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
Gpt 4 1'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
Let's proceed step by step. All calculations are built from the data provided above.
1. Year-by-Year Table: FY2026–FY2030
Step 1: Entry Calculations (FY2025 / at Close)
- EBITDA: $120m
- Purchase Price (EV): 12.0 × $120m = $1,440m
- Transaction Fees: 2.0% × $1,440m = $28.8m
- Total Uses: $1,440m + $28.8m = $1,468.8m
Debt at Close:
- Term Loan: 4.0 × $120m = $480m
- Mezzanine: 1.5 × $120m = $180m
- Total Debt: $660m
Equity Contribution:
$1,468.8m (uses) – $660m (debt) = $808.8m equity
Step 2: Operating Forecasts
Revenue and EBITDA
| Year | Growth | Revenue | Margin | EBITDA |
|---|---|---|---|---|
| FY2025 | — | $900.0m | 13.3% | $120.0m |
| FY2026 | 8% | $972.0m | 14.0% | $136.1m |
| FY2027 | 7% | $1,039.0m | 15.0% | $155.8m |
| FY2028 | 6% | $1,101.3m | 16.0% | $176.2m |
| FY2029 | 5% | $1,156.4m | 16.5% | $190.8m |
| FY2030 | 5% | $1,214.2m | 17.0% | $206.4m |
Capex
Capex = 3.0% of Revenue
Change in NWC
ΔNWC = 0.5% × (Current Yr Revenue – Prior Yr Revenue)
EBITDA – Cash Interest
We'll need to track debt balances for Term Loan and Mezzanine, as both amortize/accrete.
Step 3: Debt Schedules
Term Loan
- Starting: $480m
- Interest: 9.0% cash
- Amortization: 1.0% per year
- All excess FCF (after required payments) sweeps to paydown
Mezzanine
- Starting: $180m
- Interest: 12.0% cash + 2.0% PIK (PIK accrues to principal)
- Paid at exit (no principal paydown until exit)
Step 4: Table Construction
A. Build Year-by-Year Table
| FY | Revenue | EBITDA | Capex | ΔNWC | Term Loan: Beg Bal | TL Cash Interest | TL Amort | Mezz: Beg Bal | Mezz Cash Interest | Mezz PIK | Taxes | FCF after Debt Service | TL End Bal | Mezz End Bal |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 972.0 | 136.1 | 29.2 | 3.6 | 480.0 | 43.2 | 4.8 | 180.0 | 21.6 | 3.6 | 17.8 | 36.0 | 438.9 | 183.6 |
| 2027 | 1,039.0 | 155.8 | 31.2 | 3.4 | 438.9 | 39.5 | 4.4 | 183.6 | 22.0 | 3.7 | 23.6 | 53.5 | 381.0 | 187.3 |
| 2028 | 1,101.3 | 176.2 | 33.0 | 3.1 | 381.0 | 34.3 | 3.8 | 187.3 | 22.5 | 3.7 | 29.9 | 71.7 | 305.5 | 191.0 |
| 2029 | 1,156.4 | 190.8 | 34.7 | 2.8 | 305.5 | 27.5 | 3.1 | 191.0 | 23.0 | 3.8 | 33.1 | 89.8 | 210.0 | 194.8 |
| 2030 | 1,214.2 | 206.4 | 36.4 | 2.9 | 210.0 | 18.9 | 2.1 | 194.8 | 23.4 | 3.9 | 34.6 | 110.5 | 96.4 | 198.7 |
B. Calculations Breakdown
- Capex: 3% × Revenue
- ΔNWC: 0.5% × (Revenue_this_year – Revenue_last_year)
- Term Loan Amortization: 1% × Beg Bal
- Term Loan Cash Interest: 9% × Beg Bal
- Mezzanine Cash Interest: 12% × Beg Bal
- Mezzanine PIK: 2% × Beg Bal
- Taxes: 25% × max(0, EBITDA – Total Cash Interest)
- FCF after Debt Service:
- FCF = EBITDA – Capex – ΔNWC – Cash Interest (TL + Mezz) – Taxes – TL Amort
- All FCF after required payments (above) goes to optional TL paydown
C. Debt Balances
- Term Loan End Bal: Prior year end – required amortization – optional paydown (from FCF)
- Mezz End Bal: Prior year + PIK
Optional Term Loan Paydown Calculation
- Any FCF after required payments is used to pay down the Term Loan (after required amortization).
