Exam 2: T4 2020

To increase the return of an LBO investment, increased leverage should be used.

Generally, senior secured debt is less costly than junior subordinated debt because (i) senior bank loans’ security provides banks with extra comfort in case of insolvency and (ii) senior bank loans typically have more flexible debt covenants to be met.

A business that grows 15% per annum, is funded with 50% debt and has no multiple arbitrage, should generate a 3.0x money multiple over 5 years.

Hedge funds typically focus on long-term investments, whereas Private Equity Funds pursue short to medium-term strategies.

Carried interest (or carry) is the compensation that LPs pay to GPs for managing their money, regardless of the fund’s performance.

The Lock Box method is characterized by (i) no revision of Net Debt nor Net Working Capital at Completion and (ii) it is usually the Sellers’ preferred method.

In a PE investment, it is indifferent to have an extra dollar of EBITDA or an extra dollar of cash.