Courses / Leveraged Buyouts (Standard)

Leveraged Buyouts (Standard)

30 Lessons

Leveraged buyout (LBO) is the purchase of all or substantially all of a company using large amount of debt. Since the 1960s, LBO has been the primary investment strategy of private equity firms, such as KKR, Blackstone and TPG. The use of debt to fund the buyout offers compelling benefits to investors, such as increased spending power and enhanced IRR potential. In this course, we’ll not only learn how LBO works conceptually, but we’ll also learn how to build LBO models in Excel like how they are built at the private equity firms and how you’ll need to build them in many private equity interviews.

Key Takeaways:

  • Why private equity investors use leverage
  • How the debt schedule works
  • How to build a LBO model in Excel

Lessons

1. What is a Leveraged Buyout (LBO)?

3:51

A Leveraged Buyout (LBO) is the acquisition of all or substantially all of a company's equity through the use of leverage.

2. Why Private Equity Firms Use Leverage

4:25

The use of leverage to finance buyouts offer private equity firms significant economic benefits.

3. Why the Use of Leverage Boosts Equity Returns

8:17

The use of leverage increases private equity investors' returns because of arithmetic reasons.

4. How Equity Investors Make Money from LBO

2:58

Equity investors make money when the value entitled to them increase over time.

5. How a LBO Model Works

2:25

In this lesson, we'll learn the logic flow behind a LBO model and understand at a high level how to build it.

6. Modeling the Entry Valuation

8:40

In this lesson, we'll model the entry valuation for our illustrative LBO of Hamilton Beach Brands.

7. Financing Fees

2:05

Companies borrowing debt have to pay fees for the arrangement of the debt. These fees are known as "Financing Fees".

8. Amortization of Financing Fees

3:29

While borrowers pay the financing fees upfront with cash, these fees are amortized over time on the financial statements.

9. Modeling the Capital Structure Table

12:29

In this lesson, we'll model the proposed capital structure to finance our illustrative LBO of Hamilton Beach Brands.

10. Modeling LBO Sources & Uses

6:43

In this lesson, we'll model the transaction sources and uses in our illustrative LBO of Hamilton Beach Brands.

11. Modeling LFCF Projections

7:56

In this lesson, we'll project earnings and cash flow for our illustrative LBO of Hamilton Beach Brands.

12. Introduction to Debt Schedule

3:50

The Debt Schedule is a mini-financial model built to simulate the behavior of debt.

13. Cash Available to Optionally Repay Debt

3:56

Cash Available to Optionally Repay Debt is a key metric that will flow throughout the Debt Schedule.

14. Modeling Cash Available to Optionally Repay Debt

4:55

In this lesson, we'll model the first step of the debt schedule for our illustrative LBO of Hamilton Beach Brands.

15. Modeling the Benchmark Rate

2:24

In this lesson, we'll model the benchmark rates in the debt schedule for our illustrative LBO of Hamilton Beach Brands.

16. Order Matters in Debt Schedule

1:17

The ordering of the different tranches in the debt schedule impacts repayment and interest expense calculations.

17. Modeling Revolver in Debt Schedule

10:42

In this lesson, we'll model revolver in the debt schedule for our illustrative LBO of Hamilton Beach Brands.

18. Modeling Term Loan in Debt Schedule

10:34

In this lesson, we'll model term loan in the debt schedule for our illustrative LBO of Hamilton Beach Brands.

19. Modeling Bond in Debt Schedule

2:16

In this lesson, we'll model bond in the debt schedule for our illustrative LBO of Hamilton Beach Brands.

20. Significance of Positive vs. Negative LFCF

3:06

The border between positive and negative LFCF is very important.

21. Net Debt

1:05

Net Debt equals gross debt minus cash. It's a measure of how much debt a company owes, net of its cash balance.

22. Modeling the Capital Structure

5:49

In this lesson, we'll model how the capital structure evolves over time for our illustrative LBO of Hamilton Beach Brands.

23. Modeling the Integration of Financials

3:42

In this lesson, we'll integrate the different sections of the model for our illustrative LBO of Hamilton Beach Brands.

24. Circularity in the Debt Schedule

2:15

The integration of financials creates a circular reference in the debt schedule. We'll learn about this circularity in this lesson.

25. Circular Reference Error

5:30

The existence of circular reference can lead to situations where errors loop throughout the circularity, which can ruin the model.

26. Modeling the Circularity Protection

2:30

In this lesson, we'll model in a mechanism to protect the analysis against circularity errors for our illustrative LBO of HBB.

27. Modeling the Returns Profile

3:54

In this lesson, we'll model the investment returns profile for our illustrative LBO of Hamilton Beach Brands.

28. Cost of Capital in LBO

2:21

Because LBO is incrementally riskier than buying a few shares on the stock market, private equity investors require a much higher return.

29. Drivers of IRR in LBO

4:15

There are five major drivers that together determine every LBO's investment returns.

30. Connecting Dots

2:16

Now that we understand the concept of buyout and the concept of capital structure, let's tie things together.