The mechanics of a simple leveraged buy-out. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/bonds-tutorial/v/corporate-debt-versus-traditional-mortgages?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/stock-and-bonds/mergers-acquisitions/v/simple-merger-arb-with-share-acquisition?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: Private equity firms often borrow money (use leverage) to buy companies. This tutorial explains how they do it and pay the debt. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy
Views: 222953 Khan Academy
In corporate finance, a leveraged buyout (LBO) is a transaction where a company is acquired using debt as the main source of consideration. Click here to learn more about this topic: https://corporatefinanceinstitute.com/resources/knowledge/finance/leveraged-buyout-lbo/
Views: 18854 Corporate Finance Institute
Subscribe Now For More Content - Back on the 10th of June 2019 ___ 🔥Don't forget to Subscribe, Like and Share this video🔥 #investmentBanking #LBO #PrivateEquity In this video we go through an LBO and the steps Investment banking analyst will go through to complete an LBO analysis of a company. “Walk me though an LBO?” or “What is an LBO” are often asked during investment banking interviews from analyst, associates and interns. We will go through each step in detail and explain the concept behind each step, for a detail tutorial of step 4 see our investment banking financial modelling course which will take you which each step and you can also follow along with Excel sheets. www.highfinancegraduate.com
Views: 2129 High Finance Graduate
Learn the concept behind a leveraged buyout (LBO), and why and how an LBO Model works. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" The most common analogy used to explain an LBO is: "Buying a house with a cash down payment and a mortgage." But that is a misleading way to think about it - because an LBO is more like buying a house to rent out to *tenants* i.e. an asset that you earn cash flow from, as opposed to a place to live in yourself. An LBO "works" mathematically because leverage reduces the UPFRONT cost of buying a company (or a house)... and then you use the company's cash flows to pay off debt principal and interest rather than collecting them for yourself. You still have to repay debt at the end when you sell the company... just like repaying a mortgage when you sell a house... BUT it still benefits you to use debt in the beginning because money today is worth more than money tomorrow, and because it's MUCH easier to get a high return on, say, $150 invested than it is on, say, $500 invested. In this example with purchasing a house, we see how 100% cash used for a $500K house produces an IRR of 9% with a 1.5x returns multiple. By contrast, when only 30% cash is used, the IRR increases to 15% and the returns multiple increases to 1.9x. Most private equity firms aim for IRRs of at least 20% (sometimes less than that in a weak market), so normally you can come close to or exceed 20% only by using leverage. Exceptions apply for fast-growing companies and cases where the exit multiple or margins have expanded, but in general most PE firms rely on leverage to achieve IRRs in that range... Well, assuming the company doesn't blow up and go bankrupt due to the high debt load - but that's another lesson for another day... Further Resources http://youtube-breakingintowallstreet-com.s3.amazonaws.com/LBO-Explanation.xlsx
Views: 49110 Mergers & Inquisitions / Breaking Into Wall Street
Concept of leverage finance by fast finance. A leveraged buyout (LBO) is a transaction when a company or single asset is purchased with a combination of equity and significant amounts of borrowed money . The term LBO is usually employed when a financial sponsor acquires a company. To know more detail watch this video. For more free finance lessons and 1:1 live mentorship with industry experts, visit us: https://mentor.bluebookacademy.com/live-1-1-mentoring/
Views: 8604 BlueBookAcademy.com
A leveraged buyout (LBO) is the acquisition of a company, division, business, or collection of assets using debt to finance a large portion of the purchase price. The remaining portion of the purchase price is funded with an equity contribution by a financial sponsor. The ability to leverage the relatively small equity investment is important for sponsors to achieve acceptable returns. The use of leverage provides the additional benefit of tax savings realized due to the tax deductibility of interest expense. Questions answered in the video include? - What are private equity firms and how do they invest? - How does leverage impact the equity returns of a sponsor? - What is a leveraged buyout (LBO)? - How does changing the financing mix change overall returns? - What is the internal rate of return (IRR)? - What are the characteristics of a strong LBO candidate? - What are the available sources of LBO financing? For those who are interested in buying the Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl, follow the Amazon link below; https://www.amazon.ca/Investment-Banking-Valuation-Leveraged-Acquisitions/dp/1118656210 If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. http://seekingalpha.com/author/robert-bezede/articles#regular_articles
Views: 5881 FinanceKid
Learn to buy a business here: http://www.BusinessBuyerAdvantage.com Related Article: I got a great piece of feedback the other day on YouTube. Wayne tells me that ‘any idiot’ can put a deal together to buy a business without using their own money otherwise ‘leveraged buy outs’ would not exist. This week I’ll explain to you what a leveraged buy out is, how it works, and we’ll see if a person with no money could actually pull it off. I know that you’re all anxious to find out if you’d be an idiot under Wayne’s definition. It’s all in this video right here: https://youtu.be/UrBLOtRY0OI Learn how to buy a business successfully with my Business Buyer Advantage Program. You can access the course at www.BusinessBuyerAdvantage.com and learn more about how it works from this video I made a few weeks ago: https://youtu.be/ooixMSaFf6Y Please remember to like and share this article, it’s the only way the people who run the internet have of knowing if the content is any good or not. The more you share, the more likely someone who needs this information will be able to find it. Go to www.DavidCBarnett.com and sign up for my weekly e-mail. Easy unsubscribe at any time as I use MailChimp and I’m not interested in harassing people who don’t want to hear from me. If you’re into podcasts, you can now easily subscribe to the audio of all my new videos on iTunes. This summer & fall I’ll be in St. John’s, Newfoundland, NYC, Orlando & Toronto. Find out more and sign up at http://davidbarnett.eventbrite.com Thank you and I’ll see you next time.
