What is an LBO?
In a leveraged buyout,
1) PE firm acquires a company using D + E
2) Operates it for a several years with operating improvements
3) sells it at the end of the period to realize a return on that investment
Walk me through the mechanics of an LBO model.
1) Assumptions
2) S...
Street of Walls - Private Equity or LBO-
specific questions and answers 2023
What is an LBO? - answer In a leveraged buyout,
1) PE firm acquires a company using D + E
2) Operates it for a several years with operating improvements
3) sells it at the end of the period to realize a return on that investment
Walk me through the mechanics of an LBO model. - answer 1) Assumptions
2) S&U
3) Adjust Balance Sheet - Debt and Equity - Goodwill
4) Project 3 statements
5) Project FCF
6) Debt and Interest Schedule
7) Exit Calc (MOic and IRR)
8) Sensitivity Tables
How do you assess credit risk? - answer Leverage Ratios (never exceed 4x)
(debt / equity - under 2x)
Interest-coverage ratios (greater than 1 - maintenance - above 3x)
Fixed Charge Coverage Ratio
Look at the industry, growth.
Credit - protection against bankruptcy
Industry and Company perspective
,What are the different types of PE firms? - answer 1) (EARLY STAGE) VC (5-10% - preferred
equity or warrants)
2) (MID STAGE) Growth Equity (10-30%)
3) (LATE STAGE) LBO (20-50%)
What makes a good LBO investment candidate? - answer (S) Stable Cash FLows
(A) assets
(M) Margins
(C) Low CapEx
(L) Low - Risk
(U) Undervalued
(B) Badass Management
What are the different ways to find the valuation of a company? - answer (1) Precedent Tran.
(2) Public Comps
(3) DCF
(4) LBO
(5) NAV
(6) SOTP
How would you spend a million dollars if it were given to you? - answer I would consider the
investment options available to me (1) PE co-invest (2) bonds and (3) equities. I do not want to
invest in something I do not understand well. Since I am 25 and won't be retiring for awhile, I
want a high rate of return.
(1) 10% PE coinvest - high return, BUT illiquid, investments of employer
(2) 60% diversified stocks - (passive equity funds) - between domestic and international (half
and half)
, (3) 30% bonds, low-cost, medium-maturity bonds (2-10 years)- uncorrelated with equity - buy a
home in 5 years.
Company A has a potential IRR of 23% and Company B has a potential IRR of 30%. What 2
questions would you ask before you decide which one to invest in? - answer 1) How much
investment
2) Timing
3) What industry to they operate in?
What are the 4 main drivers of the change in IRR for an LBO scenario? - answer 1) Lower
purchase
2) Exit Multiple
3) Amount of Leverage
4) EBITDA expansion
How do you model in PIK notes? - answer https://www.wallstreetoasis.com/forums/interview-
question-pik-accounting
Walk me through the calculation of Free Cash Flow. - answer EBITDA
Less: Interest
Less: Taxes
Less: CapEx
Less: Change in NWC
Why would a private equity firm use a convertible preferred note? - answer Access to upside in
the equity of the company. Low-risk debt investment until the company proves to be successful,
then becomes an equity investment. Has the best of both worlds.
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