Mini LBO Underwrite

Prompt

You are underwriting a 5-year LBO for a private equity investment committee. Company (fictional): HarborTech Services (HTS) – mission-critical HVAC maintenance + monitoring for data centers (mostly recurring service contracts). Use only the information below. Do NOT browse the web. This is a fictional exercise. ENTRY (close at end of FY2025) - FY2025 revenue: $900m - FY2025 EBITDA: $120m (13.3% margin) - Purchase price: 12.0x EBITDA - Transaction fees: 2.0% of enterprise value (paid at close, funded by equity) SOURCES & USES (simplified) - Total leverage at close: 5.5x EBITDA - Term Loan: 4.0x EBITDA, 9.0% cash interest, 1.0% annual amortization - Mezzanine: 1.5x EBITDA, 12.0% cash interest + 2.0% PIK (PIK accrues to principal) - Equity funds the remainder - Assume starting cash is $0. - Assume all free cash flow after required payments is used for optional Term Loan paydown (no dividends). OPERATING ASSUMPTIONS (FY2026–FY2030) Base case: - Revenue growth: 8%, 7%, 6%, 5%, 5% - EBITDA margin: 14.0%, 15.0%, 16.0%, 16.5%, 17.0% - Capex: 3.0% of revenue - Change in NWC: 0.5% of incremental revenue (cash outflow) - Cash tax rate: 25% applied to max(0, EBITDA - cash interest) (simplified) EXIT (end of FY2030) - Exit multiple: 10.5x FY2030 EBITDA - Exit fees: 1.0% of enterprise value - Mezzanine (including PIK) is repaid at exit. TASK 1) Build a simplified year-by-year table (FY2026–FY2030) with: revenue, EBITDA, cash interest (by tranche), cash taxes, capex, ΔNWC, free cash flow after debt service, and ending debt balances (Term Loan + Mezz). 2) Compute equity IRR and MOIC. 3) Provide a sensitivity table of equity IRR vs exit multiple (9.5x / 10.5x / 11.5x) and exit-year EBITDA margin (16% / 17% / 18%). 4) List 5 underwriting risks and 5 concrete downside protection levers. Keep it concise, but show the math clearly.

Response

Aurora AlphaMini LBO Underwrite

Aurora Alpha

HarborTech Services (HTS) – 5‑yr LBO (FY2026‑FY2030)

All figures are $ m (rounded to two decimals).

FY	Revenue	EBITDA	Cash Interest – Term	Cash Interest – Mezz	Total Cash Interest	Taxes (25 % of EBITDA‑Interest)	Capex (3 % Rev)	ΔNWC (0.5 % of ΔRev)	Free‑Cash‑Flow (before amort.)	Mandatory Amort. (4.8)	Optional Pay‑down	Term‑Loan Balance EoY	Mezz Balance EoY
2026	972.00	136.08	43.20	21.60	64.80	17.82	29.16	0.36	23.94	4.80	19.14	456.06	183.60
2027	1 040.04	156.01	41.05	22.03	63.08	23.23	31.20	0.34	38.16	4.80	33.36	417.90	187.27
2028	1 102.44	176.39	37.61	22.47	60.08	29.08	33.07	0.31	53.84	4.80	49.04	364.06	191.02
2029	1 157.56	192.00	32.77	22.92	55.69	34.08	34.73	0.28	67.23	4.80	62.43	296.83	194.84
2030	1 215.44	206.63	26.71	23.38	50.10	39.13	36.46	0.29	80.65	4.80	75.85	216.18	198.73

Notes

Term‑Loan amortisation = 1 % of the original $480 m ($4.8 m) each year + any optional pay‑down.
Mezzanine cash interest = 12 % of the outstanding mezz balance; a 2 % PIK accrues to principal each year.
Taxes are 25 % of EBITDA – cash interest (no tax shield on PIK).
All free cash flow after the mandatory amortisation is used to optional pay‑down the term loan (no dividends).

