What You'll Learn Today
What Is a Leveraged Buyout?
Understanding the most iconic private equity transaction
Imagine you want to buy a house worth ₹1 Crore. You don't have ₹1 Crore in cash — you only have ₹20 Lakhs (20%). So you take a home loan for the remaining ₹80 Lakhs from a bank. The bank lends you the money because the house itself is the collateral — if you default, the bank takes the house.
Now, you rent out the house for ₹50,000/month. You use the rental income to pay the EMI on the loan. Over 10 years, the loan gets paid down using the tenant's money, and the property value appreciates to ₹1.5 Crores. You sell the house for ₹1.5 Cr, repay the remaining loan balance of say ₹30 Lakhs, and walk away with ₹1.2 Crores — all from an initial investment of just ₹20 Lakhs. That's a 6x return on your money!
That's exactly what a Leveraged Buyout (LBO) is. A private equity firm (you) buys a company (the house) using mostly debt (the home loan), uses the company's own cash flows (rent) to repay the debt, and then sells the company at a higher value (property appreciation) to earn a return on their small equity investment (down payment).
📖 Formal Definition
A Leveraged Buyout (LBO) is the acquisition of a company using a significant amount of borrowed money (typically 50-80% of the purchase price) to meet the cost of acquisition. The assets of the company being acquired (along with those of the acquiring company) are often used as collateral for the loans.
Sponsor (Equity)
Bonds (Debt)
Company
Pay Down Debt
(Sell/IPO)
📊 LBO vs. Strategic M&A — Key Differences
| Feature | Strategic M&A (Sessions 14-15) | Leveraged Buyout (Sessions 16-17) |
|---|---|---|
| Buyer | Operating company (e.g., TechVista) | Private equity fund (e.g., Apex Capital) |
| Purpose | Strategic synergies, market expansion | Financial return (IRR) for investors |
| Financing | Mix of cash, stock, some debt | Primarily debt (60-80% of purchase price) |
| Time Horizon | Permanent (forever) | Temporary (3-7 years, then exit) |
| EPS Impact | Accretion/Dilution is key metric | IRR and MOIC are key metrics |
| Target Type | Any company with strategic fit | Stable cash flows, low capex, defensible market |
| Value Creation | Revenue/cost synergies | EBITDA growth + debt paydown + multiple expansion |
| Control | May be minority or majority | Always majority (typically 100%) |
🎯 What Makes a Good LBO Candidate?
Private equity firms look for specific characteristics when screening acquisition targets:
✅ Must-Haves (Non-Negotiable)
- Stable, predictable cash flows — to service heavy debt
- Low capital expenditure requirements — more free cash flow for debt repayment
- Strong market position — defensible competitive moat
- Manageable existing debt — clean balance sheet preferred
- Capable management team — or replaceable with PE operators
⭐ Nice-to-Haves (Bonus Points)
- Operational improvement opportunities — cost cutting, margin expansion
- Growth potential — new products, new markets, bolt-on acquisitions
- Hard assets — real estate, inventory (collateral for lenders)
- Non-core subsidiary — parent company may sell at discount
- Favorable industry trends — tailwinds for growth
Companies to AVOID: Cyclical revenue (commodities, semiconductors), high R&D requirements (biotech startups), rapidly changing technology (SaaS with high churn), negative free cash flow, regulatory uncertainty, and heavy union obligations. If cash flows are unpredictable, the debt burden will crush the company.
The LBO Value Creation Formula
Three levers that drive private equity returns
Remember the house you bought for ₹1 Cr with ₹20 Lakhs down? Your profit came from three sources:
1. Rental income paid down the loan: You owed ₹80 Lakhs initially, but 10 years of EMIs reduced it to ₹30 Lakhs. The debt paydown of ₹50 Lakhs is money you didn't have to invest — the tenant paid it for you.