Detailed Calculations (First Year Example: FY2026)
- Revenue: $972.0m
- EBITDA: $972.0m × 14% = $136.1m
- Capex: $972.0m × 3% = $29.2m
- ΔNWC: 0.5% × ($972.0m – $900.0m) = 0.5% × $72.0m = $0.36m (should be $0.36m, but above table uses $3.6m; let's double-check: 0.5% × $72m = $0.36m, but above is $3.6m, so let's use $0.36m as the correct value)
- Term Loan Beg Bal: $480.0m
- Interest: 9% × $480m = $43.2m
- Amortization: 1% × $480m = $4.8m
- Mezz Beg Bal: $180.0m
- Cash Interest: 12% × $180m = $21.6m
- PIK: 2% × $180m = $3.6m
- Taxes: 25% × ($136.1m – $43.2m – $21.6m) = 25% × $71.3m = $17.8m
- FCF after Debt Service:
- $136.1m – $29.2m – $0.36m – $43.2m – $21.6m – $17.8m – $4.8m = $19.14m
- Optional Paydown: $19.14m goes to Term Loan paydown
Term Loan End Bal: $480m – $4.8m – $19.14m = $456.1m
Mezz End Bal: $180m + $3.6m = $183.6m
(I will correct the NWC to $0.36m per year, not $3.6m as previously)
Let me recalculate the table with this fix.
Final Table
| FY | Revenue | EBITDA | Capex | ΔNWC | TL Beg Bal | TL Interest | TL Amort | Mezz Beg Bal | Mezz Int | Mezz PIK | Taxes | FCF after Debt Service | TL End Bal | Mezz End Bal |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 972.0 | 136.1 | 29.2 | 0.36 | 480.0 | 43.2 | 4.8 | 180.0 | 21.6 | 3.6 | 17.8 | 19.14 | 456.1 | 183.6 |
| 2027 | 1,039.0 | 155.8 | 31.2 | 0.34 | 456.1 | 41.0 | 4.6 | 183.6 | 22.0 | 3.7 | 22.1 | 32.14 | 419.4 | 187.3 |
| 2028 | 1,101.3 | 176.2 | 33.0 | 0.31 | 419.4 | 37.7 | 4.2 | 187.3 | 22.5 | 3.7 | 26.6 | 45.90 | 369.3 | 191.0 |
| 2029 | 1,156.4 | 190.8 | 34.7 | 0.28 | 369.3 | 33.2 | 3.7 | 191.0 | 23.0 | 3.8 | 29.2 | 59.98 | 305.6 | 194.8 |
| 2030 | 1,214.2 | 206.4 | 36.4 | 0.29 | 305.6 | 27.5 | 3.1 | 194.8 | 23.4 | 3.9 | 30.9 | 74.50 | 228.0 | 198.7 |
2. Equity IRR and MOIC Calculation
A. Exit Calculation (End of FY2030)
- Exit EBITDA: $206.4m
- Exit Multiple: 10.5x
- Enterprise Value: $206.4m × 10.5 = $2,166.7m
- Exit Fees: 1% × $2,166.7m = $21.7m
- Net Proceeds: $2,166.7m – $21.7m = $2,145.0m
- Less Debt Repayment:
- Term Loan: $228.0m
- Mezzanine: $198.7m
- Total Debt: $426.7m
- Equity Value at Exit: $2,145.0m – $426.7m = $1,718.3m
B. Entry Equity
- Entry Equity: $808.8m
C. MOIC
- MOIC = $1,718.3m / $808.8m = 2.13x
D. IRR
- Entry: –$808.8m at end 2025 (t=0)
- Exit: +$1,718.3m at end 2030 (t=5)
[ IRR = \left(\frac{$1,718.3}{$808.8}\right)^{1/5} - 1 = (2.126)^{0.2} - 1 \approx 16.0% ]
3. Sensitivity Table: IRR vs Exit Multiple and EBITDA Margin
Assume:
- Exit Year EBITDA = Revenue × Margin
- FY2030 Revenue: $1,214.2m
- Debt at exit: As above (approx $228.0m TL, $198.7m Mezz)
- Entry equity: $808.8m
a) Exit Year EBITDA at Different Margins
| Margin | EBITDA ($m) |
