Take-privates of technology companies are having a moment! In the largest enterprise software PE deal of 2023, Silver Lake and the Canada Pension Plan Investment Board bought Qualtrics off of the Nasdaq for $12.5bn. In March, Blackstone acquired software company Cvent for $4.6bn. In October, Vista Equity Partners agreed to purchase EngageSmart for $4bn.1
Here are the key concepts to better understand Leveraged Buyouts (LBOs):
In an LBO, the first step is to list out the sources and uses and make sure they match. Here are the key items for each:
Sources (how the deal is going to be funded):
New Debt (Revolver, Term Loans, Senior Notes etc.)
Management Equity
Sponsor Equity
Uses (capital required to make the acquisition):
Purchase Equity
Retire Existing Debt
Transaction Fees
Financing Fees
Key Formulas:
Leverage Ratio = Debt / EBITDA2
Interest Coverage Ratio = EBITDA / Interest Expense
MOIC (Multiple on Invested Capital) = Total Cash Inflows / Initial Investment
Cash-on-Cash Multiple = Exit Equity Value / Entry Equity Value3
IRR (Internal Rate of Return) = (Exit Equity Value / Entry Equity Value) ^ (1/N) - 1
Source: PitchBook
EBITDA = Earnings Before Interest, Taxes, and Depreciation & Amortization
Enterprise Value = Equity Value + Debt - Cash. Hence, Equity Value = Enterprise Value - Debt + Cash