Wall Street Prep: LBO Fundamentals
Questions with expert solutions
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
Questions with expert solutions
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
