Weekly Digests Archive

June 26, 2023: What's the deal with PE right now?

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Leveraged Buyout Analysis (LBO) + Questions

Basic LBO Walkthrough: Make transaction assumptions on the purchase price Make a Sources and Uses table  Project out a company's financial statements to free cash flows after debt paydown Make assumptions about the exit and calculate the returns (MoM and IRR) Purchase Price Assumptions: Public company: the purchase price is mostly based on a premium to its current share price Calculate its purchase equity value and then adjust for cash and debt to reach purchase enterprise value Private company: assume entry EV/EBITDA multiple to reach purchase enterprise value directly Sources and Uses of Funds: Sources: All forms of debt: revolver, term loans, senior notes, subordinated notes, mezzanine, preferred stock, and other debt products Management Rollover Excess cash Sponsor Equity Uses: Equity purchase price of the company Advisory, legal, and financing fees Refinanced debt: if the debt is refinanced, the PE firm repays it using new debt and equity After creating a Sources and Uses tabl...
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Accretion and Dilution Analysis + Questions

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Read the previous post on Diluted Shares Outstanding Accretion/Dilution analysis refers to analyzing whether an M&A deal actually adds value to the buyer. In accretion/dilution analysis, P/E and EPS are the most important metrics Accretive deal Represents a deal where the profits of the acquisition outweigh the costs Dilutive deal Represents a deal where the costs of the acquisition outweigh the profits There are 2 approaches to conducting accretion/dilution analysis in interview questions: Comparing the cost of capital with the seller's yield Comparing the pre-acquisition EPS with pro forma EPS Some formulas to keep in mind: PE = Share Price / EPS PE = Equity Value / Net Income EPS = Net Income / No. Shares Outstanding 1. Costs of Capital Approach: Cost of Cash = Foregone Interest Rate on Cash * (1 - Buyer's Tax Rate) Cost of Debt = Interest Rate on New Debt * (1 - Buyer's Tax Rate) Cost of Equity = Reciprocal of the Buyer's PE Multiple (Net Income / Equity Value) ...
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What's the deal with PE right now?

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Introduction: During the 2008 financial crisis and the initial stages of COVID-19 in 2020, the Federal Reserve aided investors by lowering interest rates, making it easier for asset prices to rise during an economic downturn. Consequently, PE investors and strategic buyers found lucrative opportunities—the prevailing circumstances allowed them to acquire high-value companies at significantly reduced prices, enabling the acquisition of quality investments at bargain rates.  But the current situation has taken a different turn, with the Federal Reserve adopting measures that work counter to the interests of investors. By raising interest rates, the Fed is creating obstacles for asset prices to go back up. As a result, the PE market is seeing many changes in trends and policies, with many firms shifting to emphasize their credit arms. So what exactly is happening? How do rising interest rates affect private equity? Let's find out.
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