1️⃣ Equity Returns – Base Case (Exit Multiple = 10.5×, EBITDA margin = 17 %)

Item	Amount
Equity invested (t0)	–$808.80 m (purchase price $1 440 m – debt $660 m + transaction fee $28.8 m)
Cash‑flow FY2026‑FY2029	$0 (all cash used for debt repayment)
Cash‑flow FY2030 (exit)	$1 732.95 m (see calculation below)
Equity IRR	≈ 16.4 %
Equity MOIC	2.14×

Exit cash‑flow calculation (base case)

FY2030 EBITDA = $206.63 m
Exit EV = 10.5 × EBITDA = $2 169.56 m
Exit fees = 1 % × EV = $21.70 m
Debt repaid = Term‑Loan $216.18 m + Mezzanine $198.73 m = $414.92 m
Equity proceeds = EV – fees – debt = $1 732.95 m

IRR = ((1 732.95/808.80)^{1/5} - 1 = 16.4 %) ; MOIC = 1 732.95 / 808.80 = 2.14×.

2️⃣ Sensitivity of Equity IRR & MOIC

Exit Multiple	EBITDA Margin	EBITDA (m)	Exit EV (m)	Exit Fee (m)	Equity Proceeds (m)	MOIC	IRR
9.5×	16 %	194.47	1 847.47	18.47	1 414.08	1.75×	11.8 %
9.5×	17 %	206.63	1 962.96	19.63	1 528.42	1.89×	13.6 %
9.5×	18 %	218.78	2 078.41	20.78	1 642.70	2.03×	15.2 %
10.5×	16 %	194.47	2 041.94	20.42	1 606.61	1.99×	14.7 %
10.5×	17 %	206.63	2 169.56	21.70	1 732.95	2.14×	16.4 %
10.5×	18 %	218.78	2 297.18	22.97	1 859.29	2.30×	18.1 %
11.5×	16 %	194.47	2 236.41	22.36	1 799.13	2.23×	17.3 %
11.5×	17 %	206.63	2 376.19	23.76	1 937.51	2.40×	19.1 %
11.5×	18 %	218.78	2 515.47	25.15	2 075.39	2.57×	20.8 %

All IRR figures assume the same equity outlay of $808.8 m at t0 and a 5‑year holding period.

3️⃣ Key Underwriting Risks

#	Risk	Why it matters
1	Revenue growth slower than 8‑5 %	A 2 % shortfall cuts EBITDA by >$10 m each year, reduces cash‑flow for debt pay‑down, and lowers exit proceeds.
2	EBITDA margin compression	If margins fall 2 % points (e.g., to 15 % in FY2028) EBITDA drops ≈$20 m, eroding cash‑flow and equity value.
3	Higher capex or NWC needs	Capex >3 % of revenue or ΔNWC >0.5 % of incremental revenue would consume cash that would otherwise pay down debt, increasing leverage at exit.
4	Interest‑rate / refinancing risk	The term‑loan is fixed at 9 % but may need refinancing after 5 yr; a rise in rates would increase cash‑interest and reduce cash‑flow.
5	Operational risk in data‑center HVAC	Service contracts are mission‑critical; a major service‑failure event could trigger penalties, loss of contracts, and reputational damage.

4️⃣ Down‑side Protection Levers

#	Lever	How it protects equity
1	Cash‑sweep covenant (mandatory use of excess cash to repay term‑loan)	Guarantees that any free cash flow beyond the planned optional pay‑down automatically reduces leverage, limiting downside equity exposure.
2	Senior‑first lien with 1 % annual amortisation	Provides a clear schedule for debt reduction and ensures senior lenders are paid before mezzanine at exit.
3	Mezzanine PIK accrual capped at 2 %	Limits the growth of mezzanine principal, keeping total debt at exit predictable.
4	Financial covenants – EBITDA‑coverage ≥ 3.0×	Forces the company to maintain sufficient earnings to cover interest, triggering remedial actions if breached.
5	Equity “reset” or earn‑out clause	Allows the PE sponsor to adjust the purchase price or receive additional equity if EBITDA margins fall below a pre‑agreed floor, sharing upside/downside with the seller.

Bottom line:

Base‑case equity IRR ≈ 16.4 % with a 2.14× MOIC.
The investment is most sensitive to the exit multiple and the FY2030 EBITDA margin; a 2 × spread in exit multiple (9.5‑11.5×) moves IRR from ~12 % to ~21 %.
The key risks revolve around growth, margin, capex/NWC, interest‑rate exposure, and operational execution, while the listed covenants and cash‑sweep mechanisms provide solid downside protection.

