Unlevered IRR
Does anyone know of an unlevered IRR formula for converting a levered IRR?
I'll explain my goal. PE managers usually underwrite 20-25% returns for the portfolio companies on a levered basis. I am trying to derive an unlevered IRR formula and use it as an EBITDA growth rate for the company. For example: EBITDA at acquisition * (1 + unlevered IRR)^(holding period) = EBITDA at exit
I found this formula for unlevered IRR:
levered IRR = unlevered IRR + (unlevered IRR - cost of debt) * (Debt / Equity)
I would define levered IRR for either 20% or 25%, get the average cost of debt for that period, and the companies debt to equity ratio, then solve for the unlevered IRR.
What does you guys think about this formula? Does it work?
If you have all the information you need for that formula why can't you just do some algebra and solve it for unlevered IRR instead of levered IRR?
i'm asking if the formula and method makes sense. I just found it randomly online, I'm not going to assume its correct just because some random person put it online... I wanted to see if other random people online agree with it, then i'll accept it.
UnleveredIRR (Originally Posted: 08/28/2015)
Hello everybody.
I am analysing the Internal Rate of Return from an operation of LBO by Private Equity firm. I have already computed the levered IRR.
Can I compute the unlevered IRR in the following way? As Cash-outflows at the entry, I put the total purchase price. While for the next cash-flows I put dividends and proceeds from exit without considering repayment of debt coming from the recapitalization.
In my case study, PE firm has acquired the company (listed) through an LBO injecting 1/3 of equity and 2/3 of debt. Afterwards the delisting occurred. The company acquired controlled another listed company that remained listed. In a second moment, after some years, the two companies separated up both controlled by the PE firms. Then, one was sold (the unlisted one) while the other was sold after some other years. I computed total IRR considering equity injected at the beginning and those at the end (considering recapitalization and dividends). Now I would like to compute value levers considering from the beginning the investiment as two different investments. I tried to separated up ma I did not manage to compute value levers. Any suggestion)? Thank you on advance
Just run the same model assuming you financed it with all equity!
Yes. But how do I have to deal with recapitalization? If the deal had been funded by equity only, recapitalization would not have occurred!
As regard of value levers, in case I compute the levers making reference to equity only (therefore not considering debt at the entry), what does the leverage effect mean?
You don't? If you aren't going to change the capital structure (i.e. 100% equity), there is not a recapitalization.
I mean, I want to compute value levers. Since the case is complex I would like to separate up the two investments from the beginning considering the equity value at the beginning of the two companies. But if I consider the cases in this way, the deleverage effect makes sense?
Unlevered IRR affected by D/E ratio? (Originally Posted: 11/04/2015)
under what case would the unlevered IRR affected by the d/e ratio? thanks
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