At last week's DealMaven boot camp I was asked to whip up a returns analysis even more advanced than the one provided in the Level II Knowledge Base -- one that includes a coinvestment at a higher valuation plus a management option
package. I thought this Community would also appreciate seeing the example. See if you can figure out the answer before peeking at the answer file. Enjoy!
Instructions:
- Suppose LBO Sponsor does a deal where it invests $59.9 of equity and uses $125.0 of debt
to buy a business.
- The business grows EBITDA and pays down debt as shown below (Year 0 = investment year).
- Management is given a 10.0% option package with a strike equal to
Sponsor's valuation (i.e. options to buy $6.0 of stock by paying $6.0).
- In between announcement and closing, Sponsor offers an LP from one of its other funds the
opportunity to invest, but now at a higher valuation (e.g. suppose prospects/valuation have
improved since announcement). Specifically, the LP pays $20.0 to buy 25.0% of Sponsor's stake.
- What are returns to Sponsor and LP, and the amount of money made by
Management, for an exit in year 1, 2, 3, 4, or 5, assuming an exit at
the same 8.1x EBITDA multiple as Sponsor's initial investment?
- As extra credit (to stress test the model), what would be the IRR to Sponsor for a year 2 exit
IF the options had been struck at 2x Sponsor's buy-in price?
EBITDA (Year 0 through Year 5): $22.7, $24.7, $27.1, $29.8, $32.8, $36.1
Net Debt (Year 0 through Year 5): $125.0, $119.3, $112.0, $102.7, $91.3, $77.5
Challenging, eh? Good luck.