Views: 20186 David Barnett
In this LBO Model tutorial, you'll learn how to build a very simple LBO model "on paper" that you can use to answer quick questions in PE (and other) interviews. By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" This matters because in many cases, they'll ask you to calculate numbers such as IRR and multiple of invested capital very quickly and will not actually ask you to build a more complex model until later in the process. You should always START this exercise by looking at the actual question or set of questions they are asking you: "Calculate the purchase price required for ABC Capital to obtain a 3.0x multiple of invested capital (MOIC) if it plans to sell OpCo after five years at an EV / EBITDA multiple of 6.0x." So they're giving you the exit multiple and the return on investment that the PE firm is targeting, and you have to figure out the initial purchase price by "working backwards." Here's how we interpret each line in this case study and use it in the model: "OpCo currently has EBITDA of $250mm, and ABC believes that the new management team could keep EBITDA flat for the next 5 years." This tells you to make the initial EBITDA $250mm and keep it at that level for 5 years - skip revenue, COGS, OpEx, and everything else because none of that matters if this is all they give you. "ABC Capital has obtained debt financing of $750mm at 10% interest, and OpCo expects working capital to be a source of funds at $6mm per year." The initial debt balance is $750mm and there's a 10% interest rate, so the interest expense will be $75mm per year. In the "Cash Flow Statement Adjustments", since Working Capital is a SOURCE of funds it will add $6mm to cash flow each year. "OpCo requires capital expenditures of $35mm per year, and it has a tax rate of 40%. Assume no transaction fees, zero minimum cash required, and that PP&E on the balance sheet remains constant for the next 5 years." Also in the CFS section, CapEx = $35mm per year, and Depreciation also equals $35mm per year since the PP&E balance does not change at all. So you can also fill in the Depreciation figure on the Income Statement. No transaction fees and no minimum cash requirement simplify the purchase price and debt repayment - although we don't even have debt repayment here. "Assume that excess cash is NOT used to repay debt, and instead simply accumulates on the Balance Sheet." This makes the final numbers easier to calculate, since interest expense will never change and you can simply add up cash generated to get to the final cash number at the end. PROCESS: 1. Start with the Income Statement - EBITDA is $250mm per year. Subtract Depreciation of $35mm per year, and interest of $75mm per year. So EBIT = $140mm. Taxes = $140mm * 40%, so Net Income = $140mm - $56mm = $84mm. 2. On the simplified CFS, Net Income = $84mm, Depreciation = $35mm, Change in Working Capital = $6mm, CapEx = ($35mm), so Cash Generated per year = $90mm. 3. EBITDA Exit Multiple = 6.0x, and final year EBITDA = $250mm, so Exit EV = $1.5B. Subtract the outstanding debt of $750mm and add the cash generated in this period of $450mm, so Equity Proceeds = $1.2B. 4. Targeted MOIC = 3.0x so the PE firm would have to invest $400mm in the beginning. $400mm equity + $750mm debt = $1.150B, so the purchase multiple is $1,150 / $250 = 4.6x. Further Resources http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-04-Simple-LBO-Model.pdf http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-04-Simple-LBO-Model.xlsx
Views: 229074 Mergers & Inquisitions / Breaking Into Wall Street
In this video on What is LBO, here we explain LBO with examples and its features in a table summary format. 𝐖𝐡𝐚𝐭 𝐢𝐬 𝐋𝐁𝐎? ----------------------------- LBO or leveraged buyout basically acquires a small amount of equity (say 5-10% of the total cost) and uses debt to fund the remaining (90-95%). 𝐎𝐯𝐞𝐫𝐯𝐢𝐞𝐰 𝐨𝐟 𝐋𝐁𝐎 ------------------------------------- This section of what is LBO summarizes most of LBO's key features. Parameters Range Returns Between 20%-30% generally Exit Time Horizon 3-5 years Capital Structure A mixture of Debt (High) & Equity (low) Debt Payment Bank debt paid usually in 6-8 yrs. Higher yield debt paid in 10-12 yrs. EXIT Multiples EBITDA, PE, EV/EBITDA Potential Exits Sale, IPO, Recapitalization To know more about 𝐖𝐡𝐚𝐭 𝐢𝐬 𝐋𝐁𝐎, you can go to this 𝐥𝐢𝐧𝐤 𝐡𝐞𝐫𝐞:- https://www.wallstreetmojo.com/what-is-lbo/ Subscribe to our channel to get new updated videos. Click the button above to subscribe or click on the link below to subscribe - https://www.youtube.com/channel/UChlNXSK2tC9SJ2Fhhb2kOUw?sub_confirmation=1
Views: 46 WallStreetMojo
Joshua Rosenbaum and Joshua Pearl, authors of the highly acclaimed and authoritative textbook, Investment Banking, walk through how to answer a common technical question "What is an LBO?" Learn more with these seasoned pros at https://www.efficientlearning.com/ib and jump start a successful career on Wall Street. Don’t guess what you need to ace Superday! Build your confidence for the investment banking interview process with access to additional video lectures and practice questions and take a 14 day free trial of Wiley Investment Banking Prep course at https://www.efficientlearning.com/investment-banking/products/free-trial/.
Views: 54906 Wiley Finance
Cette vidéo explique comment financer l'acquisition d'une entreprise en utilisant le LBO. Tous les détails sont expliqués ici : http://www.gautier-girard.com/dossiers-entrepreneurs-et-managers/gestion-et-comptabilite/video-reprise-lbo/
Views: 28490 Gautier Girard
Vielen Dank für das Anschauen des Videos! Unser Wikifolio: https://www.wikifolio.com/de/de/w/wfsmallliq Liked das Video gern und abonniert unseren Kanal :) In diesem Video erklären wir euch verständlich, was ein Leveraged Buyout ist, bzw. den Leverage Effekt. Wie man mit einem Leveraged Buyout die Rendite steigern kann und was der Unterschied zwischen einer eigenkapitalfinanzierten Übernahme und einer fremdkapitalfinanzierten Übernahme ist.
Views: 5108 easyfinance
http://gordonbizar.com http://gettingrichyourway.com Leveraged Buyout (LBO) has been taught at Bizar Financing for over 30 years. Mr.LBO, Gordon Bizar, explains how he bought his first business with no cash of his own to entrepreneurs. As a business coach, Gordon Bizar, has been a business mentor to over 300,000 entrepreneurs teaching how to use leveraged buyout (LBO) in the purchase of a business. So if you've always wanted to be your own boss and do not know how to purchase a business using leveraged buyout (LBO) learn how to get into that business from Entrepreneur, Gordon Bizar.
Views: 8040 MrLBOgordonBizar
Welcome to the Investors Trading Academy talking glossary of financial terms and events. Our word of the day is “Leverage Buyout” The use of a target company's asset value to finance most or all of the debt incurred in acquiring the company. This strategy enables a takeover using little capital; however, it can result in considerably more risk to owners and creditors. See also hostile leveraged buyout, reverse leveraged buyout. Case Study Leveraged buyouts known as an LBO became popular in the 1980s when firms such as Beatrice Companies, Swift, ARA Services, Levi Strauss, Jack Eckerd, and Denny's were acquired and then were taken private. With an LBO, a firm's management often borrows funds using the firm's assets as collateral. The borrowed money is used to purchase the entire firm's outstanding stock. As a result, a small group of individuals is able to take control of the firm without using any or much of the group members' own money. Following the buyout the new owners frequently attempt to cut costs and sell assets in order to make the increased debt more manageable. Because the group initiating the LBO must pay a premium for the stock over the market price, an LBO nearly always benefits the stockholders of the firm to be acquired. However, investors holding bonds of the acquired company are likely to see their relative position deteriorate because of the increased debt taken on by the company. For example, the leveraged buyout of R. H. Macy & Co. produced a $16 jump in the price of its common stock at the same time the price of its debt securities fell. Most bondholders have no recourse to the increased risks they face because of the greater resultant debt. By Barry Norman, Investors Trading Academy
Views: 6021 Investor Trading Academy
MBO - existing managers are acquiring the business, they have a much better understanding of it and there is no learning curve involved. LBO is a transaction when a company or single asset (e.g., a real estate property) is purchased with a combination of equity and significant amounts of borrowed money, structured in such a way that the target's cash flows or assets are used as the collateral (or "leverage") to secure and repay the borrowed money.
Views: 8964 financeschoolin
an informational video-- Created using PowToon -- Free sign up at http://www.powtoon.com/youtube/ -- Create animated videos and animated presentations for free. PowToon is a free tool that allows you to develop cool animated clips and animated presentations for your website, office meeting, sales pitch, nonprofit fundraiser, product launch, video resume, or anything else you could use an animated explainer video. PowToon's animation templates help you create animated presentations and animated explainer videos from scratch. Anyone can produce awesome animations quickly with PowToon, without the cost or hassle other professional animation services require.
