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LBO Modeling Private Equity Case Study: TPG’s $3 Billion Buyout of J. Crew

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Understand debt basics (interest rates, principal repayment) Completed the 3-statement projection model homework Understand LBO concept Prerequisites…

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Learn/Review Accounting Need to Learn to “Speed Build” PE Interviews – Required! Always in the News Why an LBO Model?

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The Case Study (1 / 3)

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The Case Study (2 / 3)

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The Case Study (3 / 3)

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Adjust BS / CFS Modify Income Statement Assumptions Game Plan: Debt Schedules & Linking Returns & Case Answers

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Assumptions:

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More Assumptions:

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Debt Assumptions:

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Sources & Uses

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Pop Quiz Q: How would Sources & Uses Change if the PE firm assumed J. Crew’s existing debt instead? A) We would remove the “Repay Existing Debt” item. B) We would add a “Debt Assumed” item under both Sources and Uses. C) We would add a “Debt Assumed” item only under Sources.

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Final Assumption: Goodwill

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Existing Income Statement…

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LBO Effects…

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Income Statement, Post-LBO

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Pop Quiz Q: What’s the flaw with the way we just modified the income statement? A) Depreciation and Amortization are non-cash items so they shouldn’t be there at all. B) We need better estimates for the periods for the PP&E write-up and intangibles. C) We can’t just divide the amount by the period, because the period may be less than 5 years.

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Balance Sheet: Assets

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BS Adjustments: Assets

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Pop Quiz Q: Wait a minute, why do Capitalized Financing Fees count as an asset? A) Because they reduce the amount of taxes the company will pay in the future. B) Because they correspond to another item (debt) that remains on the balance sheet for years. C) Both of the above.

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Balance Sheet: L & E

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BS Adjustments: L&E

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Pop Quiz Q: Why do we wipe out all of J. Crew’s shareholders’ equity? Don’t they still have retained earnings? A) Because the PE firm gets everything, including the retained earnings, in the transaction. B) Because the PE firm purchases everything and replaces it with their own equity. C) It’s just an accounting convention and doesn’t actually affect the model.

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Projected Balance Sheet: Assets

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Projected Balance Sheet: L&E

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Projected CFS:

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Debt Schedules – Interest Rates

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Debt Schedules – Repayment

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Explaining the MIN Formula: =MIN(Prior Year Debt, Beginning Balance * Yearly Amortization) Prior Year Debt = 400, Beginning Balance = 500, Yearly Amortization = 10%... Repay 50, since 50 < 400 Prior Year Debt = 20, Beginning Balance = 500, Yearly Amortization = 10%... Repay 20, since 20 < 50

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Debt Schedules – Repayment

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Explaining the MAX/MIN Formula: =MAX(MIN(Prior Year Revolver, Cash Flow Available – Debt Repaid So Far), 0) Revolver = 100, Cash Flow Available = 100, Debt Repaid So Far = 50… Repay 50, since 50 < 100 Revolver = 20, Cash Flow Available = 100, Debt Repaid So Far = 50… Repay 20, since 20 < 50 Revolver = 100, Cash Flow Available = 100, Debt Repaid So Far = 120 Repay 0, since 0 > -20

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Debt Schedules – Repayment

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Final Version of Debt Schedules:

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Pop Quiz Q: Why do we need the MAX function in the optional debt repayment formula? A) Because the Subtotal Before Revolver – All Payments So Far might be negative. B) Because the Prior Year Term Loan – Mandatory Repayment part might be negative. C) We should always include MAX(Formula, 0) around repayment formulas to error-check the model.

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Debt Schedules – Interest

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Linking – Debt Payments

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Linking – Net Change in Cash

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Linking – Long-Term Assets

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Linking – Liabilities

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Linking – Income Statement

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Make Sure Circularity Works…

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Calculating Returns

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Back to the Case Study…

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Sensitivity Tables

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Case Study Answers Investment: No – only way to get solid returns is multiple expansion or lower price Exit Multiple: Select range based on purchase multiple Tweaks: Debt barely changes anything; need multiple expansion or higher growth to win Additional Information: Expansion plans, customer/store data, competition, cost cutting possibilities, retail indicators

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Learn More Advanced Topics Download the Model and Files Go Practice Yourself What Next?

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