2. Property value increased: The house went from ₹1 Cr to ₹1.5 Cr. That ₹50 Lakhs of appreciation is the "multiple expansion" — the asset became more valuable per unit of what it generates.
3. You increased the rent: When you bought, rent was ₹40,000/month. You renovated and increased it to ₹50,000/month. Higher income → higher property value. This is "EBITDA growth."
These are the exact same three levers in an LBO.
📊 The Three Levers of LBO Value Creation
Sponsor Return = EBITDA Growth + Multiple Expansion + Debt Paydown
📈 Lever 1: EBITDA Growth (Operational)
Increase the company's earnings through operational improvements.
- Revenue growth (new products, new markets)
- Cost reduction (headcount, procurement)
- Margin expansion (pricing power, efficiency)
- Bolt-on acquisitions (buy and integrate smaller competitors)
🔄 Lever 2: Multiple Expansion (Market)
Sell the company at a higher EV/EBITDA multiple than the purchase multiple.
- Buy at 8x, sell at 10x = 25% return from multiple expansion alone
- Driven by market conditions, industry sentiment, growth profile
- PE firms buy "ugly" companies, fix them, sell as "attractive"
💰 Lever 3: Debt Paydown (Financial Engineering)
Use the company's free cash flow to repay debt, increasing equity value.
- Buy with 70% debt → company's cash flows pay it down to 30%
- Equity value = Enterprise Value − Net Debt
- As debt decreases, equity value increases (even if EV stays flat)
✏️ Worked Example 1: Value Creation Bridge
Scenario: Apex Capital buys NovaTech at 8.0x EBITDA (EBITDA = ₹300 Cr) with 65% debt. Five years later, they sell at 9.0x EBITDA (EBITDA = ₹420 Cr). How much value did each lever create?
Purchase EV = ₹300 Cr × 8.0x = ₹2,400 Cr
Debt (65%) = ₹1,560 Cr | Equity (35%) = ₹840 Cr
Exit EV = ₹420 Cr × 9.0x = ₹3,780 Cr
Debt paid down to = ₹700 Cr (from ₹1,560 Cr)
Equity Value = ₹3,780 − ₹700 = ₹3,080 Cr
Equity Value Created = ₹3,080 − ₹840 = ₹2,240 Cr
MOIC (Multiple on Invested Capital) = ₹3,080 ÷ ₹840 = 3.67x
Lever 1 — EBITDA Growth: (₹420 − ₹300) × 8.0x entry multiple = ₹120 × 8.0 = ₹960 Cr
Lever 2 — Multiple Expansion: ₹420 × (9.0 − 8.0) = ₹420 × 1.0 = ₹420 Cr
Lever 3 — Debt Paydown: ₹1,560 − ₹700 = ₹860 Cr
Total: ₹960 + ₹420 + ₹860 = ₹2,240 Cr ✓
| Value Creation Lever | Amount (₹ Cr) | % of Total | Controllable? |
|---|---|---|---|
| 📈 EBITDA Growth (Operational) | 960 | 42.9% | High |
| 🔄 Multiple Expansion (Market) | 420 | 18.7% | Low |
| 💰 Debt Paydown (Financial) | 860 | 38.4% | Medium |
| Total Value Created | 2,240 | 100% |
The PE firm invested ₹840 Cr and got back ₹3,080 Cr — a 3.67x return. EBITDA growth contributed the most (43%), followed by debt paydown (38%), and multiple expansion (19%). In a well-executed LBO, operational improvements (EBITDA growth) should be the primary value driver — this is what separates great PE firms from mediocre ones who rely on market timing.
Sources & Uses of Funds
Building the foundational table that explains how the deal is financed
📖 What Is the Sources & Uses Table?