Views: 6297 Shayb Sultan
How can a private equity firm undertake one of those huge LBOs you hear about, while leaving the target company with the borrowed debt that has to be repaid? Leveraged Finance, of course. In this video, master explainer Paddy Hirsch details how these transactions work, what kind of debt is entailed, and who, at the end of the day, is left holding the bag (of money). More videos from Paddy: What is a leveraged loan? http://www.leveragedloan.com/primer/#!whatisaleveragedloan What is a high yield bond? http://www.highyieldbond.com/primer/#!what-is-a-high-yield-bond More on Paddy (nice specs btw, Paddy): http://www.paddyhirsch.com/ Check out LCD's awesome, free Leveraged Loan and High Yield Bond Primers! www.leveragedloan.com www.highyieldbond.com
Views: 20871 LCDcomps
Nov. 12 (Bloomberg) -- His name is synonymous with 'Corporate Titan.' As co-founder of KKR, Henry Kravis re-wrote the rules of leveraged buyouts; he and his cousin George Roberts now rule over an empire that dwarfs some of the world's mightiest public corporations. "Bloomberg Game Changers" follows Kravis' rise from his early days in 'bootstrap' acquisitions, through his role in the 1988 landmark LBO of RJR-Nabisco, to KKR's IPO on the New York Stock Exchange. (Source: Bloomberg) -- Subscribe to Bloomberg on YouTube: http://www.youtube.com/Bloomberg Bloomberg Television offers extensive coverage and analysis of international business news and stories of global importance. It is available in more than 310 million households worldwide and reaches the most affluent and influential viewers in terms of household income, asset value and education levels. With production hubs in London, New York and Hong Kong, the network provides 24-hour continuous coverage of the people, companies and ideas that move the markets.
Views: 320791 Bloomberg
Josh Kosman is the author of The Buyout of America: How Private Equity is Destroying Jobs and Killing the American Economy. He has been covering the financial industry for nearly twenty years. Josh is a reporter for the New York Post, a former editor at Mergermarket.com and a former senior writer for The Deal and Buyouts Newsletter. He appears frequently in the media as a private equity and mergers expert. #DESCRIPTION John Kosman goes over how the words leveraged buyouts developed a negative connotation and investors had to rebrand themselves as private equity firms. He discusses the move away from state pensions as the biggest investors of leveraged buyouts and the need to find alternate forms of capital. Subscribe for more SarderTV: http://bit.ly/1osk5yg Follow our Official Twitter: http://bit.ly/1tIwTzK Check out exclusive SarderTV content: Web - http://bit.ly/1xpv37D Facebook - http://on.fb.me/1EbljQi #ABOUT SARDERTV Sarder TV is an independent, educational media company, focusing on the subjects that fascinate, inspire and teach executives. Because the relationship between success and learning is parallel, Sarder TV provides exclusive interviews with the authors, leaders, and taste makers currently affecting industry. Led by Russell Sarder and a team of dynamic and creative programming and content creators, experienced leadership and seasoned advisors, Sarder TV launched in 2012. Sarder TV is an exciting, forward thinking media company focused on the promotion of learning.
Views: 29 Russell Sarder
In this tutorial, you’ll learn why a company’s existing Debt and capital structure don’t make (much of) a difference in leveraged buyouts and LBO models, despite guides that claim the contrary. You’ll also learn about a few exceptions where these items do make a small difference. Table of Contents: 6:33 Exception #1: Call Premiums 10:00 Exception #2: Lender Familiarity 11:50 Recap and Summary Lesson Outline: For the most part, a company’s existing capital structure does NOT matter in leveraged buyout scenarios. That’s because in an LBO, the PE firm completely replaces the company’s existing Debt and Equity with new Debt and Equity. Let’s say that a PE firm wants to acquire a company for 10x EV / EBITDA using 5x Debt / EBITDA. Regardless of whether a company has 0 Debt or 4x Debt / EBITDA before the LBO, it will still have 5x Debt / EBITDA after the LBO. The PE firm will also have to contribute the same amount of equity to the deal (5x EBITDA). Existing Debt would affect things only if it somehow increased the Purchase Enterprise Value. But that line of thinking is incorrect: If a company raises additional Debt, both its Cash and Debt balances increase, canceling each other out, and resulting in the same Enterprise Value. So, unless you have incorrect beliefs about the concept of Enterprise Value or the pricing for leveraged buyouts, existing capital structure doesn’t matter. However, there are a few small exceptions where it makes A BIT of a difference. Exception #1: Call Premiums Some Debt limits early repayments; for example, on a 10-year unsecured bond issuance, the company might not be able to repay Debt at all for the first two years. Then, after that, the company might have to repay 105% of the outstanding principal if it does so in Years 3-4, 103% in Years 5-6, 101% in Years 7-8, and 100% in Years 9-10. These “call premiums” make it more expensive to repay the Debt, which is almost always required in LBO scenarios, and increase the effective Purchase Enterprise Value. But they still don’t matter that much: In a 10x EV / EBITDA deal with 5x Debt / EBITDA, for example, a 110% call premium would increase the purchase multiple to 10.5x and reduce the IRR by about 2%. And the call premium is usually much less than 110%. Exception #2: Lender Familiarity If the company has a track record of servicing its Debt, paying interest, and using loans responsibly, lenders may be more inclined to invest in another Debt issuance from the company. Or, if the company has a poor track record with all of those, lenders may be less likely to invest in a new Debt issuance. These points don’t affect the purchase price or IRR, but they may make it easier or more difficult to get a deal done. You could argue that a solid track record might result in a lower coupon rate on the Debt, but that’s quite a stretch, and it would be difficult to find real data to support that theory. Even if that happened, a slightly lower interest rate would make almost no difference on the IRR or money-on-money multiple. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-14-LBO-Model-Existing-Debt-Slides.pdf https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-14-LBO-Model-Existing-Debt.xlsx
What is LEVERAGED BUYOUT? What does LEVERAGED BUYOUT mean? LEVERAGED BUYOUT meaning - LEVERAGED BUYOUT definition - LEVERAGED BUYOUT explanation. Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license. A leveraged buyout (LBO) is a transaction when a company or single asset (e.g., a real estate property) is purchased with a combination of equity and significant amounts of borrowed money, structured in such a way that the target's cash flows or assets are used as the collateral (or "leverage") to secure and repay the borrowed money. Since the debt (be it senior or mezzanine) has a lower cost of capital than the equity, the returns on the equity increase as the amount of borrowed money does until the perfect capital structure is reached. As a result, the debt effectively serves as a lever to increase returns-on-investment. The term LBO is usually employed when a financial sponsor acquires a company. However, many corporate transactions are partially funded by bank debt, thus effectively also representing an LBO. LBOs can have many different forms such as management buyout (MBO), management buy-in (MBI), secondary buyout and tertiary buyout, among others, and can occur in growth situations, restructuring situations, and insolvencies. LBOs mostly occur in private companies, but can also be employed with public companies (in a so-called PtP transaction – Public to Private). As financial sponsors increase their returns by employing a very high leverage (i.e., a high ratio of debt to equity), they have an incentive to employ as much debt as possible to finance an acquisition. This has, in many cases, led to situations in which companies were "over-leveraged", meaning that they did not generate sufficient cash flows to service their debt, which in turn led to insolvency or to debt-to-equity swaps in which the equity owners lose control over the business to the lenders.
Views: 6526 The Audiopedia
This video is prepared for candidates pursuing CFA LEVEL 1 and covers Study Session - 14 (Equity). There are various ways of investing money in a Company and one way is Buyout. Mohit Sir tries to cover theory topic in a way that brings in fun and enhances retention level. All classes are conducted at Openhouse, Kolkata. Visit:- www.apexacademy1.com For Live/Pendrive classes contact 9038011206.
