Larger PE funds and / or PE firms executing LBOs in non-cyclical industries with recurring cash flows aim for a 2.5x multiple of capital over a 5-year period before selling the company, which is a 20% IRR. For growth equity investments in more cyclical industries with higher growth rates, a 3x multi...

Market sizing questions are usually asked in consulting interviews but may be asked in IB or PE interviews since industry analysis is part of the job. It’s more important to explain the logic behind your assumptions and less important to get the right number. It’s best to go with a top-down appr...

IRR stands for internal rate of return, and PE firms use this metric to judge the return on an investment. IRR is the annualized return of the equity investment, and is equal to the CAGR of the equity investment until exit, assuming no other interim cashflows before the sale of the company, such as ...

A dividend recapitalization is when a company borrows money to pay its investors a dividend. This happens when the company has paid down significant amounts of debt from the original LBO, there are limited growth opportunities to invest the debt proceeds into, and investors want to enhance their ret...

EBITDA in year 0 = revenue – COGS – SG&A = $100 – $50 – $20 = $30 Since the company is bought at 10x:Enterprise value = EBITDA x entry multiple = $30 x 10 = $300 With debt of 5x, we borrow 5 x $30 = $150, so the other $150 is funded by […]...

A $100M decrease in net working capital would increase IRR the most. A $100M increase in revenue would typically come with an increase in COGS as well as an increase in taxes. If the increase in revenue came from an increase in prices, then COGS would not increase, but taxes would still increase. A ...

Usually, industries with stable cash flows and a tangible asset base are good for LBOs. For example, consumers, healthcare, and B2B services are common industries for PE. Software companies with recurring revenue who serve businesses could also be attractive; despite lacking a tangible asset base, t...

A covenant is a requirement or metric on debt that is common in LBOs; this requirement or metric must be met or else the borrower will technically be in default. The details of the covenant can be found in the credit agreement. Maintenance covenants require the borrower to meet certain financial met...

Senior debt is typically provided by banks and has a higher priority claim on assets and cash flows than junior debt. Given this higher priority, senior debt is safer and features a lower interest rate. The interest rate is based on a floating rate, which is a benchmark rate (typically 1-month SOFR)...

Another common measure of return is multiple of capital, also known as multiple of invested capital, money-on-money, or cash-on-cash. It represents how many times you’ve multiplied your original investment, and can be calculated as ending equity divided by invested equity. Where are there multiple...