Think of the Sources & Uses table like your personal finances when buying that ₹1 Cr house:
Uses (Where the money goes): House price ₹1 Cr + Stamp duty ₹5 Lakhs + Broker fees ₹2 Lakhs + Renovation ₹3 Lakhs = Total ₹1.10 Cr needed
Sources (Where the money comes from): Your savings ₹20 Lakhs + Home loan ₹90 Lakhs = Total ₹1.10 Cr available
Total Sources must ALWAYS equal Total Uses. It's like a balance sheet at the moment of acquisition — every rupee needed (uses) must be funded by some source.
In an LBO, the Sources & Uses table is the single most important build — it structures the entire deal. It answers two fundamental questions:
- Uses: How much money do we need to complete this acquisition?
- Sources: Where is every rupee of that money coming from?
Total Sources = Total Uses (ALWAYS, no exceptions)
Buyer (Sponsor): Apex Capital Partners — A mid-market Indian private equity fund with ₹5,000 Cr AUM
Target: NovaTech Industries Ltd — A leading Indian auto-components manufacturer
Deal: 100% acquisition at ₹550 per share (25% premium to current ₹440 market price)
📊 NovaTech Industries — Pre-Deal Financial Snapshot
| Financial Metric | Amount / Detail |
|---|---|
| Revenue (LTM) | ₹2,400 Cr |
| EBITDA (LTM) | ₹480 Cr (20% margin) |
| D&A | ₹120 Cr |
| EBIT | ₹360 Cr |
| Net Income | ₹215 Cr |
| Balance Sheet | |
| Existing Debt | ₹600 Cr |
| Cash on Hand | ₹150 Cr |
| Total Equity (Book) | ₹1,200 Cr |
| Market Data | |
| Shares Outstanding | 10.00 Cr |
| Current Share Price | ₹440 |
| Market Capitalization | ₹4,400 Cr |
| Offer Price per Share | ₹550 (25% premium) |
| Equity Purchase Price | ₹5,500 Cr |
| EV/EBITDA (Offer) | ₹5,950 / ₹480 = 12.4x |
📋 Building the Uses Side
Uses represent all the costs to complete the acquisition:
Offer Price × Shares Outstanding = ₹550 × 10.00 Cr = ₹5,500 Cr
This is the amount paid to NovaTech's shareholders to buy 100% of the company
NovaTech has ₹600 Cr existing debt — the PE firm must repay it (lenders have change-of-control clauses)
Existing Debt Refinanced = ₹600 Cr
Investment banking advisory fees (1.0% of EV): ₹59.50 Cr
Legal & due diligence costs: ₹15.00 Cr
Financing fees (debt arrangement costs): ₹45.00 Cr
Total Fees = ₹119.50 Cr
Total Uses = ₹5,500 + ₹600 + ₹119.50 = ₹6,219.50 Cr
📋 Building the Sources Side
Sources represent where all the money comes from. In an LBO, the debt structure is layered (like a cake):
Amount: ₹2,200 Cr | Interest Rate: 9.5% | Tenure: 5 years
The safest layer — first claim on company assets. Banks lend this because they have priority in liquidation. Typically 3.0-4.5x EBITDA (here: ₹2,200 / ₹480 = 4.6x EBITDA).
Amount: ₹800 Cr | Interest Rate: 13.0% | Tenure: 7 years
Riskier layer — subordinate to bank debt. Higher interest compensates for higher risk. Typically 1.0-2.0x EBITDA (here: ₹800 / ₹480 = 1.7x EBITDA).
Amount: ₹350 Cr | Interest Rate: 16.0% + 2% PIK (Payment-In-Kind)
Most expensive layer — combines debt and equity features. PIK means some interest accrues rather than paid in cash. Total debt = ₹2,200 + ₹800 + ₹350 = ₹3,350 Cr (Total Debt / EBITDA = 7.0x)
NovaTech has ₹150 Cr cash — the PE firm uses it to fund the deal
Cash Used = ₹150 Cr
Sponsor Equity = Total Uses − Total Debt − Cash Used
Sponsor Equity = ₹6,219.50 − ₹3,350 − ₹150 = ₹2,719.50 Cr
The equity check is whatever is left after debt and cash are used. This is the PE firm's own money at risk.
