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

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

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

4. The Case Study (1 / 3)

5. The Case Study (2 / 3)

6. The Case Study (3 / 3)

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

8. Assumptions:

9. More Assumptions:

10. Debt Assumptions:

11. Sources & Uses

12. 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.
[The answer is B – if debt is being assumed it has no effect on the model, so C is wrong. A is also wrong because you want to reflect the fact that debt is assumed in the Sources & Uses – otherwise someone looking at the model may be confused on how you’re treating debt in the transaction.]

13. Final Assumption: Goodwill

14. Existing Income Statement…

15. LBO Effects…

16. Income Statement, Post-LBO

17. 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.
[The answer is C – it’s fine to make estimates of 5-10 years and it’s very common in models so B is OK; D&A are non-cash but they are tax-deductible so they show up on the income statement anyway; the real problem is that our formula fails if the period is less than 5 years.]

18. Balance Sheet: Assets

19. BS Adjustments: Assets

20. 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.
[The answer is C – no “official” explanation but both of these explanations are logical ways to think about it.]

21. Balance Sheet: L & E

22. BS Adjustments: L&E

23. 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.
[The answer is B – you do this whenever a firm acquires another firm and takes an ownership position to reflect buying out existing shareholders’. C is wrong because it definitely affects the model and A is wrong because they don’t just “get” shareholders’ equity – they purchase it.]

24. Projected Balance Sheet: Assets

25. Projected Balance Sheet: L&E

26. Projected CFS:

27. Debt Schedules – Interest Rates

28. Debt Schedules – Repayment

29. Debt Schedules – Repayment

30. 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

31. Debt Schedules – Repayment

32. 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

33. Debt Schedules – Repayment

34. Final Version of Debt Schedules:
[Explain how this is from later on when entire model is linked together and filled out – just bringing up here because previous screenshots were inaccurate since we hadn’t filled out debt balances yet.]

35. 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.
[The answer is A – if there’s revolver borrowing required, that part of the equation might be negative, in which case we should assume no optional repayments. B can never be negative because the mandatory repayment formula takes care of that case, and C is completely wrong because you shouldn’t just include a MAX formula everywhere – only where negatives are disallowed in the model.]

36. Debt Schedules – Interest

37. Linking – Debt Payments

38. Linking – Net Change in Cash

39. Linking – Long-Term Assets

40. Linking – Liabilities

41. Linking – Income Statement

42. Make Sure Circularity Works…

43. Calculating Returns

44. Calculating Returns

45. Back to the Case Study…

46. Sensitivity Tables

47. 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

48. What Next? Go Practice Yourself Download the Model and Files
[Final point of the “Why”-”What”-”How”-”What Next?” structure I like to use. Emphasize how they can practice themselves with recent deals in the news and how to find equity research on brokers like TD Ameritrade. Can also download model for interview prep/practice. Learn more advanced concepts as well and reference Advanced LBO Model course.]
Learn More Advanced Topics

49. JobSearchDigest.com