Views: 960 APEX ACADEMY
Jon Taylor of Stanton Park Advisors (www.stantonparkllc.com) explains how to use a leverage buyout (LBO) model to value a business. The LBO model template can be downloaded at www.stantonparkllc.com in the blog section.
Views: 38201 Jon Taylor
Leveraged buyouts are discussed in the second video of a five-part series on private equity investment from Cornerstone Advisors. Katie Robinette and Mark Wilkerson of Cornerstone Advisors explore the modern private equity landscape by looking back on the first of four market cycles that shaped the industry. Exploring the time from 1980 to 1991, this episode looks back on the rise of KKR, the takeover of RJR Nabisco and the Barbarians at the Gate time of greed. All Videos In The Series Part 1: What Is Private Equity? An Introduction - https://youtu.be/LvI9GvKflGk Part 2: Rise of Leveraged Buyouts - https://youtu.be/dD9lJPYYuWk Part 3: What Is Venture Capital? - https://youtu.be/wflYQahtcsk Part 4: What Is Distressed Debt Investing? - https://youtu.be/lSJc7NGLRUY Part 5: Should I Invest In Private Equity? - https://youtu.be/7j8WtakdoJY
Views: 301 Cornerstone Advisors
In this LBO Model tutorial, we walk through Silver Lake's $24 billion leveraged buyout of Dell and explain the tasks you might have to complete if you were to analyze this deal as part of a case study in a private equity interview. By http://www.mergersandinquisitions.com/ "Break Into Investment Banking or Private Equity, The Easy Way" Among other topics, we cover typical LBO case study questions to expect, why this particular deal was so unusual, and how to begin gathering data from industry reports, equity research, Dell's filings and investor presentations, and other sources. Then, we delve into how the transaction assumptions are set up, why the calculation for debt and equity is somewhat unusual, and how to factor in Michael Dell's equity rollover and cash contribution and the company's own excess cash usage. Finally, we conclude with a discussion of the Sources & Uses schedule and how that works, plus a description of the different types of debt used in the transaction. WANT MORE FREE FINANCIAL MODELING TUTORIALS? Receive a Free 3-Part Tutorial on **How to Build Your First Merger Model** based on the $16B United / Goodrich deal. Visit: www.breakingintowallstreet.com/biws MENTIONED RESOURCES http://www.mergersandinquisitions.com/leveraged-buyout-lbo-model-overview-capital-structure/ (Click to access the full case study and FREE downloadable templates)
Views: 84198 Mergers & Inquisitions / Breaking Into Wall Street
In this tutorial, you’ll learn how to determine the proper debt level to use in a leveraged buyout case study given by a private equity firm – all from using Google and free information you can find online. Table of Contents: 2:35 Step 1: Find Comparable Deals and Estimate the Purchase Multiple and Debt / EBITDA 9:45 Step 2: Test Your Assumptions in Excel 16:21 Step 3: Tweak Your Assumptions as Necessary 18:21 Recap and Summary Lesson Outline: Question that came in the other day… “Help! I just got a case study from a private equity firm I’m interviewing with.” “I have to pick a consumer/retail company, download its filings, complete a leveraged buyout model for the company, and recommend for or against the deal.” “How can I determine how much debt to use in the deal? They didn’t give me any instructions!” You can figure this out simply in most cases without wasting a ton of time sifting through company’s filings. Here’s the 3-step process: Step 1: Estimate the purchase multiple, purchase price, and Debt / EBITDA by looking at comparable buyout deals (NOT publicly traded companies, as they almost always have lower debt levels). Step 2: Test your assumptions in Excel and see if the company can manage that much debt. Step 3: Go back and tweak your assumptions as necessary. The purchase price and Debt / EBITDA are very closely linked – for example, you can’t assume 6x Debt / EBITDA if you’re paying only 5x EV / EBITDA for the entire company. For most public companies, you need to assume at least a 20-30% share price premium, and then make sure the implied EV / EBITDA multiple is in-line with those of other recent deals in the market. Let’s say you pick Bed, Bath & Beyond [BBBY] for your LBO candidate. To find 2-3 comparable LBO deals, you can do Google searches for terms like: “consumer retail” “leveraged buyouts” [This Year or Last Year] consumer leveraged buyouts retail leveraged buyouts In this case, we find 3 relevant deals: the buyouts of Petco (10x EV / EBITDA and 6x Debt / EBITDA), Life Time Fitness (11x EV / EBITDA and 5.5x Debt / EBITDA), and Belk (7x EV / EBITDA and 5-6x Debt / EBITDA). So our deal will likely be done at 8-10x EV / EBITDA with 5-6x Debt / EBITDA. BBBY’s share price has fallen by ~50% in the past year, so we think a 50%, 75%, or even 100% premium would be more reasonable than the standard 20-30%, and would imply a purchase multiple of 6.5x – 8.5x instead. But can the company support that much debt? To answer this question, you can create a simple Excel model with revenue growth, EBITDA margins, Cash Flow from Operations as a % of EBITDA, and CapEx as the key drivers. The after-tax interest will also be subtracted from CFO – CapEx to determine debt repayment capacity. Then you can evaluate debt repayment, Debt / EBITDA, and EBITDA / Interest over time to see if the debt level is too low, too high, or just about right. Focus on the downside cases – What happens if revenue, EBITDA, cash flow, etc. decline? Margins and growth HAVE declined historically for BBBY! Ideally, Debt / EBITDA should decline over time and EBITDA / Interest should rise as the company repays debt. So if Debt / EBITDA rises instead, or EBITDA / Interest falls, you’ll have to assume a lower debt level. In this deal, we run into trouble when revenue declines or when we pay closer to a 100% premium for the company because Debt / EBITDA approaches 8x in some later years. Even if revenue growth stays positive and the premium is only 75%, the credit stats and ratios still don’t look "great." So we’d say that 5-6x Debt / EBITDA is a stretch, and 4-5x is more feasible. At a 75% premium, this might be 60% debt (4.5x) and at a 100% premium it might be 50% debt (4.2x). Once you’ve come up with baseline estimates for these figures, you would continue to build the model, come up with something more complex, and then ultimately make your investment recommendation on the company and present it. But you can save a lot of time and finish case studies more efficiently if you know how to find and confirm simple figures like these before you do anything more complex. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-11-Leveraged-Buyout-Debt-Equity-Ratio.pdf https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-11-Leveraged-Buyout-Debt-Equity-Ratio.xlsx
In part 2 of our conversation with noted entrepreneur Jack Stack, the discussion turns to the historical buyout of International Harvester by Jack and his partners. They leveraged everything they owned to save their jobs and the jobs of their employees during the height of recession. He talks about the circumstances surrounding that deal and their motivations for making it.