|---|---|
| 16% | $194.3m |
| 17% | $206.4m |
| 18% | $218.6m |
b) Exit Value Calculation
| Margin | EBITDA | 9.5x EV | 10.5x EV | 11.5x EV |
|---|---|---|---|---|
| 16% | 194.3 | 1,846.9 | 2,040.2 | 2,233.5 |
| 17% | 206.4 | 1,961.7 | 2,167.2 | 2,372.8 |
| 18% | 218.6 | 2,076.8 | 2,294.7 | 2,512.6 |
- Less 1% exit fees to get Net EV
- Less debt ($426.7m)
c) IRR Table
| Exit Mult × Margin | Equity Value @ Exit | MOIC | IRR |
|---|---|---|---|
| 9.5x × 16% | $1,828.4m – 426.7 = 1,401.7 | 1.73x | 11.6% |
| 10.5x × 16% | $2,019.8m – 426.7 = 1,613.1 | 2.00x | 14.9% |
| 11.5x × 16% | $2,211.2m – 426.7 = 1,784.5 | 2.21x | 17.1% |
| 9.5x × 17% | $1,942.1m – 426.7 = 1,515.4 | 1.87x | 13.1% |
| 10.5x × 17% | $2,145.5m – 426.7 = 1,718.8 | 2.13x | 16.0% |
| 11.5x × 17% | $2,348.1m – 426.7 = 1,921.4 | 2.38x | 18.8% |
| 9.5x × 18% | $2,056.0m – 426.7 = 1,629.3 | 2.02x | 14.7% |
| 10.5x × 18% | $2,271.7m – 426.7 = 1,845.0 | 2.28x | 17.6% |
| 11.5x × 18% | $2,486.5m – 426.7 = 2,059.8 | 2.55x | 20.2% |
Note: IRR = (MOIC)^(1/5) – 1
4. Underwriting Risks & Downside Protection Levers
Key Risks
- Contract Concentration: Loss of a major data center client materially impacts revenue.
- Tech Disruption: Shift in cooling technology (e.g., liquid cooling) could reduce demand for traditional HVAC services.
- Labor Shortage/Inflation: Tight labor market or wage increases could compress margins.
- Slower End-market Growth: Slower data center buildout or macro downturn reduces recurring revenue growth.
- Execution Risk: Failure to improve margins (e.g., via cost initiatives or upsell) limits deleveraging and value creation.
Downside Protection Levers
- Strong Recurring Contracts: Focus on high-renewal, long-term customer agreements for base cash flow.
- Cost Flexibility: Variable cost structure allows for expense reduction in downturns.
- Covenant-lite Structure: Negotiate flexible covenants to avoid default in a downturn, preserving optionality.
- Diversification: Expand customer base and service lines to reduce concentration risk.
- Capex Deferral: Ability to defer non-critical capex to preserve cash in tough periods.
Summary Table (FY2026–FY2030)
| FY | Revenue | EBITDA | Capex | ΔNWC | Taxes | FCF after Debt Service | TL End Bal | Mezz End Bal |
|---|---|---|---|---|---|---|---|---|
| 2026 | 972.0 | 136.1 | 29.2 | 0.36 | 17.8 | 19.14 | 456.1 | 183.6 |
| 2027 | 1,039.0 | 155.8 | 31.2 | 0.34 | 22.1 | 32.14 | 419.4 | 187.3 |
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About GPT-4.1
Capabilities
Categories
Specifications
- Provider
- Openai
- Released
- 2025-04-14
- Size
- XLARGE
- Parameters
- Not disclosed
- Context
- 1,047,576 tokens
