“As a private equity associate evaluating two potential buyout targets — a mature industrial manufacturer and a high-growth software company — walk me through how the investment thesis, due diligence priorities, capital structure, and exit strategy would differ between the two deals, and show me how a similar entry enterprise value can produce a similar IRR through completely different value creation levers.”
As a private equity associate evaluating two potential buyout targets — a mature industrial manufacturer and a high-growth software company — walk me through how the investment thesis, due diligence priorities, capital structure, and exit strategy would differ between the two deals, and show me how a similar entry enterprise value can produce a similar IRR through completely different value creation levers.
Task: compare how the investment thesis, leverage, and exit assumptions differ between an industrials buyout and a tech buyout, then demonstrate that a similar entry enterprise value can produce a similar sponsor IRR through very different value creation levers using the figures below.
Both companies are potential buyout targets the sponsor is evaluating side by side.
| Metric | IndustrialCo | TechCo |
|---|---|---|
| LTM EBITDA | $37.5m | $20.0m |
| Entry EV/EBITDA Multiple | 8.0x | 15.0x |
| Max Leverage (x EBITDA) | 5.5x | 4.0x |
| Assumed Annual EBITDA Growth | 4% (0.04) | 20% (0.20) |
| Hold Period | 5 years | 5 years |
| FCF Allocated to Debt Paydown (% of Entry Debt) | 50% (0.50) | 25% (0.25) |
| Exit EV/EBITDA Multiple | 8.0x | 13.0x |
EV = LTM EBITDA × Entry Multiple
Debt = LTM EBITDA × Leverage Multiple
Sponsor Equity = EV − Debt
Using these formulas, compute entry EV, debt, and sponsor equity for both companies.
Exit EBITDA = LTM EBITDA × (1 + Annual EBITDA Growth)^Hold Period
Using this formula, compute exit-year EBITDA for both companies.
Exit EV = Exit EBITDA × Exit Multiple
Remaining Debt = Entry Debt × (1 − Debt Paydown %)
Exit Equity = Exit EV − Remaining Debt
Using these formulas, compute exit EV, remaining debt, and exit equity for both companies.
MoM = Exit Equity / Sponsor Equity
IRR ≈ MoM^(1 / Hold Period) − 1
Using these formulas, compute the money multiple and approximate IRR for both companies, then compare which lever drove each result.
Try answering out loud first — then reveal the model answer and compare.
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