PE/LBO Model request - (Upcoming interview!) **Included an example question on dividend recap that needs an answer**
I've got a few models here and there to look at and practice with, but they are from BIWS (which is fairly straightforward) or some that are very very messy...
I was wondering if anyone have a few good examples to share with me? Something I'd like to see is how dividend recapitalizations are included, and also rollover equity (and cases like a buy-and-build example - where PE firm owns Company A, but is considering Company B [maybe from another PE firm] where synergies come in play, and there's rollover equity involved).
Note: This is for an upcoming interview (different from the one in a previous post). I'd like to be able to learn from the mistakes of my last attempt. It's a similar format - 2/3hr modeling test (maybe without presentation - this is TBD)
Thanks again all!
EDIT: See my post below - I included an example case study question w/ some arbitrary numbers. PE WSOers, pls take a look to see if you can answer/help?
Bump - it's less than a week away...
bump
http://www.macabacus.com/
Thanks Mezz - I've downloaded the Macabacus version. Are there any good case study type models too?
Not too sure. I dont have any. Sorry.
did they really ask you to model dividend recaps or "buy and build" scenarios in your last case study? usually it's just a straight lbo...
Yeah they did... and because I practiced with a very vanilla LBO (a few I got from friends, the 'basic' and 'advanced' model from BIWS and some other training program), I was caught a bit off guard. That said, they weren't fussy about formatting and the presentation.
PE WSOers - how exactly does a dividend recap show up in the LBO? I'm confused on how exactly does it show up in the model and the accounting. Can anyone clarify this?
Hey! I was wondering if you could help me out. I'm looking to get a few practice models. I know it's been a while, but you wouldn't happen to have any practice LBO's or financing case studies I could use.
Thanks!!
You bascially recapitalize and issue a huge dividend to the sponsor, so in your IRR calculation for the sponsor, you should have a huge inflow that boosts your IRR...
Ok... let's actually use numbers in an example. I don't recall the numbers I got in my case, so I'm just going to make some stuff up:
So let's say the PE firm bought Company X in 2004 for $1,000MM. (EBITDA is $200MM, purchase multiple is 5x). And let's say the debt multiple was 3x or $600MM, so equity sponsor amount was $400MM.
Now it's 2007, and the PE firm is considering doing a dividend recap to pay itself and LPs. So they think they can get $900MM in debt. And as of today, the EBITDA is 250MM and let's say purchase multiples have gone up to 6x (so new value of the firm is $1500MM as of 2007).
So - this was the case study question: Should PE firm do the dividend recap?
How would you go about doing this? I'm confused on what your inputs would be for your XIRR formula now... usually it's XIRR(-$400MM, $Exit equity amount). But how does the dividend recap fit in and what's the dividend recap amount?
assuming it's a 5 year investment, the year 3 dividend generally should boost the sponsor's 5yr IRR because they get their money out faster. if EBITDA's growing that fast and multiples have increased by 20% since purchase, they could also just sell the company at year 3 and it would be a great IRR (although selling later results in higher absolute dollar proceeds and still a really good IRR).
here's a really simple model based on the scenario you described:
https://www.yousendit.com/download/bFlFZUN2YWJqV0EwTVE9PQ
[quote=bankbank]assuming it's a 5 year investment, the year 3 dividend generally should boost the sponsor's 5yr IRR because they get their money out faster. if EBITDA's growing that fast and multiples have increased by 20% since purchase, they could also just sell the company at year 3 and it would be a great IRR (although selling later results in higher absolute dollar proceeds and still a really good IRR).
here's a really simple model based on the scenario you described:
https://www.yousendit.com/download/bFlFZUN2YWJqV0EwTVE9PQ[/quote]
yeah, the point here is MoM vs IRR. dividend recaps are an expensive way to take money off the table for whatever reason and inflate IRR, at the cost of value at exit.
thanks bankbank!
There are also tax implications at stake (at the fund level, not portfolio company level) as dividend recap inflows are taxed at a dividend rate while an actual exit of the company is taxed as capital gains. This is part of what drove all the dividend recaps in 2H10, along with thawing debt markets and a bad IPO market.
Bankbank, I too have an upcoming interview and was hoping you could provide me with the link to the dividend recap model you posted for Kanon as the one on this page has expired.
Kanon, how did your interview go? Anything to share? Did you ever find any good case studies? If so, please share.