✏️ Worked Example 2: Complete Sources & Uses Table
💰 Sources
| Source | Amount (₹ Cr) | % of Total |
|---|---|---|
| Senior Secured Term Loan | 2,200.00 | 35.4% |
| High-Yield Bonds | 800.00 | 12.9% |
| Mezzanine Debt | 350.00 | 5.6% |
| Total Debt | 3,350.00 | 53.9% |
| Cash from Balance Sheet | 150.00 | 2.4% |
| Sponsor Equity | 2,719.50 | 43.7% |
| Total Sources | 6,219.50 | 100% |
📊 Uses
| Use | Amount (₹ Cr) | % of Total |
|---|---|---|
| Equity Purchase Price | 5,500.00 | 88.4% |
| Refinance Existing Debt | 600.00 | 9.6% |
| Transaction Fees | 59.50 | 1.0% |
| Legal & Due Diligence | 15.00 | 0.2% |
| Financing Fees | 45.00 | 0.7% |
| Total Uses | 6,219.50 | 100% |
Debt / Total Capitalization: ₹3,350 / ₹6,219.50 = 53.9% — a moderate leverage level for an Indian LBO
Equity Check: ₹2,719.50 Cr — this is what Apex Capital must invest from its fund
Total Debt / EBITDA: ₹3,350 / ₹480 = 7.0x — aggressive but within range for a stable cash flow business
Equity Purchase Price + Premium: ₹5,500 Cr on a ₹4,400 Cr market cap = 25% premium
Debt Capacity Analysis
How much debt can the company safely support?
When you apply for a home loan, the bank doesn't just look at the house price — they check your income. They typically cap your EMI at 40-50% of your monthly income. If you earn ₹1 Lakh/month, the bank might give you an EMI of ₹45,000, which translates to a maximum loan of about ₹55 Lakhs (at 8.5% for 20 years).
Lenders in an LBO do the same thing — they look at the company's ability to repay using specific metrics. The company's EBITDA is like your salary, and the interest payments are like EMIs. Lenders want to ensure the company generates enough cash to comfortably service its debt.
📊 Key Debt Capacity Metrics
| Metric | Formula | Typical Range | NovaTech | Assessment |
|---|---|---|---|---|
| Total Debt / EBITDA | Total Debt ÷ LTM EBITDA | 4.0x – 6.0x | 7.0x | Aggressive |
| Senior Debt / EBITDA | Senior Debt ÷ LTM EBITDA | 2.5x – 4.0x | 4.6x | Upper range |
| Interest Coverage Ratio | EBITDA ÷ Total Interest | > 2.0x | 2.3x | Adequate |
| FCF / Total Debt | Free Cash Flow ÷ Total Debt | > 10% | 13.1% | Good |
| Fixed Charge Coverage | (EBITDA − Capex) ÷ (Interest + Principal) | > 1.2x | 1.4x | Good |
Senior lenders (banks) are the most conservative — they want a 2.5-4.0x Senior Debt/EBITDA and 3.0x+ interest coverage. High-yield bond investors accept more risk for higher returns — 1.0-2.0x of EBITDA in subordinated debt. Mezzanine investors are the most risk-tolerant — they charge 15-20% interest and may take equity warrants (options to buy equity). Each layer of debt must meet its own credit metrics.
✏️ Worked Example 3: Calculating Interest Coverage
Question: Can NovaTech comfortably service ₹3,350 Cr of total debt? Calculate the interest coverage ratio.