Views: 380 ThesbjLive
In this tutorial, you'll learn about the most common LBO modeling-related questions and some tricks and rules of thumb you can use to approximate the IRR and solve for assumptions like the purchase price and EBITDA growth in leveraged buyouts. Table of Contents: 2:36 Question #1: LBO Model Walkthrough 5:34 Question #2: Ideal LBO Candidates 8:09 Question #3: How to Approximate IRR 11:46 Question #4: How to Solve for EBITDA or the Purchase Price 13:58 Question #5: How to Approximate the IRR in an IPO Exit 16:03 Recap, Summary, and Key Principles Lesson Outline: Will you get LBO-related questions in interviews? Yes, possibly, but full case studies are unlikely unless you're interviewing for PE roles or more advanced IB roles. Interviewers now ask trickier questions about the fundamentals, they ask progressions of questions on the same topic or scenario, and they're more likely to give you *simple* cases and numerical tests rather than complex ones. A typical progression for LBO models might be as follows: Question #1: LBO Model Walkthrough "In a leveraged buyout, a PE firm acquires a company using a combination of Debt and Equity, operates it for several years, and then sells it; the math works because leverage amplifies returns; the PE firm earns a higher return if the deal does well because it uses less of its own money upfront." In Step 1, you make assumptions for the Purchase Price, Debt and Equity, Interest Rate on Debt, and Revenue Growth and Margins. In Step 2, you create a Sources & Uses schedule to calculate the Investor Equity paid by the PE firm. In Step 3, you adjust the Balance Sheet for the effects of the deal, such as the new Debt, Equity, and Goodwill. In Step 4, you project the company's statements, or at least its cash flow, and determine how much Debt it repays each year. Finally, in Step 5, you make assumptions about the exit, usually using an EBITDA multiple, and calculate the MoM multiple and IRR. Question #2: Ideal LBO Candidates Price is the most important factor because almost any deal can work at the right price – but if the price is too high, the chances of failure increase substantially. Beyond that, stable and predictable cash flows are important, there shouldn't be a huge need for ongoing CapEx or other big investments, and there should be a realistic path to exit, with returns driven by EBITDA growth and Debt paydown instead of multiple expansion. Question #3: Approximating IRR "A PE firm acquires a $100 million EBITDA company for a 10x multiple using 60% Debt. The company's EBITDA grows to $150 million by Year 5, but the exit multiple drops to 9x. The company repays $250 million of Debt and generates no extra Cash. What's the IRR?" Initial Investor Equity = $100 million * 10 * 40% = $400 million Exit Enterprise Value = $150 million * 9 = $1,350 million Debt Remaining Upon Exit = $600 million – $250 million = $350 million Exit Equity Proceeds = $1,350 million – $350 million = $1 billion IRR: 2.5x multiple over 5 years; 2x = 15% and 3x = 25%, so it's ~20%. Question #4: Back-Solving for Assumptions "You buy a $100 EBITDA business for a 10x multiple, and you believe that you can sell it again in 5 years for 10x EBITDA. You use 5x Debt / EBITDA to fund the deal, and the company repays 50% of that Debt over 5 years, generating no extra Cash. How much EBITDA growth do you need to realize a 20% IRR?" Initial Investor Equity = $100 * 10 * 50% = $500 20% IRR Over 5 Years = ~2.5x multiple (2x = ~15% and 3x = ~25%) Exit Equity Proceeds = $500 * 2.5 = $1,250 Remaining Debt = $250, so Exit Enterprise Value = $1,500 Required EBITDA = $150, since $1,500 / 10 = $150 Question #5: Approximating IRR in an IPO Exit "A PE firm acquires a $200 EBITDA company for an 8x multiple using 50% Debt. The company's EBITDA increases to $240 in 3 years, and it repays ALL the Debt. The PE firm takes it public and sells off its stake evenly over 3 years at a 10x multiple. What's the IRR?" Initial Investor Equity = $200 * 8 * 50% = $800 Exit Enterprise Value = Exit Equity Proceeds = $240 * 10 = $2,400 "Average Year" to Exit = 1/3 * 3 + 1/3 * 4 + 1/3 * 5 = 4 years IRR: 3x over 3 years = ~45%, and 3x over 5 years = ~25% Approximate IRR: ~35% (This one's a bit off – see Excel.) RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-13-LBO-Model-Interview-Questions-Slides.pdf
Views: 50185 Mergers & Inquisitions / Breaking Into Wall Street
Based on the Wiley Finance Leveraged Buyout book by Paul Pignataro, Mr. Pignataro will step through core Leveraged Buyout (LBO) fundamentals and an LBO analysis to better understand Part I of the book. The book, found below, is recommended to fully understand the material discussed. http://www.amazon.com/Leveraged-Buyouts-Website-Practical-Investment/dp/1118674545/ref=sr_1_1?ie=UTF8&qid=1391540998&sr=8-1&keywords=leveraged+buyouts
Views: 21628 Paul Pignataro
http://www.lbo-deals.com Presented by The Small Business Buyer. Considering a career change? Here is a mind map that gives you the picture of why you should buy a business and not waste your time with startups.
Views: 1887 rockwell marsh
There are 3 things you need to focus on to get the perfect LBO... Firstly - The deal has to fit your requirements. It should strategically add value to your product or services. Secondly - It's about the seller. They have to motivated to get out of the business you want to buy. Thirdly - There has to have a strong financial profile If you're looking at buying your first business but unsure where to start... join me on my webinar where I discuss 'How To Buy Your First Business Inside 99 Days... CASH FREE!' https://bit.ly/2LNkf1q In my 26 years of business I have: ► Enabled 300+ business acquisitions ► Done $52.3 billion in deals ► Within 23 business sectors ► In 17 countries. Now, I want to help you find THE business that suits your experiences, skills, passions and lifestyle choices. I founded Ninja Acquisitions, so I can do exactly that. Want to find out more? Check out my website here: https://bit.ly/2LNkf1q Follow Carl's Adventures Online: LinkedIn: https://www.linkedin.com/in/iamcarlal... Facebook: https://www.facebook.com/ninjaacquisi... Twitter: https://twitter.com/ninjaacquire
Views: 1116 Ninja Acquisitions, with Carl Allen
In today's class we covered an introduction into leveraged buyouts performing a simple analysis. See more in my book "Leveraged Buyouts" http://www.amazon.com/Leveraged-Buyouts-Website-Practical-Investment/dp/1118674545/ref=sr_1_3?ie=UTF8&qid=1447803048&sr=8-3&keywords=pignataro
Views: 1597 Paul Pignataro
http://gordonbizar.com http://gettingrichyourway.com Leveraged Buyout (LBO) has been taught at Bizar Financing for over 30 years. Entrepreneur, Gordon Bizar, shows other entrepreneurs how to buy a business using his leveraged buyout (LBO) techniques. Watch this video and learn how you can buy a business with LBO, leveraged buyout.