Thank you
here's the model i posted before. https://www.yousendit.com/download/eURDYnV3UzhwTVZjR0E9PQ . SBs appreciated. haha.
this is very simplistic and was really only intended to show the simple math for the dividend. your scratch lbo model for an interview case, while it won't be very detailed/complicated, will probably need to have more detail in the income statement, sources and uses (could be based on a public company with shares and a stock price for purchase price), and probably a little more detail for the debt schedule (another tranche of debt, interest rate assumptions, etc).
for the case we ran at our shop, we would generally just give candidates a 10k and maybe some research or an earnings transcript and a blank excel sheet. we would then ask the candidates to do an lbo model with a few given assumptions. they would have a while to do the model and write a little about the investment opp. and then we would talk to them about the assumptions they made and how they thought about the business and if it seemed like a good investment, or if not, at what price would it seem like a good investment. we didn't have candidates model in dividend recaps or any additional acquisitions - it was just a straight LBO (and i think this is how most shops do it).
good luck with your interview.
kpkennedy80 - unfortunately I haven't found any good case study examples. Seems the general practice is to take a CIM and try to run through it, or try something via BIWS (I think it's got at least 2-3 separate lbo examples). I would also recommend Macabacus (http://macabacus.com/) which is free, and they have a pretty complex model that would cover most questions.
And the modeling interview went well - but I was invited in very late in the process, so that PE fund I met with were already pretty set on two people with prior PE exp.
Kanon, was the BIWS courses worth the money? Bankbank, thank you for your help. i'll keep you posted.
^ I think BIWS is really worth it. I was one of the lucky ones that got it early (back when it was $147 all inclusive), but I think it's just under $400 now, for everything and it's a lifetime/ongoing package.
Even at the current price, it's a great value. Brian from BIWS goes into each step via video in great detail, and he adds new stuff all the time (or sometimes, when he thinks something could be done better - he'll improve on current offerings). He has a few videos specifically focused on interview questions for LBOs as well.
Is there anyone who can please repost the model for this? That would be greatly appreciated!!
[sorry double post]
didn't read through all of the other responses, but, as far as modeling it is concerned, just drop a line above your "cash available for debt repayment" for your dividend and rework your formula to reduce your cash available for debt paydown to include the dividend adjustment. If your debt schedule is built correctly, you will see the dividend recap hit your revolver -- this should not happen. You will need to adjust the formula so that, if the dividend recap line is not blank, that you take on senior/sub debt to finance it. just use the =ifblank formula or you can build a toggle.
to separate yourself, you may also want to build in a few lines showing your debt metrics so that you can say that a dividend of $x would put the debt/ebitda ranges outside of the typical ranges.
model reposted here:
http://www.yousendit.com/download/T2dkZ284Nnl0Njk4SjhUQw
yousendit takes the file down after 7 days.
again, this is a highly simplified lbo model and was specifically done to show how the dividend recap works.
that being said, this is essentially what you need to analyze an lbo. you don't need a lot of bells and whistles to look at a company on a high level and determine if it is a good lbo candidate based on the equity IRR a model will produce. equity returns are driven by your purchase and exit multiple, ebitda growth, and starting leverage and debt paydown.
Quick question, just wondering, can a PE owned company pay a regular dividend instead of a dividend recap i.e. not issue leveraged loans or other debt and pay a dividend simultaneously?
Generally excess fcf will be allocated toward debt paydowns. Some PE firms will charge their portfolio cos a management fee, which is probably more tax effecient than a recurring dividend.
Why couldn't it? The point of employing leverage is to maximize returns. But, if the PE firm has paid down existing debt and just wants to take out cash each period, it can do that. Upon exit, if it resells the portfolio company, it gets cash that has built up on the BS anyway. If it IPOs, it probably would take a dividend or use the strong balance sheet to increase the proceeds received.
As duff indicates, there are higher tax liabilities with straight dividends. A dividend recap helps alleviate that by writing down the tax liability thanks to U.S tax law and debt.
Typically the debt documentation will prohibit the company paying a dividend to the sponsors until the debt is completely repaid or sometimes it will have a certain "permitted payments basket" which will define how much the the sponsor can take out. This limits the ability to do regular dividends. So typically to take money out the sponsor will get a waiver from the debt holders for which they might pay a small fee. This means you will typically not see PE owned firms paying a regular dividend.
And if you are in a situation where you don't have any debt, you will almost always want to recap. PE funds cost of capital is typically >20% versus senior debt at ~5% so there would need to be a very strong reason to not have any debt in the capital structure.
In these credit markets dividend recaps make sense, especially when you are not ready to exit. (can be PIK toggle notes, not just cash only, so they don't have to strangle CFs). Yes, portfolio companies do not pay regular divs
I'm curious how you get to a >20% cost of capital of PE funds. Explain please?
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