Senior Term Loan: ₹2,200 × 9.5% = ₹209 Cr
High-Yield Bonds: ₹800 × 13.0% = ₹104 Cr
Mezzanine (Cash Pay): ₹350 × 16.0% = ₹56 Cr
Mezzanine (PIK): ₹350 × 2.0% = ₹7 Cr (accrues, not paid in cash)
Total Cash Interest = ₹209 + ₹104 + ₹56 = ₹369 Cr
ICR = EBITDA ÷ Cash Interest = ₹480 ÷ ₹369 = 1.30x
EBITDA = ₹480
− Cash Interest = (₹369)
− Capex = (₹100)
− Taxes (on ₹480 − ₹120 − ₹369 = negative → minimal tax)
+ Working capital release = ₹20
= ~₹31 Cr free cash flow for debt repayment
An ICR of 1.30x is aggressive but not uncommon in PE deals. The model assumes that NovaTech's EBITDA will grow over 5 years (from ₹480 to ₹600+), improving coverage. The key risk: if EBITDA declines by even 20%, the company may default. This is why PE firms target companies with stable, predictable cash flows.
📊 Debt Capacity Sensitivity: EBITDA × Leverage Multiple
How much debt can be raised at different leverage multiples and EBITDA levels?
| EBITDA (₹ Cr) ↓ Leverage → |
Total Debt / EBITDA Multiple | |||
|---|---|---|---|---|
| 4.0x | 5.0x | 6.0x | 7.0x ★ | |
| ₹400 Cr (Bear Case) | ₹1,600 | ₹2,000 | ₹2,400 | ₹2,800 |
| ₹480 Cr (Base Case) | ₹1,920 | ₹2,400 | ₹2,880 | ₹3,350 |
| ₹560 Cr (Bull Case) | ₹2,240 | ₹2,800 | ₹3,360 | ₹3,920 |
★ = Selected leverage for this deal (7.0x). At the bear case EBITDA of ₹400 Cr, only ₹2,800 Cr of debt is supportable — a ₹550 Cr shortfall from the ₹3,350 Cr actual debt.
At 7.0x leverage on base-case EBITDA (₹480 Cr), the deal uses ₹3,350 Cr of debt. But if EBITDA drops to ₹400 Cr (bear case), only ₹2,800 Cr would be supportable at the same 7.0x — meaning the deal would need ₹550 Cr MORE equity. This sensitivity analysis is exactly what lenders and credit committees review before approving the debt package.
IRR Analysis & Sponsor Returns
The ultimate measure: does this deal meet the PE fund's return hurdle?
You put ₹10 Lakhs in a fixed deposit at 7% annual interest. After 5 years, your money grows to ₹14.03 Lakhs. The 7% is the Internal Rate of Return (IRR) — the annualized rate at which your investment grows.
Private equity firms work the same way — they invest ₹2,719.50 Cr in NovaTech and need to know: "What annualized return will we earn?" PE funds typically target 20-25% IRR because they need to compensate investors (LPs) for the illiquidity and risk of locking up money for 5-7 years. A PE fund that consistently generates 25%+ IRR is considered top-quartile (top 25% of all funds).
📖 Two Key Return Metrics
📐 MOIC (Multiple on Invested Capital)
How many times your money comes back.
MOIC = Exit Equity Value ÷ Entry Equity Investment
Example: Invest ₹100 Cr, get back ₹300 Cr → MOIC = 3.0x
Target: 2.5x – 3.0x+ over 5 years
📊 IRR (Internal Rate of Return)
Annualized rate of return — accounts for time value of money.
Investment = Σ [Cash Flow_t ÷ (1 + IRR)^t]
Example: ₹100 Cr invested, ₹300 Cr after 5 years → IRR ≈ 24.6%
Target: 20-25%+ for mid-market PE
A 3.0x MOIC in 3 years = ~44% IRR (outstanding). A 3.0x MOIC in 7 years = ~17% IRR (mediocre). Same multiple, vastly different returns. Time is the enemy of IRR — the longer a PE firm holds a company, the higher the exit value must be to maintain its target IRR. This is why PE firms have a typical holding period of 3-7 years.