Mini LBO Underwrite

Prompt

Response

Aurora AlphaMini LBO Underwrite

Aurora Alpha

HarborTech Services (HTS) – 5‑yr LBO (FY2026‑FY2030)

All figures are $ m (rounded to two decimals).

FY	Revenue	EBITDA	Cash Interest – Term	Cash Interest – Mezz	Total Cash Interest	Taxes (25 % of EBITDA‑Interest)	Capex (3 % Rev)	ΔNWC (0.5 % of ΔRev)	Free‑Cash‑Flow (before amort.)	Mandatory Amort. (4.8)	Optional Pay‑down	Term‑Loan Balance EoY	Mezz Balance EoY
2026	972.00	136.08	43.20	21.60	64.80	17.82	29.16	0.36	23.94	4.80	19.14	456.06	183.60
2027	1 040.04	156.01	41.05	22.03	63.08	23.23	31.20	0.34	38.16	4.80	33.36	417.90	187.27
2028	1 102.44	176.39	37.61	22.47	60.08	29.08	33.07	0.31	53.84	4.80	49.04	364.06	191.02
2029	1 157.56	192.00	32.77	22.92	55.69	34.08	34.73	0.28	67.23	4.80	62.43	296.83	194.84
2030	1 215.44	206.63	26.71	23.38	50.10	39.13	36.46	0.29	80.65	4.80	75.85	216.18	198.73

Notes

Term‑Loan amortisation = 1 % of the original $480 m ($4.8 m) each year + any optional pay‑down.
Mezzanine cash interest = 12 % of the outstanding mezz balance; a 2 % PIK accrues to principal each year.
Taxes are 25 % of EBITDA – cash interest (no tax shield on PIK).
All free cash flow after the mandatory amortisation is used to optional pay‑down the term loan (no dividends).

1️⃣ Equity Returns – Base Case (Exit Multiple = 10.5×, EBITDA margin = 17 %)

Item	Amount
Equity invested (t0)	–$808.80 m (purchase price $1 440 m – debt $660 m + transaction fee $28.8 m)
Cash‑flow FY2026‑FY2029	$0 (all cash used for debt repayment)
Cash‑flow FY2030 (exit)	$1 732.95 m (see calculation below)
Equity IRR	≈ 16.4 %
Equity MOIC	2.14×

Exit cash‑flow calculation (base case)

FY2030 EBITDA = $206.63 m
Exit EV = 10.5 × EBITDA = $2 169.56 m
Exit fees = 1 % × EV = $21.70 m
Debt repaid = Term‑Loan $216.18 m + Mezzanine $198.73 m = $414.92 m
Equity proceeds = EV – fees – debt = $1 732.95 m

IRR = ((1 732.95/808.80)^{1/5} - 1 = 16.4 %) ; MOIC = 1 732.95 / 808.80 = 2.14×.

2️⃣ Sensitivity of Equity IRR & MOIC

Exit Multiple	EBITDA Margin	EBITDA (m)	Exit EV (m)	Exit Fee (m)	Equity Proceeds (m)	MOIC	IRR
9.5×	16 %	194.47	1 847.47	18.47	1 414.08	1.75×	11.8 %
9.5×	17 %	206.63	1 962.96	19.63	1 528.42	1.89×	13.6 %
9.5×	18 %	218.78	2 078.41	20.78	1 642.70	2.03×	15.2 %
10.5×	16 %	194.47	2 041.94	20.42	1 606.61	1.99×	14.7 %
10.5×	17 %	206.63	2 169.56	21.70	1 732.95	2.14×	16.4 %
10.5×	18 %	218.78	2 297.18	22.97	1 859.29	2.30×	18.1 %
11.5×	16 %	194.47	2 236.41	22.36	1 799.13	2.23×	17.3 %
11.5×	17 %	206.63	2 376.19	23.76	1 937.51	2.40×	19.1 %
11.5×	18 %	218.78	2 515.47	25.15	2 075.39	2.57×	20.8 %

All IRR figures assume the same equity outlay of $808.8 m at t0 and a 5‑year holding period.

