Fellow analysts, how often are you making LBO models? Also, why is this our responsibility? Shouldn't it be the buyers responsibility?

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You need to understand what type of returns a financial sponsor can expect if they were to acquire the business. This knowledge can help guide your thinking around potential buyers, bid tactics, etc.

For leverage, take a look at what recent LBOs in the sector have done. For example, If it’s a dying industry and other companies aren’t levering past 5x, you probably shouldn’t assume a 7x LBO

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Any strategic alternatives pitch will require an LBO. And it is the buyers responsibility to evaluate the business. But it’s our job to inform the board of directors on sponsor ability to pay. You want to know the valuation band that would be ascribed by sponsors prior to launching a process; makes it easier to evaluate their bids.

Dry powder identification happens when you’re putting a buyer list together. Usually you’re not going to have much insight into this as a variety of PE shops won’t disclose it. However sometimes they’ll have press releases on raising their funds and subsequent releases on how they’ve deployed their capital since.

As for leverage, firms will sometimes disclose their investment strategies and leverage targets. Just depends on the company.

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