📊 PE Return Benchmarks
| IRR Range | MOIC | Rating | Description |
|---|---|---|---|
| > 30% | > 4.0x | Exceptional | Top-decile performance. Rare in mid-market. Usually requires significant operational transformation. |
| 25% – 30% | 3.0x – 4.0x | Excellent | Top-quartile. Most PE funds target this range. Covers LPs' 8% hurdle rate with significant upside. |
| 20% – 25% | 2.5x – 3.0x | Good | Second-quartile. Acceptable for most funds. Meets typical LP expectations. |
| 15% – 20% | 1.8x – 2.5x | Marginal | Below target. PE firm may struggle to raise next fund. LPs might prefer public markets. |
| < 15% | < 1.8x | Poor | Below hurdle rate. PE fund loses money after management fees and carried interest. |
✏️ Worked Example 4: Base Case IRR Calculation
Scenario: Apex Capital holds NovaTech for 5 years. EBITDA grows from ₹480 Cr to ₹600 Cr. They sell at the same 12.4x multiple. Total debt is paid down from ₹3,350 Cr to ₹1,800 Cr over 5 years.
Exit EBITDA = ₹600 Cr (grew from ₹480 Cr over 5 years — 4.6% CAGR)
Exit EV/EBITDA Multiple = 12.4x (same as entry — no multiple expansion)
Exit Enterprise Value = ₹600 × 12.4x = ₹7,440 Cr
Exit Equity Value = Exit EV − Net Debt at Exit
Exit Equity Value = ₹7,440 − ₹1,800 = ₹5,640 Cr
MOIC = Exit Equity ÷ Entry Equity = ₹5,640 ÷ ₹2,719.50 = 2.07x
IRR ≈ (Exit Equity / Entry Equity)^(1/n) − 1
IRR ≈ (5,640 / 2,719.50)^(1/5) − 1 = (2.074)^(0.2) − 1 = 15.7%
📊 IRR Sensitivity: Exit Multiple vs. EBITDA at Exit
How do different exit scenarios affect sponsor returns?
| Exit EBITDA ↓ Exit Multiple → |
Exit EV/EBITDA Multiple | |||
|---|---|---|---|---|
| 10.0x | 11.0x | 12.4x ★ | 14.0x | |
| ₹540 Cr (Slow Growth) | 8.2% / 1.4x | 10.8% / 1.6x | 13.7% / 1.9x | 16.4% / 2.2x |
| ₹600 Cr (Base Case) | 10.8% / 1.6x | 13.6% / 1.9x | 15.7% / 2.1x | 19.6% / 2.5x |
| ₹660 Cr (Strong Growth) | 13.1% / 1.9x | 16.0% / 2.2x | 18.9% / 2.5x | 22.6% / 3.0x |
| ₹720 Cr (Aggressive Growth) | 15.1% / 2.1x | 18.1% / 2.5x | 21.8% / 2.9x | 25.3% / 3.5x |
★ = Base case (12.4x entry = exit multiple). Each cell shows IRR% / MOIC. Green cells meet the 20%+ IRR target.
At the base case (12.4x exit multiple, ₹600 Cr EBITDA), the IRR is only 15.7% — below the 20% target. The deal only reaches 20%+ IRR if either:
(a) EBITDA grows faster than expected (₹660+ Cr through operational improvements), or
(b) The PE firm exits at a higher multiple (14.0x — requires favorable market conditions), or
(c) A combination of both — which is the typical PE playbook.
This analysis shows that at a 12.4x entry multiple, Apex Capital needs to actively grow the business — they can't just rely on financial engineering. The deal requires genuine operational improvement.