3️⃣ Key Underwriting Risks

#	Risk	Why it matters
1	Revenue growth slower than 8‑5 %	A 2 % shortfall cuts EBITDA by >$10 m each year, reduces cash‑flow for debt pay‑down, and lowers exit proceeds.
2	EBITDA margin compression	If margins fall 2 % points (e.g., to 15 % in FY2028) EBITDA drops ≈$20 m, eroding cash‑flow and equity value.
3	Higher capex or NWC needs	Capex >3 % of revenue or ΔNWC >0.5 % of incremental revenue would consume cash that would otherwise pay down debt, increasing leverage at exit.
4	Interest‑rate / refinancing risk	The term‑loan is fixed at 9 % but may need refinancing after 5 yr; a rise in rates would increase cash‑interest and reduce cash‑flow.
5	Operational risk in data‑center HVAC	Service contracts are mission‑critical; a major service‑failure event could trigger penalties, loss of contracts, and reputational damage.

4️⃣ Down‑side Protection Levers

#	Lever	How it protects equity
1	Cash‑sweep covenant (mandatory use of excess cash to repay term‑loan)	Guarantees that any free cash flow beyond the planned optional pay‑down automatically reduces leverage, limiting downside equity exposure.
2	Senior‑first lien with 1 % annual amortisation	Provides a clear schedule for debt reduction and ensures senior lenders are paid before mezzanine at exit.
3	Mezzanine PIK accrual capped at 2 %	Limits the growth of mezzanine principal, keeping total debt at exit predictable.
4	Financial covenants – EBITDA‑coverage ≥ 3.0×	Forces the company to maintain sufficient earnings to cover interest, triggering remedial actions if breached.
5	Equity “reset” or earn‑out clause	Allows the PE sponsor to adjust the purchase price or receive additional equity if EBITDA margins fall below a pre‑agreed floor, sharing upside/downside with the seller.

Bottom line:

Base‑case equity IRR ≈ 16.4 % with a 2.14× MOIC.
The investment is most sensitive to the exit multiple and the FY2030 EBITDA margin; a 2 × spread in exit multiple (9.5‑11.5×) moves IRR from ~12 % to ~21 %.
The key risks revolve around growth, margin, capex/NWC, interest‑rate exposure, and operational execution, while the listed covenants and cash‑sweep mechanisms provide solid downside protection.

Mini LBO Underwrite

?
Prompt

Response

1️⃣ Equity Returns – Base Case (Exit Multiple = 10.5×, EBITDA margin = 17 %)

2️⃣ Sensitivity of Equity IRR & MOIC

3️⃣ Key Underwriting Risks

4️⃣ Down‑side Protection Levers

About Aurora Alpha

Capabilities

Categories

Specifications

Claude Sonnet 4.6's version

Aurora Alpha vs Gemini 3.1 Pro Preview

Mini LBO Underwrite

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Prompt

Response

1️⃣ Equity Returns – Base Case (Exit Multiple = 10.5×, EBITDA margin = 17 %)

2️⃣ Sensitivity of Equity IRR & MOIC

3️⃣ Key Underwriting Risks

4️⃣ Down‑side Protection Levers

About Aurora Alpha

Capabilities

Categories

Specifications

Claude Sonnet 4.6's version

Aurora Alpha vs Gemini 3.1 Pro Preview

Mini LBO Underwrite

?Prompt

Response

1️⃣ Equity Returns – Base Case (Exit Multiple = 10.5×, EBITDA margin = 17 %)

2️⃣ Sensitivity of Equity IRR & MOIC

3️⃣ Key Underwriting Risks

4️⃣ Down‑side Protection Levers

About Aurora Alpha

Capabilities

Categories

Specifications

Claude Sonnet 4.6's version

Aurora Alpha vs Gemini 3.1 Pro Preview

Mini LBO Underwrite

?Prompt

Response

1️⃣ Equity Returns – Base Case (Exit Multiple = 10.5×, EBITDA margin = 17 %)

2️⃣ Sensitivity of Equity IRR & MOIC

3️⃣ Key Underwriting Risks

4️⃣ Down‑side Protection Levers

About Aurora Alpha

Capabilities

Categories

Specifications

Claude Sonnet 4.6's version

Aurora Alpha vs Gemini 3.1 Pro Preview

?
Prompt

1️⃣ Equity Returns – Base Case (Exit Multiple = 10.5×, EBITDA margin = 17 %)

?
Prompt

1️⃣ Equity Returns – Base Case (Exit Multiple = 10.5×, EBITDA margin = 17 %)