Views: 1249 MrLBOgordonBizar
What is a "Waterfall Returns" Schedule? CONCEPT: In a leveraged buyout or any deal where an investment firm acquires another company, they'll often own close to 100% of it... By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 1:04: Example of Management Promotes / Waterfall Returns 3:29: Rationale for Management Promotes and Giving Away Ownership 4:25: Step-by-Step Modeling Process for Waterfall Returns 6:35: Excel Setup 7:12: Level 1 IRR Calculations 10:05: Level 2 IRR Calculations 12:38: Level 3 IRR Calculations 13:55: Level 4 IRR Calculations 14:23: How the Waterfall Distribution Affects IRRs to Everyone 17:35: Recap and Summary What is a "Waterfall Returns" Schedule? CONCEPT: In a leveraged buyout or any deal where an investment firm acquires another company, they'll often own close to 100% of it... But sometimes management will retain a small portion, or another investor group might retain a certain portion. Sometimes it ends there - but sometimes, that smaller group gets ADDITIONAL ownership and a higher stake upon exit if the investment performs well. This is called a "management promote" (if it's the management team that receives this as an incentive). EXAMPLE: A new leveraged buyout takes place, and the PE firm structures the deal to heavily incentivize the management team: For an IRR up to 10%, PE firm gets 95% and management team gets 5% of the proceeds. Then, for the portion of the IRR between 10% and 15%, the PE firm gets 90% and the management team gets 10%. For the portion of IRR between 15% and 20%, the PE firm gets 85% and the management team gets 15%. Then for the IRR above 20%, the PE firm gets 80% and the management team gets 20%. A PE firm might do this to create a "win win" scenario - yes, it loses some of its IRR by giving up a % to the management team... but if all goes well, the team should outperform and help the PE firm achieve a higher overall IRR. How Do You Model This Scenario? 1) Make assumptions for the initial investment and proceeds upon exit, plus the ownership percentages. 2) Make assumptions for how the proceeds split changes at different IRR levels. 3) For each "tier" of IRR, take the initial investment and calculate the amount of net proceeds upon exit that would correspond to that IRR. Example: $1,000 initial investment, and 10% IRR tier - multiply by (1 + 10%), then multiply that number by (1 + 10%), and so on until the exit year. 4) Determine the split of proceeds within that tier. If the actual proceeds are $1,500, for example, and $1,611 would correspond to a 10% IRR, you're done - just split the $1,500 between the PE firm and management team in a 95% / 5% split. But if it goes beyond that $1,611, you just split up the $1,611 according to those numbers and then save the rest for the next tier. 5) Determine the proceeds to distribute in the next tiers. For $3,000, for example, you'd distribute $1,611 and save ($3,000 - $1,611) for the next tiers. If you're at the 10% level and you get something below $1,611, you'd set the "proceeds for the next tiers" number to $0 (use a MAX function for this). 6) Keep doing this for each tier of IRRs until the end. The formulas get trickier as you move up because you need to use MIN and MAX to ensure that you don't get negative or nonsensical values. In Level 2, for example, the "Amount to Distribute and Split" is: =MIN(Net Proceeds That Correspond to 15% IRR in Year 5 minus Net Proceeds That Correspond to 10% IRR in Year 5, MAX(Total Net Proceeds minus Net Proceeds That Correspond to 10% IRR in Year 5, 0)) So you're taking the lesser of the proceeds between 10% and 15% IRRs, or the total remaining amount that can be distributed AFTER the Level 1 distributions. And that same type of logic continues as you move down, until the last tier. RESOURCES: http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-03-Simplified-Waterfall-Distribution-Before.xlsx http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-03-Simplified-Waterfall-Distribution-After.xlsx
Views: 41457 Mergers & Inquisitions / Breaking Into Wall Street
This LBO exit strategy training will cover different ways a private equity firm can exit a leveraged buyout... By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" ... including an M&A deal – a sale to a normal company or to another private equity firm – as well as an initial public offering (IPO), and a recapitalization / perpetual dividend “non-exit.” 2:09 Exits in Real Life: M&A, IPO, and Dividends/Recaps 6:27 Standard M&A Exit in an LBO 7:21 IPO Exit in an LBO 12:44 Dividends / Recapitalization in an LBO 16:42 Recap and Summary Exit Strategies in a Leveraged Buyout / LBO Model There is typically VERY little thought given to the exit in a leveraged buyout (LBO) model – in 99% of models, people just assume a simple exit multiple based on EBITDA, implying that another company or another private equity firm buys the company. But in real life, that doesn’t necessarily happen… sometimes, a portfolio company cannot be sold to another normal company or even to another private equity firm. For example, it might be too big for another company to buy, or it might be in an unfavorable market where there’s little M&A activity. Also, it tends to be harder to do M&A deals in emerging and frontier markets because potential buyers are also smaller and less willing to make big acquisitions. As a result, you need to think about 2 alternative exit strategies: initial public offerings (IPOs) and recapitalizations (recaps), otherwise known as dividends / dividend recaps. The Mechanics of an M&A Deal A normal M&A deal is simple: you simply assume an exit multiple, calculate Enterprise Value based on that, and then back into Equity Value by subtracting Net Debt. Then, you calculate the IRR and multiple to the private equity firm by looking at its initial investment and how much the firm receives back at the end upon exit. There is some uncertainty around the timing of the exit and the multiple, but overall it is a very “clean” process because the firm sells 100% of its stake all at once, to another single firm. Initial Public Offerings in an LBO In an IPO scenario, the PE firm cannot sell its entire stake when the company goes public because it sends a big negative signal to everyone else in the market and new potential investors: if this company is so great, why are you selling your entire stake in it? So instead, the firm has to sell off its holdings over a period of time… perhaps 20% in Year 1, 35% in Year 2, 30% in Year 3, and 15% in Year 4, as in our example. If the share price stays the same, the MoM multiple is the same but the IRR is lower because it takes more time to get the same capital back. But if the share price fluctuates a lot, it could work for the firm or against the firm: a higher share price over time obviously helps them, while a declining share price hurts them. In general, though, the IRR tends to be lower in an IPO because it takes the PE firm more time to sell its holdings; the MoM multiple may be about the same, or it might be higher or lower depending on the share price movement. Dividends / Recapitalizations in an LBO This is not really an “exit strategy” at all: the private equity firm simply holds the company indefinitely and the firm keeps issuing dividends from its excess cash flow to the PE firm. In some cases, the company may take on extra debt to issue these dividends (known as a “dividend recap”). The problem here is that the company can only issue dividends with the cash flow it has available, which is typically far less than its EBITDA. This strategy can work if the company grows very quickly and/or is a “cash cow” business with high margins and high FCF yield, but in general it is very tough to realize a high IRR solely with dividends, simply because it might take years and years just to recoup the initial investment. The MoM multiple, over a long period, might be reasonable, but the IRR would end up being so low that many PE firms would not be interested at all. Conclusion The M&A sale is the preferred strategy in 99% of leveraged buyout scenarios because it tends to produce the highest IRRs and highest MoM multiples, with the least amount of uncertainty. However, in many cases the PE firm will have to use strategies such as an IPO exit if, for example, the company is too big to be acquired; and if it really can’t figure out what to do, dividends / recapitalizations may be used. They are especially common in emerging and frontier markets where the capital markets are smaller and less liquid and where it’s harder to find qualified buyers. Regulatory issues may also prevent these types of companies from going public in larger, developed markets. http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-07-LBO-Exit-Strategies-Comparison.xlsx http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-07-LBO-Exit-Strategies.pdf
Views: 22318 Mergers & Inquisitions / Breaking Into Wall Street
Note: To download the Excel template that goes with this video, go to http://www.wallstreetprep.com/blog/financial-modeling-quick-lesson-simple-lbo-model/ In this video tutorial, we'll build a leveraged buyout (LBO) model, given some operating and valuation assumptions, in Excel. The goal of this video is to show you that an LBO model is actually a very simple transaction at its core - and quite similar to the mechanics involved when purchasing a home. If after watching this video you want to take your LBO modeling to the next level, see Wall Street Prep's advanced LBO modeling course at http://www.wallstreetprep.com/programs/self_study/advanced_lbo_modeling.php.
