How do private equity firms exit their position?
1) Sale to a Strategic Buyer
2) Secondary Buyout (sponsor-to-sponsor deal) - less than ideal because another PE firm won't pay a synergy premium
2) IPOs - option exclusive to firms of larger size (megafunds) or club deals
Primary Levers in ...
Wall Street Prep: LBO Fundamentals test
questions and answers
How do private equity firms exit their position? - answer 1) Sale to a Strategic Buyer
2) Secondary Buyout (sponsor-to-sponsor deal) - less than ideal because another PE firm won't
pay a synergy premium
2) IPOs - option exclusive to firms of larger size (megafunds) or club deals
Primary Levers in an LBO that drive returns? - answer 1) Deleveraging - value of equity owned
be PE firms will grow
2) EBITDA Growth - making operational improvements to teh business's margin profile,
implementing new growth strategies to increase revenue, doing add-on acquisitions that are
accretive
3) Multiple Expansion - buy at low multiple and then exit at a higher multiple
How can a company work on margin expansion? - answer 1) Build better investor sentiment
2) Better economic conditions
3) Favorable transaction dynamic (strategic rather than another sponsor)
Do PE firms typically assume entry multiple for exit? - answer It is popular to assume exit is the
same as entry - since deal environment is unknown it is too risky to assume it is higher
What attributes make a business an ideal LBO candidate? - answer 1) Steady, Predictable cash
flows
2) Strong mature industry in defensible market positioning
3) Business model with recurring revenue component
3) Strong, Committed Managment team - possible history or working with PE firms
4) Diverse revenue steams with minimal cyclicality
5) Low capex requirements and working capital needs
, 6) Currently undervalued by market (low-purchase multiple)
What industries attract the most LBO deal flow? - answer 1) Mature
2) Growing at a moderate rate
3) Non-cyclical
Predictable revenue with fewer disruption risks from technology or new entrants to having a
higher barrier entry
What will a firm look at when the investment strategy is based around roll-up acquisitions? -
answer Fragmented industries where consolidation strategy is more viable since there are more
add-on targets in the market
Ideal type of products/services being sold? - answer 1) Mission Critical - product/service is
essential to the end market being served. Discontinuity would be detrimental to business
continuity
2) High Switching Costs - costs to switch would outweight the benefits of moving to a lower-cost
provider
3) Recurring Revenue Component - products/services require MAINTENANCE
What is the typical capital structure prevalent in LBO transactions? - answer Currently around
60/40 debt to equity
Debt: They will be in different tranches with most being senior
Equity: Contribution will mostly come from the financial sponsor with in some cases an existing
management team. Also, since LBOs typically retain existing management team - sponsors will
reserve 3% - 20% of the total equity as an incentive for the management team to meet financial
targets
What credit ratios would you look at when assessing the financial health of a borrower? -
answer 1) Total Debt / EBITDA
2) Senior Debt / EBITDA
3) Net Debt / EBITDA
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller BRAINBOOSTERS. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £10.30. You're not tied to anything after your purchase.