Hands-On Practice Exercises
Build the LBO entry model in Excel
🏋️ Exercise 1: Build a Sources & Uses Table (25 min)
Objective: Construct a complete S&U table for a PE acquisition of GreenPly Furniture Ltd
| Assumption | Value |
|---|---|
| Target Shares Outstanding | 5.00 Cr |
| Current Market Price | ₹320 per share |
| Offer Premium | 30% above market |
| Existing Debt to Refinance | ₹450 Cr |
| Cash on Balance Sheet | ₹80 Cr |
| LTM EBITDA | ₹350 Cr |
| Target Debt/EBITDA | 5.5x total; 3.5x senior |
| IB Advisory Fees | 1.0% of Equity Purchase Price |
| Legal & Due Diligence | ₹12 Cr |
| Financing Fees | 2.0% of total debt raised |
Tasks:
- Calculate the Equity Purchase Price (offer price × shares)
- Calculate Total Uses (equity + refinance + fees)
- Calculate total debt capacity at 5.5x EBITDA
- Structure debt: Senior (3.5x EBITDA at 10%), Subordinated (remaining at 14%), Mezzanine (₹100 Cr at 18% + 3% PIK)
- Calculate the sponsor equity check (the "plug")
- Verify Total Sources = Total Uses
Offer Price = ₹320 × 1.30 = ₹416 per share
Equity Purchase Price = ₹416 × 5.00 Cr = ₹2,080 Cr
IB Fees = 1.0% × ₹2,080 = ₹20.80 Cr
Total Debt = 5.5x × ₹350 = ₹1,925 Cr
Financing Fees = 2.0% × ₹1,925 = ₹38.50 Cr
Legal & DD = ₹12.00 Cr
Total Fees = ₹20.80 + ₹38.50 + ₹12.00 = ₹71.30 Cr
Total Uses = ₹2,080 + ₹450 + ₹71.30 = ₹2,601.30 Cr
Senior Debt = 3.5x × ₹350 = ₹1,225 Cr (at 10%)
Subordinated = Total Debt − Senior − Mezz = ₹1,925 − ₹1,225 − ₹100 = ₹600 Cr (at 14%)
Mezzanine = ₹100 Cr (at 18% + 3% PIK)
Total Debt = ₹1,225 + ₹600 + ₹100 = ₹1,925 Cr ✓
Sponsor Equity = Total Uses − Total Debt − Cash = ₹2,601.30 − ₹1,925 − ₹80 = ₹596.30 Cr
💰 Sources
| Senior Debt | 1,225.00 |
| Subordinated Debt | 600.00 |
| Mezzanine | 100.00 |
| Cash from BS | 80.00 |
| Sponsor Equity | 596.30 |
| Total Sources | 2,601.30 |
📊 Uses
| Equity Purchase Price | 2,080.00 |
| Refinance Existing Debt | 450.00 |
| IB Advisory Fees | 20.80 |
| Legal & DD | 12.00 |
| Financing Fees | 38.50 |
| Total Uses | 2,601.30 |
Debt / Total Capital = ₹1,925 / ₹2,601.30 = 74.0%
Equity / Total Capital = ₹596.30 / ₹2,601.30 = 22.9%
Total Debt / EBITDA = ₹1,925 / ₹350 = 5.5x
Entry EV/EBITDA = (₹2,080 + ₹450 − ₹80) / ₹350 = ₹2,450 / ₹350 = 7.0x
🏋️ Exercise 2: IRR Analysis (20 min)
Objective: Calculate the sponsor's IRR and MOIC for the GreenPly acquisition under three scenarios
Given (from Exercise 1): Entry equity = ₹596.30 Cr | Entry EBITDA = ₹350 Cr | Entry EV = ₹2,450 Cr (7.0x)
Exit Assumptions (Year 5):
| Scenario | Exit EBITDA | Exit Multiple | Net Debt at Exit |
|---|---|---|---|
| Bear Case | ₹380 Cr | 6.5x | ₹1,200 Cr |
| Base Case | ₹430 Cr | 7.5x | ₹900 Cr |
| Bull Case | ₹500 Cr | 8.5x | ₹600 Cr |
| Metric | Bear Case | Base Case | Bull Case |
|---|---|---|---|
| Exit EBITDA (₹ Cr) | 380 | 430 | 500 |
| × Exit Multiple | 6.5x | 7.5x | 8.5x |
| Exit Enterprise Value | 2,470 | 3,225 | 4,250 |
| − Net Debt at Exit | (1,200) | (900) | (600) |
| Exit Equity Value | 1,270 | 2,325 | 3,650 |
| Entry Equity | 596.30 | 596.30 | 596.30 |
| MOIC | 2.13x | 3.90x | 6.12x |
| IRR (5 years) | 16.3% | 31.3% | 43.7% |
| Verdict | Marginal | Excellent | Exceptional |
IRR = (2,325 / 596.30)^(1/5) − 1 = (3.899)^(0.2) − 1 = 0.3127 = 31.3%
MOIC = 2,325 / 596.30 = 3.90x
🏋️ Exercise 3 (Advanced): Reverse Engineer the Entry Price (15 min)
Objective: What is the maximum price Apex Capital can pay for NovaTech to achieve a 25% IRR?
