What are the risks of taking on more leverage? Well leverage can work for or against you. It all depends on the direction of your absolute returns. If you generate a positive return, leverage further increases your returns. If you generate a negative return, leverage further decreases your returns. For instance, say you bought an asset for $100. Over the
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
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
Why do we need a Sources & Uses schedule? In an LBO, the schedule is the basis of the new capital structure of the pro-forma company (post-LBO). The capitalization of the business will change depending on how much leverage the private equity firm decides to put on the company to close the deal. The S&U schedule will indicate the sponsor
What are the sources? What are the uses? At its core, a deal is a financial transaction between two parties. If you are acquiring a company, you are exchanging capital for the business. In doing so, you need to first establish what is the amount of capital that must be transferred to the seller in order to acquire the company.
