Private Equity Transition

LBO Long Form Modeling: Expert

Model Overview

• Emphasis of real-life issues that make the modeling of an LBO complex
• Sources and uses of funds at entry
• Operating forecast
• Distribution of proceeds at exit
• Returns analysis

Sources and Uses of Funds at Entry

• Sources and uses of funds table
• Ownership structure: Equity ownership at entry vs exit
• Common equity (Sponsor and Management), including equity rollover
• The use of different types of equity: Shareholder loan (PIK interest) and preferred stock
• The use of different types of debt: revolver (including modeling a revolver limit), term loans, subordinated debt, high yield, mezzanine (with PIK and cash interest)

Operating Forecast

• Creating the opening balance sheet
• Cash flows available for debt servicing
• Repayment schedules for individual debt instruments
• Acceleration of debt payments using a cash sweep mechanism
• Modeling the revolving credit facility
• Thin capitalization test and limiting the tax shield on interest
• Adjusting the operating forecast for tax losses
• Adjusting the cash sweep using a complex sweep covenant test
• Injecting additional capital to cure covenant breaches and exceeding the revolver limit
• Sweeping excess cash to equity holders
• Circularities and the interest calculations, including fees on undrawn revolver
• PIK interest
• Using the model outputs to identify key debt covenants

Distribution of proceeds at exit

• Benefit of modeling out value to all investors at exit

Returns

• Calculation and interpretation of returns to the equity investors
• Calculation and interpretation of returns to mezzanine investors
• Calculation and interpretation of returns to the management team
• IRR and money multiple
• Sensitizing the outputs of the analysis
• Analysis of the output

LBO Model Checks

• Finding typical errors within an LBO model

LBO: Buy and Build

• Buy and build overview
• Summary structure of an LBO short form model
• Adjusted structure for buy and build model
• Adding the first deal to the platform company
• Deal math
• Adjusting the operating forecast and incorporating synergies
• Incorporating the new financing into the model
• Exit valuation: which multiple?
• Returns with and without the bolt-on business
• Sensitivity analysis
• Adding a second deal to the platform company

Leveraged Recapitalization & Management Incentive Packages

Leveraged recapitalization/refinancing

• Overview, including a leveraged recap section into the model
• Functionality allows a switch to include the recap and flexibility as to the timing of the recap
• Impact on a short form LBO model including refinancing of existing debt being replaced by larger debt tranches with new financing rates and a revised amortization schedule
• Switches used to change the amortization schedule
• Payment of a special dividend
• Model can be adjusted to reflect a refinancing at lower rather than a recapitalization and payment of a special dividend

Management Incentive Packages (MIPs)

• Rollover and rachet mechanisms
• Simple MIP structures, including percentage of equity increase
• Advanced MIP structures that incorporate target equity IRRs and/or money multiples

• Mezzanine finance
• Part PIK, part cash pay
• Pay if you can (PIYC)
• HoldCo and OpCo modeling
• Concept of debt push down
• Debt at the OpCo level
• Equity, shareholder loan and mezzanine finance at the HoldCo level

LBO: Restructuring – Debt to Equity Swaps

• Structuring a debt-to-equity swap
• Establishing debt capacity of the distressed business
• Modeling best, base and downside cases
• Structuring the debt write-down and the resulting equity ownership
• Recovery rate of debt-to-equity swap versus liquidation
• Return calculation of debt-to-equity swap
• Return sensitivity analysis
• Structuring an equity injection from existing shareholders
• Old money return pre- and post- restructuring (base case only)
• New money return (MOIC and IRR) (base case versus downside case)
• Modeling a capital injection from a super-senior capital investment
• Analyzing returns for the original lenders and potential distressed debt investors
• Return sensitivity analysis

Private Company Modeling

Operating Model Build: Income Statement

• The participants are provided with a detailed number of transactions by year and product type, outlining volume sold, price per product, and cost per product
• Participants are required to group and analyze the data to produce the following information per year and product:
  • Revenue, COGS and volume
  • Price per unit
  • Cost per unit
  • Gross profit per unit
  • Revenue growth; and
  • Gross margin
• Based on this analysis the participants are required to extrapolate and provide forecasts for each of these
• Using the historic and forecast financials the participants will perform a bridge analysis to establish what are the drivers of the growth of the increase in Gross Profit. This can be attributed to a combination of volume, price and margin growth
• Using the historic SG&A data the participants will clean the historic information to provide the basis for future forecasting
• Income statement is completed

Operating Model Build: Balance Sheet and Cash Flow Statement

• The participants are provided with a detailed asset register, including a forecast deprecation based on existing assets, it will also provide management forecasts for several years of planned expansion capex
• The participants will be able to project the future PP&E using the depreciation schedule as well as additional capex and depreciation triangles on the new capex
• The Operating Working Capital will be benchmarked historically and then forecast using a step function on the different working capital days metrics
• Other assets and liabilities will be projected
• Balance sheet is completed
• Cash flow statement is built

Valuation

• The participants are provided will be provided with a list of trading comparables to base their valuation
• Where additional time is available the participants can look at other valuation approaches, including:
  • Find recent transaction multiples
  • Build a simple DCF model

LBO Model Build

• The participants will finish the project by building an LBO model, the features of the LBO model include:
  • An equity rollover
  • Two types of equity: ordinary equity and preference shares
  • Two tranches of debt as well as a revolver
  • A full cash sweep to senior debt
  • Returns analysis for:
  • Financial sponsor
  • Management
• The participants will be required to structure the transaction including:
  • Split between ordinary and preference shares
  • The amount of type of debt used
  • Management incentive packages