Inception: Mercury 2 — Mini LBO Underwrite
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
Mercury 2'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) – 5‑yr LBO (FY2026‑FY2030)
All figures are $ m (rounded to two decimals).
| FY | Revenue | EBITDA | Term‑Loan Int. (9%) | Mezz Int. (12%) | Total Int. | Cash Tax (25% of EBITDA‑Int.) | Capex (3% Rev) | ΔNWC (0.5% ΔRev) | Required Amort. (4.8) | Free Cash Flow (EBITDA‑Int‑Tax‑Capex‑ΔNWC‑Amort.) | Term‑Loan Bal EOP* | Mezz Bal EOP* |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 972.00 | 136.08 | 43.20 | 21.60 | 64.80 | 17.82 | 29.16 | 0.36 | 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 | 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 | 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 | 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 | 4.80 | 75.74 | 216.29 | 198.73 |
*EOP = End‑of‑Period balance after the required 4.8 m amortisation and the optional pay‑down of the entire free‑cash‑flow for that year.
Mezzanine balance includes the 2 % PIK accrued each year (no cash principal repayment until exit).
1️⃣ Equity Returns – Base Case (Exit 10.5× EBITDA, 17 % margin)
- Enterprise value at exit = 10.5 × EBITDA₍2030₎ = 10.5 × 206.63 = 2 169.57
- Exit fees (1 % of EV) = 21.70
- Debt repaid at exit
- Term‑Loan = 216.29
- Mezzanine (incl. PIK) = 198.73
Equity proceeds = 2 169.57 – 21.70 – 216.29 – 198.73 = 1 732.85
Equity cash‑flow timeline
| t | Cash‑flow |
|---|---|
| 0 (close) | –808.80 (equity contribution = EV – debt + 2 % transaction fee) |
| 5 (FY2030 exit) | +1 732.85 |
- MOIC = 1 732.85 / 808.80 = 2.14×
- IRR = (1 732.85 / 808.80)^(1/5) – 1 = ≈ 16.5 %
2️⃣ Sensitivity of Equity IRR & MOIC
| Exit Multiple | EBITDA Margin | EBITDA (m) | Enterprise Value (m) | Equity Proceeds (m) | MOIC | IRR |
|---|---|---|---|---|---|---|
| 9.5× | 16 % | 194.47 | 1 847.47 | 1 413.98 | 1.75× | 11.8 % |
| 9.5× | 17 % | 206.63 | 1 962.95 | 1 528.30 | 1.89× | 13.6 % |
| 9.5× | 18 % | 218.78 | 2 078.42 | 1 642.61 | 2.03× | 15.2 % |
| 10.5× | 16 % | 194.47 | 2 041.93 | 1 606.50 | 1.99× | 14.7 % |
| 10.5× | 17 % | 206.63 | 2 169.57 | 1 732.85 | 2.14× | 16.5 % |
| 10.5× | 18 % | 218.78 | 2 296.19 | 1 858.21 | 2.30× | 18.1 % |
| 11.5× | 16 % | 194.47 | 2 236.41 | 1 799.03 | 2.22× | 17.3 % |
| 11.5× | 17 % | 206.63 | 2 376.19 | 1 937.41 | 2.40× | 19.1 % |
| 11.5× | 18 % | 218.78 | 2 515.97 | 2 075.79 | 2.57× | 20.8 % |
Assumption: Debt balances at exit remain those derived in the base‑case (no covenant breach that forces early repayment).
3️⃣ Underwriting Risks (Top 5)
| # | Risk | Why it matters |
|---|---|---|
| 1 | Revenue growth slowdown – actual FY2026‑30 growth < 8‑5 % | Reduces EBITDA, cash‑flow and ability to pay down term‑loan; lowers exit value. |
| 2 | EBITDA margin compression – higher labour or parts cost, competitive pricing | Directly cuts cash‑flow and exit EBITDA; also reduces tax shield. |
| 3 | Higher capex or NWC needs – unexpected data‑center upgrades or longer cash‑conversion cycles | Increases cash outflows, eroding free cash flow available for debt pay‑down. |
| 4 | Interest‑rate risk on term‑loan (if variable) or refinancing risk for mezzanine | Higher cash‑interest expense reduces tax‑shield and cash‑flow. |
| 5 | Operational disruption (e.g., a major data‑center outage) | Could trigger contract penalties, loss of recurring revenue, and higher working‑capital usage. |
4️⃣ Down‑side Protection Levers (Concrete)
| # | Lever | How it protects equity |
|---|---|---|
| 1 | Cash‑sweep covenant – any free cash flow after required payments must be used to retire term‑loan (beyond the 4.8 m amortisation) | Guarantees debt reduction even if cash‑flow falls, limiting leverage at exit. |
| 2 | Minimum EBITDA covenant (e.g., 12 % of revenue) with default‑remedy (forced amortisation) | Forces earlier principal repayment if performance deteriorates. |
| 3 | Mezzanine PIK cap – limit PIK accrual to 10 % of original principal, with optional conversion to equity | Prevents mezzanine balance from ballooning and diluting equity at exit. |
| 4 | Equity kicker / warrants on mezzanine | Provides upside upside to mezzanine holders, reducing the amount of cash needed to repay them at exit. |
| 5 | Asset‑based security on term‑loan (e.g., lien on HVAC equipment & receivables) | Improves senior lender recovery, allowing a tighter senior‑debt structure and lower equity exposure. |
Bottom line:
With the base‑case assumptions the transaction yields a 16.5 % IRR and 2.14× MOIC for the PE sponsor. Even under a modest downside (9.5× exit multiple & 16 % EBITDA margin) the IRR stays above 11 %, while a favorable upside (11.5× & 18 % margin) pushes IRR past 20 %. The key risks are growth and margin headwinds, and the most effective mitigants are cash‑sweep covenants, EBITDA covenants, and structured mezzanine terms.
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About Inception: Mercury 2
Capabilities
Categories
Specifications
- Provider
- Inception
- Released
- 2026-03-04
- Size
- MEDIUM
- Context
- 128,000 tokens
