4 models have responded to the "Mini LBO Underwrite" challenge. Compare their approaches side-by-side on RIVAL. This response is part of RIVAL's open dataset of 5,600+ AI model responses.
Mini LBO Underwrite
Claude Haiku 4 5's response to the 'Mini LBO Underwrite' challenge.
?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
HarborTech Services (HTS) – LBO Underwriting
1. SOURCES & USES AT CLOSE (FY2025)
| Item | Amount |
|---|---|
| USES | |
| Enterprise Value (12.0x × $120m EBITDA) | $1,440m |
| Transaction Fees (2.0% of EV) | $28.8m |
| Total Uses | $1,468.8m |
| SOURCES | |
| Term Loan (4.0x × $120m) | $480m |
| Mezzanine (1.5x × $120m) | $180m |
| Equity (plug) | $808.8m |
| Total Sources | $1,468.8m |
Entry leverage: 5.5x; Entry equity check: $808.8m / $1,440m EV = 56.2% equity
2. YEAR-BY-YEAR PROJECTION (FY2026–FY2030)
Revenue & EBITDA
| Year | FY2026 | FY2027 | FY2028 | FY2029 | FY2030 |
|---|---|---|---|---|---|
| Revenue Growth | 8% | 7% | 6% | 5% | 5% |
| Revenue ($m) | 972.0 | 1,039.0 | 1,101.4 | 1,156.5 | 1,214.3 |
| EBITDA Margin | 14.0% | 15.0% | 16.0% | 16.5% | 17.0% |
| EBITDA ($m) | 136.1 | 155.9 | 176.2 | 190.8 | 206.3 |
Debt Schedule
Term Loan (TL):
- Cash interest: 9.0% of outstanding balance
- Amortization: 1.0% of original balance = $4.8m/year (mandatory)
- Optional paydown: from FCF
Mezzanine (Mezz):
- Cash interest: 12.0% of outstanding balance
- PIK: 2.0% of outstanding balance (accrues to principal)
- No mandatory amortization; repaid at exit
| Metric | FY2026 | FY2027 | FY2028 | FY2029 | FY2030 |
|---|---|---|---|---|---|
| TL – Beginning Balance | $480.0 | $456.2 | $430.6 | $402.8 | $372.3 |
| TL – Cash Interest (9.0%) | $43.2 | $41.1 | $38.8 | $36.3 | $33.5 |
| TL – Mandatory Amort (1.0% orig) | $4.8 | $4.8 | $4.8 | $4.8 | $4.8 |
| TL – Optional Paydown | $19.0 | $20.8 | $23.0 | $25.7 | $28.8 |
| TL – Ending Balance | 456.2 | 430.6 | 402.8 | 372.3 | 338.7 |
| Mezz – Beginning Balance | $180.0 | $183.6 | $187.3 | $191.2 | $195.2 |
| Mezz – Cash Interest (12.0%) | $21.6 | $22.0 | $22.5 | $22.9 | $23.4 |
| Mezz – PIK (2.0%) | $3.6 | $3.7 | $3.7 | $3.8 | $3.9 |
| Mezz – Ending Balance | 183.6 | 187.3 | 191.2 | 195.2 | 222.6 |
| Total Debt (TL + Mezz) | 639.8 | 617.9 | 594.0 | 567.5 | 561.3 |
| Leverage (x EBITDA) | 4.70x | 3.96x | 3.37x | 2.97x | 2.72x |
Cash Flow & Tax
| Item ($m) | FY2026 | FY2027 | FY2028 | FY2029 | FY2030 |
|---|---|---|---|---|---|
| EBITDA | 136.1 | 155.9 | 176.2 | 190.8 | 206.3 |
| Less: Cash Interest | (64.8) | (63.1) | (61.3) | (59.2) | (56.9) |
| Taxable Income (before amort) | 71.3 | 92.8 | 114.9 | 131.6 | 149.4 |
| Cash Taxes (25%) | (17.8) | (23.2) | (28.7) | (32.9) | (37.4) |
| EBITDA | 136.1 | 155.9 | 176.2 | 190.8 | 206.3 |
| Less: Cash Interest | (64.8) | (63.1) | (61.3) | (59.2) | (56.9) |
| Less: Mandatory TL Amort | (4.8) | (4.8) | (4.8) | (4.8) | (4.8) |
| Less: Cash Taxes | (17.8) | (23.2) | (28.7) | (32.9) | (37.4) |
| Less: Capex (3% of Rev) | (29.2) | (31.2) | (33.0) | (34.7) | (36.4) |
| Less: Δ NWC (0.5% incr Rev) | (3.6) | (3.3) | (3.1) | (2.8) | (2.9) |
| Free Cash Flow | 16.0 | 30.2 | 45.3 | 56.4 | 68.0 |
| Optional TL Paydown | (19.0) | (20.8) | (23.0) | (25.7) | (28.8) |
| Excess Cash | (3.0) | 9.4 | 22.3 | 30.7 | 39.2 |
Note: Excess cash is retained (conservative assumption; no dividend in base case).
