A financial buyer is deciding whether to undertake an LBO transaction. The buyout target has current year EBITDA of $100 million. The maximum amount of leverage allowed is 5.5 x debt over current year EBITDA and the equity contribution is 30% (of enterprise value). The investment has an exit potential in year 3 with a 7.9x EBITDA exit multiple, $125 million in EBITDA and net debt of $500 million. 

 

a. What is the IRR of the acquisition to equity investors?

b. What is the IRR to LBO fund investors taking into account that LBO fund partners get paid a 20% carried interest?

Answer rating: 100% (QA)

To calculate the IRR Internal Rate of Return of the acquisition to equity investors and the IRR to LBO fund investors we need to analyze the cash flows associated with the investment Given Current year EBITDA 100 million Maximum leverage allowed 55x debt over current year EBITDA Equity contribution 30 of enterprise value Exit potential in year 3 with a 79x EBITDA exit multiple Year 3 EBITDA 125 million Net debt in year 3 500 million LBO fund partners receive a 20 carried interest a IRR of the acquisition to equity investors To calculate the IRR for equity investors we need to determine the cash flows for the investment Assuming the investment is held for three years the cash flows can be estimated as follows Year 0 Equity contribution 30 of enterprise value negative cash flow ... View the full answer