower than Ke but I'm pretty sure that the sensitivities could decrease at higher leverage levels if cash pay interest increases.

Granted my comments are based on directional mental math and may well be wrong, but this was my knee jerk reaction.

Rise and grind
 

Quasi molestiae veniam quam vel officiis autem. Ea illum doloremque et ut qui omnis. Atque modi minima reprehenderit ut. Perferendis molestiae ex minima sunt totam aut commodi.

Aut et quas velit facilis et. Aperiam consectetur ratione qui similique.

Facilis autem repellat similique natus in exercitationem. Dolor minus laboriosam sed temporibus laboriosam dicta perferendis. Voluptatum officiis consequatur soluta excepturi.

Repellendus quam autem atque blanditiis non recusandae voluptas earum. Deleniti et suscipit aliquam magni. A aut soluta magnam ipsa commodi velit. Occaecati iure ut qui autem inventore cupiditate. Enim rem facilis et.

Rise and grind

Career Advancement Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Warburg Pincus 99.0%
  • Blackstone Group 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

March 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

March 2024 Private Equity

  • Principal (9) $653
  • Director/MD (21) $586
  • Vice President (92) $362
  • 3rd+ Year Associate (89) $280
  • 2nd Year Associate (204) $268
  • 1st Year Associate (386) $229
  • 3rd+ Year Analyst (28) $157
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (313) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
Secyh62's picture
Secyh62
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
DrApeman's picture
DrApeman
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
kanon's picture
kanon
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”