Returns attribution calculation - LBO
Hi there,
I have the following formulas (taken from WSP) to calculate the return attribution in an LBO:
Debt paydown: Final debt balance - initial debt balance
EBITDA growth: (Final EBITDA - Initial EBITDA) * Purchase multiple
Multiple expansion: (Exit multiple - entry multiple) * Exit EBITDA
I would like to clarify why one should multiply the EBITDA change by the Purchase multiple, but do the inverse with the multiple expansion..
My take is that you take EBITDA growth assuming that Multiple stays the same (as it is usually), but you use the Exit EBITDA on the Multiple exoansion attribution because multiple expansion is actually a consequence of EBITDA growth ; aka you sell at a higher multiple (also) because of the higher EBITDA; but you don't grow the EBITDA bc of Multiple expansion.
Any clarification would be much appreciated!
Thanks
Hi, I think you are just confused visualising rather than understanding the nature of it. In the end it is just a question of cannibalisation in formulas, hope below will clarify.
To remember it my advice is: tell yourself every computation is based on exit EBITDA because this is what you have achieved as fund.
Now mathematically:
1) Delta EV/EBITDA: simple multiple evolution. But remember the above - you take final/exit EBITDA and change the multiple.
2) Delta EBITDA: here you need to take again the exit EBITDA and remove the starting EBITDA, multiplying by purchase EBITDA. Why? Because if you took the exit multiple, you would double account for what has already been calculated in 1).
But mathematically, you could do it both ways:
A) the usual one: multiple delta * exit ebitda + delta ebitda * purchase multiple; or
B) multiple delta * entry ebitda + delta ebitda * exit multiple - this one being less usual
Here is an example showing it:
A) 2x200 + 9x50= 400 + 450 = 850
B) 2x150 + 11x50= 300 + 550 = 850
Just remember final EBITDA is what matters.
Finally, there is one aspect to clarify in your formulas which does not account for change in NWC unless you refer to it as debt pay down - altogether they are net liabilities repayment. But otherwise the 3 types or return are good - and to compute total shareholder return you could include dividends paid over the holding period.
Hope this helps.
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