Why do private equity firms want to invest the least amount of money into a deal? Don’t private equity firms have a lot of money to invest? Yes. Isn’t it because they want to diversify their holdings? Maybe. But, the real reason is math. By that, I mean that mathematically you generate the highest relative returns when you invest the
Entrepreneurship is the uncertainty of doing work that may never pay off. The feeling that you wasted years chasing something that fails. This is by far one of the hardest things about entrepreneurship. The uncertainty. I find it easy for my friends from the outside in to tell me that life must be great. Making money. Working on your own
Question In January, DropoutEdu sold and delivered $100 worth of textbooks to customers. Assuming a 25% tax rate, how much would DropoutEdu report in earnings in January? Answer Answer: 75 Explanation: First, the goods were transferred in January, it aligns with the reporting period (January) on the statement. Second, revenue affects earnings to common shareholders. So, this transaction will show
Equity can come from two primary sources in LBO financing. The amount of sponsor equity that is usually invested is the difference between the total uses and the maximum amount of debt capital the firm was able to access. Total Uses – Debt = Equity The private equity firms invested capital is called sponsor equity. The management’s invested capital is
The goal for private equity firms is often to take on the greatest amount of leverage that the company can handle. By handle, this means that the company should have enough cash flows to service any interest and principal repayments and then some in case things don’t go as planned. Sponsors think about the maximal amount of debt by projecting
When we think about life. Life is all relative. There are very few things in this world where the absolutes matter. I am a better investor – because I beat the markets by 1%.I am a better cook – because my family likes my food more than eating out.I am fitter – because I can run, swim, and bike more
How should we treat financing fees in an LBO? Financing fees are any upfront costs associated with issuing new money. Typically, whenever companies issue new debt, they must pay the lender a commitment fee of 0.25% to 2%. Even the financial sponsor may charge fees on total sources less fees in contributing capital to close the deal and organizing the
Is interest the only cost of issuing debt? No. Interest is important as both the lender and borrower. But, lenders have other ways to increase their returns. Aka other fees. One such fee is the commitment fee. This fee ranges from 0.25% to 2% of the loan amount. So, if you were to take on a loan of $100M, you
You think you made it, and that’s when you realize you haven’t. This defines much of my life. And, maybe even yours. If you are a competitive person. I am always seeking new opportunities. When I was in grade school, I wanted to get the best SAT score. When I got the SAT score, I wanted to write the best
Distressed companies are distressed because they are unable to meet their covenants, or rules placed by lenders, on their debt obligations. For some companies, this can be because they overlevered and do not have the ability to have their operations cover their interest on debt. If this is the case, the company must restructure itself. Financially and/or operationally. Often, companies