Given: Exit EBITDA = ₹600 Cr | Exit Multiple = 12.4x | Exit Net Debt = ₹1,800 Cr | Holding Period = 5 years
Hint: Work backwards from the exit. Required Entry Equity = Exit Equity ÷ (1 + IRR)^n
Exit EV = ₹600 × 12.4x = ₹7,440 Cr
Exit Equity = ₹7,440 − ₹1,800 = ₹5,640 Cr
Entry Equity = Exit Equity ÷ (1 + IRR)^n = ₹5,640 ÷ (1.25)^5
Entry Equity = ₹5,640 ÷ 3.0518 = ₹1,848 Cr
If Total Uses = ₹6,219.50 Cr (from the S&U table), and debt + cash = ₹3,500 Cr
Max Equity Purchase Price = Total Debt + Cash + Max Entry Equity − Fees − Refinance
Working back: Max EPP = Entry Equity + Total Debt − Cash + Fees + Refinance
At simplified level: Max Equity Price ≈ ₹3,590 Cr → ₹359 per share (vs. current offer of ₹550)
At the current offer of ₹550/share (₹5,500 Cr), the deal generates only ~15.7% IRR — well below 25%. To achieve 25% IRR, Apex Capital would need to negotiate the price down to roughly ₹359 per share (18% below current market price — essentially no premium). This shows that at 12.4x entry, the deal is already priced richly.
📚 Key Terms — Click to Flip
Test Your Understanding
10 objective questions on LBO Modeling – I
Key Takeaways
📝 What We Covered Today
- An LBO is like buying a house with a mortgage — the PE firm puts down a small equity "down payment," borrows the rest, and uses the company's own cash flows to repay the debt
- LBO value creation comes from three levers: EBITDA growth (operational, 43%), debt paydown (financial engineering, 38%), and multiple expansion (market timing, 19%)
- The Sources & Uses table is the foundational LBO build — Total Sources must ALWAYS equal Total Uses. The sponsor equity is the "plug" that balances the equation
- Debt capacity is determined by leverage multiples (Debt/EBITDA = 4-7x), interest coverage (EBITDA/Interest > 2.0x), and the company's ability to generate free cash flow
- Debt is structured in layers: senior secured (cheapest, safest) → high-yield (riskier) → mezzanine (most expensive, may include PIK)
- IRR is the annualized return to the PE sponsor — targets are typically 20-25%+ for mid-market funds. MOIC measures how many times the money comes back (target: 2.5-3.0x+)
- The NovaTech deal at 12.4x entry generates only 15.7% IRR in the base case — the deal needs operational improvements or multiple expansion to meet the 20%+ target
Session 17: LBO Modeling – II
We complete the LBO model: build the debt repayment schedule, cash flow waterfall, and full returns analysis. Topics include mandatory vs. optional debt repayment, revolving credit facility, sensitivity tables for IRR, and the impact of different exit timing and multiples. Read: Pignataro Ch. 9