Equity Valuation: Models from Leading Investment Banks

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Introduction

The coffers of private equity firms are flush with cash. In 2006, private equity funds had raised over USD 215 billion in the United States alone from pension funds, wealthy individuals and other qualified investors.¹ 2007 saw a number of record breaking deals. Fueled by significant amounts of “dry powder”, private equity firms such as The Blackstone Group, Kohlberg Kravis Roberts & Co., TPG and The Carlyle Group will likely undertake more and increasingly larger leverage buyout (LBO).

Investors of publicly listed companies can benefit from leveraged buyouts as private equity investors typically pay a control premium when they take a public company private. Many leading investors and investment banks have developed LBO models to screen for potential LBO candidates. Financial sponsors use similar LBO models when analyzing potential leveraged buyouts. In this part of the book, we describe the methodology and the mechanics of LBO models developed by leading investment banks such as Deutsche Bank, Goldman Sachs, Credit Suisse, Morgan Stanley and UBS.²

In the previous parts of this book we discussed discounted cash flow models which value companies from the perspective of investors that do not seek to gain control of a company. Unlike DCF models, LBO models value companies from the perspective of a private equity investor who recapitalizes the financial structure of a company and restructures operations to enhance profitability and capital efficiency. Used in combination, ...