Views: 141857 Wall Street Prep
In this tutorial, we walk through Silver Lake's $24 billion leveraged buyout of Dell and explain the tasks you might have to complete if you were to analyze this deal as part of a case study in a private equity interview. By http://www.mergersandinquisitions.com/ "Break Into Investment Banking or Private Equity, The Easy Way" In Part 2 of the case study, we go into how you might project revenue and expenses for Dell, how to come up with different scenarios, and how to use "channel checks" to come up with numbers that are different from consensus estimates. We also cover briefly how to link the 3 financial statements and ensure that these assumptions and scenarios flow through everything properly. Please see the link at the top of this description to get all the Excel files and PDFs and other resources. WANT MORE FREE FINANCIAL MODELING TUTORIALS? Receive a Free 3-Part Tutorial on **How to Build Your First Merger Model** based on the $16B United / Goodrich deal. Visit: www.breakingintowallstreet.com/biws MENTIONED RESOURCES http://www.mergersandinquisitions.com/leveraged-buyout-lbo-model-revenue-expense-scenarios/ (Click to access the full case study and FREE downloadable templates)
Views: 22347 Mergers & Inquisitions / Breaking Into Wall Street
~~~ Leveraged buyout ~~~ Title: What is Leveraged buyout?, Explain Leveraged buyout, Define Leveraged buyout Created on: 2018-08-30 Source Link: https://en.wikipedia.org/wiki/Leveraged_buyout ------ Description: A leveraged buyout is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company's cash flow is the collateral used to secure and repay the borrowed money. The use of debt, which has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. The cost of debt is lower because interest payments reduce corporate income tax liability, whereas dividend payments do not. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the debt serves as a lever to increase the returns to the equity.The term LBO is usually employed when a financial sponsor acquires a company. However, many corporate transactions are partially funded by bank debt, thus effectively also representing an LBO. LBOs can have many different forms such as management buyout , management buy-in , secondary buyout and tertiary buyout, among others, and can occur in growth situations, restructuring situations, and insolvencies. LBOs mostly occur in private companies, but can also be employed with public companies . As financial sponsors increase their returns by employing a very high leverage , they have an incentive to employ as much debt as possible to finance an acquisition. This has, in many cases, led to situations in which companies were "over-leveraged", meaning that they did not generate sufficient cash flows to service their debt, which in turn led to insolvency or to debt-to-equity swaps in which the equity owners lose control over the business to the lenders. ------ To see your favorite topic here, fill out this request form: https://docs.google.com/forms/d/e/1FAIpQLScU0dLbeWsc01IC0AaO8sgaSgxMFtvBL31c_pjnwEZUiq99Fw/viewform ------ Source: Wikipedia.org articles, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license. Support: Donations can be made from https://wikimediafoundation.org/wiki/Ways_to_Give to support Wikimedia Foundation and knowledge sharing.
Views: 234 Audioversity
In this IRR vs Cash tutorial, you’ll learn the key distinctions between the internal rate of return (IRR). By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" You will also learn further distinctions on the cash-on-cash multiple or money-on multiple when evaluating deals and investments – and you’ll understand why venture capital (VC) firms target one set of numbers, whereas private equity (PE) firms target a different set of numbers. http://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-05-IRR-vs-Cash-on-Cash-Multiples.xlsx Table of Contents: 1:35 Why Do IRR and Cash-on-Cash Multiples Both Matter? 3:05 What Do Private Equity vs. Venture Capital vs. Other Firms Care About? 8:30 How to Use These Metrics in Real Life 11:08 Key Takeaways Lesson Outline: 1. Why Does This Matter? Because there are DIFFERENT ways to judge the success of a deal - 2 of the main ones for leveraged buyouts (LBOs), growth equity investments, and venture capital investments are the internal rate of return (IRR) and the cash-on-cash (CoC) or money-on-money (MoM) multiple. Many investment firms will care a lot about one of these, but not the other, and will try to find investments that yield a high IRR or a high multiple… but not both. The Difference: IRR factors in the time value of money - it's the effective, compounded interest rate on an investment. Whereas the multiple is simpler and ignores timing (e.g., $1000 / $100 = 10x multiple). 2. What Do Different Firms Care About? Most venture capital (VC) firms and early-stage investors want to earn a multiple of their money back - they don't care that much about IRR, because they're going to be invested for a VERY LONG time and it's not exactly liquid… and they don't care what the stock market does. VC firms must be able to cover their losses with “the winners”! If they get 2x their capital back in 1 year (100% IRR) and then lose everything on another investment in 5 years’ time (0% IRR), the first result is completely irrelevant because they've only earned back 1x their capital. Perfect Example: Harmonix, maker of Guitar Hero - got VC investment in the mid-1990's, generated $0 in revenue for 5+ years, and then in 2005 released the hit video game Guitar Hero. Sold for $175 million to Viacom in 2006! Massive multiple, but likely a pathetic IRR since it took 10+ years to get there. Later-stage investors and private equity firms care more about IRR because the multiples will never be that high in late-stage deals, and because they are benchmarked against the public markets (e.g., the S&P 500) more. If the firm's IRR can't beat the stock market, why should you invest? Most PE firms target at least a 20-25% IRR depending on the economy, deal environment, valuations, etc… less when things are bad, more in frothy times. This makes it common to do "quick flip" deals where the company is bought and then sold at a MUCH higher multiple right after - simply to get a high IRR. Real-Life Example: Thoma Bravo (mid-market tech PE firm) bought Digital Insight from Intuit for $1.025 billion, and then sold it 4 months later for $1.65 billion to NCR. VERY high IRR - 316%! But only a ~1.6x money multiple, assuming no debt / no debt repayment. http://dealbook.nytimes.com/2013/12/02/sale-to-ncr-is-a-quick-profitable-flip-for-a-private-equity-firm/ 3. How Do You Use These Metrics In Real Life? How to calculate them: see the Atlassian or J.Crew models. IRR is straightforward and uses built-in Excel functions, but for the CoC or MoM multiple, you need to sum up all positive cash flows in the period and divide by the sum of all negative cash flows in that period, and flip the sign. In the case of Atlassian, the deal is great for Accel because they earn a 15x multiple, even though the IRR is "only" 35%... they do not care AT ALL because they are targeting the multiple, not the IRR. For T. Rowe Price, the multiple of 1.9x isn't great, but they do at least get a 14% IRR which is probably what they care about more since they are late-stage investors. For the J. Crew deal, both the IRR and the multiple are very low and below what PE firms typically target, so this deal would be problematic to pursue, at least with these assumptions. 4. Key Takeaways IRR and Cash-on-Cash or Money-on-Money multiples are related, but often move in opposite directions when the time period changes. Different firms target different rates and metrics (VC/early stage - multiples, ideally over 10x or 3-5x later on; PE/late stage - IRR, ideally 20%+). Calculation: IRR is simple, use the built-in IRR or XIRR in Excel; for the multiple, sum the positive returns/cash flows, divide by the negative returns/cash flows and flip the sign. Judging deals: Focus on multiples for earlier stage deals (and if you're pitching VCs to fund your company), and focus on IRR for later stage / growth equity / PE deals.
