Advanced LBO Modelling

Day One

Session 1 – Short Form LBO Model

• Purchase price
• Debt analysis and fees
• Debt Schedule – cash sweep repayments
• Source and use of funds
• Income Statement and Cash Flow Statement
• FCF (Free cash flow) – debt repayment
• Exit
• Return and sensitivity
• Exercise – complete a Short Form LBO model

Session 2 - Leveraged Buyout Model – Equity Value Creation

• Analysing the components for equity value creation
• Decomposing value creation into revenue growth, EBITDA margin improvements, debt repayment, multiple expansion, deal fees
• Bridge charts to show absolute amounts of value creation and Multiples of Invested Capital
• Exercise: Building a Value Creation Bridge both absolute and Money Multiple based

Session 3 - Completion Mechanisms and Deal Adjustments

• Contrasting Locked-Box vs. Completion Account mechanisms
• Reconciling Enterprise Value to Actual Equity Purchase Price
• ‘Normal’ OWC
• Book Value vs. Fair Value adjustments
• Under/(over) spend on Capex
• Debt-like liabilities
• Exercise: Estimate Equity Purchase Price after deal adjustments for Completion Accounts and Locked-Box deals.

Session 4 – LBO Debt Financing and Debt Capacity

• Debt capacity analysis
• Determining a maximum debt capacity using un-levered free cash flows
• Amortising Senior Loan
• Bullet subordinated tranches
• Mezzanine
• Exercise: Determine the level of debt the company could obtain.

Session 5 – Modelling a Debt Waterfall

• Unlevered Debt Service
• Interest income/ (expense)
• Cash Flow available for Debt repayments
• Mandatory Repayments: straight line amortisation, balloon and bullet repayments
• Issuance/ (repayment) of revolver
• Cash available after mandatory repayments and revolver
• Covenant-based constraints on cash distributions to equity investors
• Accelerated/ discretionary repayments

Day Two

Session 6 – Building a Long Form Model – LBO Case Study

• Equity Offer Value
• Source and use of LBO funds schedule, with senior, subordinated, mezzanine, shareholder loan and sweet equity
• Calculating Deal Goodwill and building Consolidated Balance Sheet
• Integrating Operating Model with NewCo Finance Structure
• Create a debt waterfall with mandatory repayments, revolving credit facility, and covenant-based cash sweep
• Current and deferred taxation, given limitations on tax deductibility of debt
• Determine the key ratios
• Exit enterprise value and bridge to equity value
• Value creation schedule with a value creation bridge
• Internal rates of return for all investors
• Sensitivity analysis

Session 7 – LBO Management Incentive Structure

• Ratchet Share Mechanisms vs. Sweet Equity
• Calculation of risk and rewards: IRR and Money Multiples
• Exercise: Contrasting RSM vs Sweet Equity with varying IRRs.

Session 8 – Leveraged Recapitalisations – LBO Case Study

• Benefits of a leveraged recapitalisation
• Recapitalised Source and use of LBO funds schedule
• Assumptions – interest and new debt capacity
• Integrating the new debt funding within a waterfall
• Integrating the new interest rates post-recapitalisation
• Exit values, with/ without the recap
• Value creation schedule with a value creation bridge
• Internal rates of return for all investors
• Sensitivity analysis

Session 9 – Structure of PE Funds: GP vs. LP Returns

• Life cycle of a PE fund: Investment, Development & Harvesting Phases
• Measuring Fund Performance: % PI, DPI, RVPI, IRR vs. TVPI
• Fund vs. GP vs. LP returns: carried interest & catch-ups
• American vs. European Funds
• Exercises: Calculating Performance Ratios, IRRs and Multiples for Fund and GPs.

Session 10 – Summary and Close