Private Equity
Model a leveraged buyout
How much does debt magnify the investor’s outcome?
Borrowing reduces entry equity. Remaining debt reduces what shareholders receive at exit.
MOIC = exit equity ÷ entry equity; annual return = MOIC^(1/years) − 1
Entry equity is $100m − $60m = $40m. Exit equity is $120m − $40m = $80m. That is 2×. Take the holding-period root to annualize a single exit payment.
Buy for $100m with $60m debt. Exit at $120m EV with $40m debt remaining. $80m proceeds on $40m equity gives 2×.
Entry equity is $100m − $60m = $40m. Exit equity is $120m − $40m = $80m. That is 2×. Take the holding-period root to annualize a single exit payment.
If exit EV falls to $35m and exit debt is $40m, what do shareholders receive?