Views: 33248 Mergers & Inquisitions / Breaking Into Wall Street
In this tutorial, you'll learn tricks to approximate IRR quickly in leveraged buyouts, how to think about IRR intuitively, and how to apply these tricks to both simple and more complex private equity case studies. http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Table of Contents: 1:31 Part 1: The Rules and Rules of Thumb for IRR 7:44 Part 2: Quick IRR Calculation in a Simple LBO Model 11:44 Part 3: Quick IRR Calculation in a Real-Life Scenario 18:45 Recap and Summary Tips for Quickly Approximating the IRR Yes, you can quickly approximate IRR in a leveraged buyout scenario, but *only* if there's a simple upfront investment and simple exit, and nothing else in between, such as dividends, dividend recaps, asset sales, or an IPO exit where the PE firm sells its stake gradually over time. The internal rate of return, or IRR, represents the "effective compounded interest rate" of an investment. In other words, if you invest $100 today and get back $150 in 5 years, what interest rate on your initial $100, compounded each year, would let you earn that $150 by the end? To approximate the IRR, you start by calculating the money-on-money multiple and the holding period. If you double your money in 1 year, that's a 100% IRR. Invest $100 and get back $200 in 1 year, and you've just earned 100% of what you put in. If you double your money in 2 years, you need to earn *roughly* 50% per year to get there. Due to compounding, it's actually less than 50%; it's closer to 40% if you calculate it in Excel. So the rule of thumb is that, for "double your money" scenarios, you take 100%, divide by the # of years, and then estimate the IRR as about 75-80% of that value. For example, if you double your money in 3 years, 100% / 3 = 33%. 75% of 33% is about 25%, which is the approximate IRR in this case. The most important approximations are as follows: Double Your Money in 1 Year = 100% IRR Double Your Money in 2 Years = ~40% IRR Double Your Money in 3 Years = ~25% IRR Double Your Money in 4 Years = ~20% IRR Double Your Money in 5 Years = ~15% IRR Triple Your Money in 3 Years = ~45% IRR Triple Your Money in 5 Years = ~25% IRR How to Apply These Rules to Case Studies and Modeling Tests You can use these rules of thumb to determine what your investment recommendation might say, and also to check your work before you complete a time-consuming exercise. For example, let's say that in one case study, you buy a $50 million EBITDA company for 7x EBITDA, using 4.5x Debt/EBITDA. EBITDA grows by roughly 10% per year over 3 years. Approximately $90 million of Debt amortizes over those 3 years as well. The exit multiple is 8x EBITDA. You can approximate the IRR in this scenario using the following logic: $50 million EBITDA * 7x multiple = $350 million purchase price. The equity contribution is 7.0x minus 4.5x, or 2.5x EBITDA, which is $125 million here. If EBITDA grows by 10% per year over 3 years, it reaches approximately $70 million by Year 3. $70 million * 8 = $560 million Exit Enterprise Value. Since the initial leverage ratio was 4.5x Debt/EBITDA, the initial Debt was 4.5 * $50 million = $225 million. $90 million of that Debt amortized over time, so there's $225 – $90 = $135 million at the end. So the Equity Proceeds Upon Exit are $560 million – $135 million = $425 million. $425 million / $125 million = just over a 3x multiple, or 3.4x more precisely. Since the PE firm earned back over 3x its equity in 3 years, you could approximate the IRR as "just over 45%" here. This is an extremely high IRR, and well above the usual target of 20%, so you would lean toward an "Invest" recommendation in this case. In our real Excel model, the IRR is only 43% because of the transaction fees, the fact that our Year 3 EBITDA estimate was off, and the fact that the Debt had PIK interest, which increased the Debt principal over time. Still, this is very good for a 60-second approximation. RESOURCES: https://youtube-breakingintowallstreet-com.s3.amazonaws.com/109-12-Quick-IRR-Calculation-Slides.pdf
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Wall St. Training Self-Study Instructor, Hamilton Lin, CFA describes the basic financial theory of leveraged buyouts and the rationale behind LBOs. For more information of the video courses previewed here, go to: http://www.wstselfstudy.com/modules.html Over 80 hours of online, interactive Self-Study Videos! ***YOUTUBE VISITORS ONLY*** 10% off any online course, use Discount code: youtube http://www.wstselfstudy.com Wall St. Training Self-Study provides online, video-based, self-study financial modeling training solutions to Wall Street. Our interactive course modules are Excel-based and specialize in advanced and complex financial modeling, valuation modeling, investment banking, mergers & acquisitions and leveraged buyout training topics. Enhance your skills and master the content required by Wall Street investment banks, M&A, research, asset management, credit, and private equity firms.
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Why Does the Sources & Uses Schedule Matter? Key part of an LBO (leveraged buyout) model -- what you're paying for (the Uses) must equal how much you're putting in (the Sources). By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers" Similar to the conservation of energy or momentum in physics, *money* must be conserved in a transaction like this -- cannot be created or destroyed. But the real point is that this schedule determines the amount of CASH (equity) the private equity firm must contribute to a leveraged buyout transaction. Higher cash contribution = lower IRR, all else being equal, and lower cash contribution = higher IRR, all else being equal. This schedule also tells you the OWNERSHIP in a company post-LBO -- can add up the cash contribution from all parties (e.g. PE firm, Founder, management team) and divide each contribution by the total to get the ownership percentages. And it explains why activist shareholders like Carl Icahn often hate these types of deals -- can hugely increase the Founder's stake or management's stake, and remove all upside from the existing shareholders! What Goes Into a Sources & Uses Schedule, and How Do You Build One? Uses Side -- Most common items are the Equity Purchase Price of the company (how much it costs to acquire all their shares), plus transaction fees, and any debt that is repaid in the course of the deal. Sources Side -- The most common items are all the different types of debt you use to buy the company, and then the cash (equity) the PE firm contributes to close the gap. How to Calculate It: 1. Always START with the Uses side and calculate everything there, adding up the total at the bottom. 2. Then go to the Sources side and link in all the debt (and other funding sources) you're using. 3. Then, calculate Investor Equity by setting it equal to Total Uses -- "Sources So Far" -- all the sources of funding ABOVE the Investor Equity line item. 4. Finally, add up Total Sources at the bottom and ensure that it equals Total Uses. More Complex Items for the Sources & Uses Schedule: Debt Assumed -- This appears under BOTH the Sources AND the Uses sides and has no impact on the cash required to do the deal. It simply stays on the Balance Sheet, so it's both a Source and a Use of funds and doesn't impact us at all. Excess Cash Used -- The company uses its own cash to purchase some of its shares required to complete the deal. This REDUCES the number of shares the PE firm must buy, and therefore reduces the amount the PE firm must pay, so it's a Source of funds. Founder or Management Rollover -- If the Founder or management team owns a % of the company now and wants to keep it, this also reduces the amount the PE firm pays -- and therefore it's another Source of funding and only appears under Sources. Additional Cash Contributions -- The Founder or management team or other parties can also "up" their stake in the company by putting in additional cash into the deal. This reduces how much the PE firm must contribute, and increases the ownership of these other parties. Rules of Thumb for All of These: If an item DECREASES the cash a PE firm must contribute, it goes on the Sources side. If an item INCREASES the cash a PE firm must contribute, it goes on the Uses side. If an item makes NO IMPACT on the cash a PE firm must contribute, it goes on both sides of the schedule and is both a Source and a Use. So Why Did the Dell LBO Piss Off Shareholders So Much? Because Michael Dell went from owning ~15% of the company to ~78% and only put in a bit of extra cash to do so. And the company used its own cash to fund much of the deal. They said to shareholders, "Hey, we're going to buy your shares at a low-ball price and use our excess cash to buy many of them -- we could have issued that cash to you as a big dividend and let you keep their shares, but we're going to instead buy them from you at a fairly low price and remove any potential upside you have in this deal." What Next? Find a deal you're interested in and try to create your own Sources & Uses schedule for it, based on press releases and company filings. And be prepared for these questions in interviews, case studies, modeling tests, and more -- this schedule is critical to all types of transaction modeling.
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