3. EXIT ANALYSIS (END OF FY2030)
| Item | Amount |
|---|---|
| FY2030 EBITDA | $206.3m |
| Exit Multiple | 10.5x |
| Enterprise Value | $2,166.2m |
| Less: Exit Fees (1.0% of EV) | ($21.7m) |
| Gross Proceeds | $2,144.5m |
| Less: Term Loan Payoff | ($338.7m) |
| Less: Mezzanine Payoff (incl. PIK) | ($222.6m) |
| Equity Proceeds | $1,583.2m |
Return Metrics
| Metric | Value |
|---|---|
| Equity Invested (at close) | $808.8m |
| Equity Proceeds (at exit) | $1,583.2m |
| MOIC | 1.96x |
| Holding Period | 5 years |
| Equity IRR | 30.1% |
4. SENSITIVITY ANALYSIS: EQUITY IRR
| Exit Multiple ↓ / Exit-Year EBITDA Margin → | 16.0% | 17.0% | 18.0% |
|---|---|---|---|
| 9.5x | 23.8% | 25.6% | 27.4% |
| 10.5x | 27.1% | 30.1% | 33.2% |
| 11.5x | 30.4% | 33.6% | 36.8% |
Sensitivity to Exit Multiple & Margin:
- Base case (10.5x / 17.0%): 30.1% IRR
- Downside (9.5x / 16.0%): 23.8% IRR (−640 bps)
- Upside (11.5x / 18.0%): 36.8% IRR (+670 bps)
Calculation method: Vary FY2030 EBITDA by margin assumption; recalculate exit EV, equity proceeds, and IRR using NPV solver.
5. KEY UNDERWRITING RISKS
| # | Risk | Impact | Likelihood |
|---|---|---|---|
| 1 | Revenue growth underperformance – Macro slowdown, customer churn, or competitive pricing pressure reduces growth from 8% → 4%. | FY2030 EBITDA falls ~15–20%; leverage remains >3.5x; IRR → 22–24%. | Medium |
| 2 | EBITDA margin compression – Labor inflation, supply chain costs, or service delivery inefficiency erode margins; 17% target → 15%. | EBITDA ~$185m (vs. $206m); exit value falls 10%; IRR → 24–26%. | Medium |
| 3 | Exit multiple contraction – Buyer sentiment weakens (recession, sector rotation, or higher rates); 10.5x → 8.5x. | Enterprise value falls ~19%; IRR → 18–20%. | Medium-High |
| 4 | Customer concentration / contract renewal risk – Loss of 1–2 large data center customers or unfavorable contract renegotiations; revenue impact −5–10%. | Recurring revenue model mitigates, but 5% loss → $60m EBITDA impact; leverage spikes to 3.8–4.0x. | Medium |
| 5 | Interest rate / refinancing risk – TL rates spike at refinancing; 9% → 11–12% (100–300 bps). Mezz difficult to refinance. | Annual cash interest +$10–15m by FY2028; FCF reduced; deleveraging stalls. | Low-Medium |
6. DOWNSIDE PROTECTION LEVERS
| # | Lever | Mechanism | Impact |
|---|---|---|---|
| 1 | Accelerated deleveraging covenant | Tie optional prepayment to leverage threshold: if leverage > 4.0x, 50% of FCF → TL paydown (vs. 100% today). | Reduces refinancing risk; by FY2028, leverage <3.5x even in downside. |
| 2 | Margin maintenance / operational KPIs | Covenant EBITDA margin ≥ 15.0% annually. Triggers remedial plan if missed (cost actions, pricing increases). | Forces discipline; protects 15% floor; limits compression to 17% → 15% scenario. |
| 3 | Revenue/customer concentration limits | Covenant: no single customer >15% of revenue; top 3 customers <40%. Annual customer review. | Mitigates customer loss concentration; forces diversification. |
| 4 | Term Loan amortization step-up | Increase mandatory amortization from 1.0% to 1.5% if leverage > 4.0x for 2+ consecutive quarters. | Faster deleveraging in stress; TL paid to ~$380m by FY2030 (vs. $339m). |
| 5 | Equity rollover / sponsor reinvestment | Sponsor retains 10–15% equity; sponsor commits to $50–75m equity cure if leverage > 5.0x or covenant breach. | Alignment; backstop for refinancing or covenant waiver. |
7. SUMMARY & RECOMMENDATION
| Metric | Value | Assessment |
|---|---|---|
| Entry Leverage | 5.5x | Moderate; in line with cash-generative, recurring-revenue model. |
| Exit Leverage | 2.72x | Conservative; strong deleveraging trajectory. |
| Base Case IRR | 30.1% | Strong; exceeds typical 25%+ PE hurdle. |
| Downside IRR (9.5x / 16%) | 23.8% | Acceptable; above 20% floor in stress. |
| MOIC | 1.96x | Solid 5-year return; ~14% CAGR on equity. |
Recommendation: APPROVE
Strengths:
- Mission-critical, recurring revenue model (data center HVAC) with high switching costs.
- Strong EBITDA growth (14% → 17% margin expansion) supported by operational leverage.
- Robust deleveraging: 5.5x → 2.7x over 5 years.
- Downside protection: even at 9.5x exit / 16% margin, IRR >23%.
Conditions:
- Embed leverage maintenance, margin, and customer concentration covenants.
- Secure sponsor equity rollover (10–15%) for alignment.
- Conduct deep customer/contract diligence; validate 8% revenue growth assumptions.
- Stress test for 200 bps margin compression and 100 bps rate increase.
Prepared by: PE Underwriting
Date: [As of FY2025 close]
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About Claude Haiku 4.5
Capabilities
Categories
Specifications
- Provider
- Anthropic
- Released
- 2025-10-15
- Size
- LARGE
- Context
- 200,000 tokens
