Would a company with a capital lease have a higher or lower EV / EBITDA multiple compared to an operating lease?
This depends if the ratio between the capital lease and the lease payment is higher or lower than the EV / EBITDA of the company. A capital lease is like buying the asset with debt. You pay interest and principal repayments. These payments are below EBITDA, meaning they are not treated as operating expenses (OPEX), […]
How can a PE firm incentivize management to stay and perform?
A PE firm can incentivize management to stay by getting management to put up some equity for the acquisition, also known as management rollover. Usually, management will anywhere from 5-20% of the company to ensure they have “skin in the game.” Another common method to incentivize management is with options. Options give management a percentage […]
What is debt sizing in project finance? (1 min)
Debt sizing is used in project finance (infrastructure) to figure out how much debt can be raised to support an infrastructure project each month / year. As dictated by the debt term sheet, there is usually a maximum leverage ratio (eg maximum of 70% debt and 30% equity) and a minimum debt service coverage ratio […]
What are the advantages and disadvantages of leading a deal by yourself vs. doing the deal with other PE firms as partners?
The advantage of being the only PE firm involved in the LBO is that you have complete control. You can dictate the type of debt financing to be raised and take full control when negotiating the financing terms with banks / institutions. You can choose whether or not to hire an investment bank as an […]
How does a capital call affect IRR?
A capital call is when a portfolio company needs to go back to its investor(s) to ask for more equity investment. This could be to finance an add-on acquisition or a new growth strategy. A capital call may also occur if the company is simply low on cash and needs more capital to stay afloat […]
Why would a PE firm choose to do a sale-leaseback after acquiring a company?
A sale-leaseback involves selling property ownership to a third party and then renting that property back from that third party at a rate that was previously agreed upon. This is also a common way to generate cash to fund other projects. Companies may also wish to do this to reduce their real estate risk and […]
How do rising interest rates affect the PE landscape, and how would you adjust your financial models and investment strategy in light of rising rates? (1 min)
As of 2022, the Federal Reserve has committed to raising interest rates to combat 7% inflation in the US, possibly by as much as 50 basis points which would drive up borrowing costs materially. This means that interest payments on existing senior debt will rise since they are typically floating rates based on a spread […]
If you were an investor, what would you look for in the balance sheet?
As an investor, you would be focused on both the book value of the company’s shares as displayed on the balance sheet, which can be calculated as total assets less liabilities. This shows how much the company is worth based only on its accounting books. Another way of thinking of the book value of a […]
What are the 3 most common ways to increase IRR in an LBO?
The 3 most common ways to increase IRR are: growing EBITDA, paying off debt, and increasing the exit multiple. Growing EBITDA is the most common way to increase IRR. Most PE firms plan to grow EBITDA either by increasing revenues, cutting costs, or some combination of the two. Even if they sell the company at […]
Why does Price / EBITDA not make sense?
Price is an equity value metric, meaning that it only accounts for the equity value and does not account for the debtholders. It represents either stock price or market capitalization. EBITDA is an enterprise value metric, meaning that it goes to both equity holders and debt holders. This is EBITDA is before interest, so we […]
