PE interviews LBO modelling test - should I always add a liquidity revolver even if not being specified in the instructions?

Hello everyone,

I am currently preparing for a few upcoming PE-interviews and I have a question concerning the LBO modelling tests you typically do in the second round ("standard" 90-120 minute test, building model from completely blank spreadsheet).

When creating the debt schedules, should I always add a liquidity facility covering eventual liquidity shortfalls stemming from e.g. operating cash flows, interest payments and mandatory repayments even if this has not been specified in the test instructions? E.g. it is specified in the test that an acquisition facility and term loan [x], [y] were raised to fund this acquisition but nothing more. Would you recommend me to include a liquidity facility based on above-mentioned reason because this would reflect reality better?

Just conscious that this would demand even more time, and will also add to the numbers of assumptions that will get scrutinised.

I am fairly certain my question has not been addressed by the other PE interview LBO modelling test threads here on WSO. Apologies if it has!

Thank you all,

F1_button

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Comments (6)

Jun 24, 2018

Hi F1_button, whoops, looks like nobody chimed in here.... maybe one of these discussions below is relevant:

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You're welcome.

Jul 1, 2018

Bump.

Apologies, guys. Modelling test coming up next week and just in my final stages of preparation.

Any opinions would be much appreciated.

F1_button

Jul 1, 2018

Also interested

Most Helpful
Jul 8, 2018

I would add this in if I were you for the sake of completeness and don't think this would take too much incremental time to add in. But don't think it's necessary.. for the vast majority of these one pager models, there should be no reason that liquidity / cash gen dips so low during the projection period that a draw from revolver becomes necessary. If such a draw is projected to be necessary, I would tweak other operating assumptions in the model such that FCF from the business fully supports / satisfies the business' liquidity needs and/or fund cash to B/S at close such that a revolver draw is not necessary.

    • 3
Jul 8, 2018

Being on the other side of the table, here is my advice:
- Make sure your model is spot on (i.e. you don't forget to add back the interests to your P&L... )
- Make sure everything is tidy and well formatted
- Even more important, triple check your results and add sensitivity tables

You wouldn't believe the number of candidates you can't get an LBO model right, partly because they are stressed and also because they always use models... If I were you, I would make sure everything is right instead of impressing your interviewer. Don't forget the LBO test is just a tick in the box, nothing more, nothing less.

So if you are confident you have nailed the test, you can always add a revolver line at the end in 2'. But again, if you have a RCF but can't even get your assumptions right, you are just going to look stupid and get penalised for that. In some cases it's better to do the job perfectly well, rather than go the extra mile and make mistakes because you don't have enough time.

Hope it helps.
Camondo

Jul 8, 2018
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