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'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
1. Year‑by‑Year Operating & Debt Schedule (FY 2026‑FY 2030)
| FY | Revenue | EBITDA | Term‑Loan Interest (9 %) | Mezz‑Cash Interest (12 %) | Total Cash Interest | Tax (25 % of EBITDA‑Interest) | Capex (3 % Rev) | ΔNWC (0.5 % ΔRev) | Term‑Loan Amort. (1 % of principal) | FCF before optional pay‑down | Optional Term‑Loan Pay‑down | New Term‑Loan Principal | Mezz‑Principal (incl. PIK) | Ending Total Debt |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | $972.0 | $136.1 | $43.2 | $21.6 | $64.8 | $17.8 | $29.2 | $0.4 | $4.8 | $19.4 | $19.4 | $455.8 | $183.6 | $639.4 |
| 2027 | $1,039.4 | $155.9 | $41.0 | $22.0 | $63.0 | $23.2 | $31.2 | $0.3 | $4.6 | $23.7 | $23.7 | $427.5 | $187.3 | $614.8 |
| 2028 | $1,101.9 | $176.2 | $38.5 | $22.5 | $60.9 | $28.8 | $33.1 | $0.3 | $4.3 | $29.8 | $29.8 | $393.5 | $191.0 | $584.5 |
| 2029 | $1,156.96 | $190.8 | $35.4 | $22.9 | $58.3 | $33.1 | $34.7 | $0.3 | $3.9 | $30.1 | $30.1 | $359.4 | $194.8 | $554.2 |
| 2030 | $1,214.15 | $206.5 | $32.3 | $23.4 | $55.7 | $37.7 | $36.4 | $0.3 | $3.6 | $31.1 | $31.1 | $324.7 | $198.7 | $523.4 |
All cash flows are rounded to the nearest tenth of a million.
Key notes
- Cash interest = Term‑Loan Interest + Mezz‑Cash Interest.
- Tax is computed on EBITDA – cash interest (simplified).
- Capex = 3 % of revenue.
- ΔNWC = 0.5 % of incremental revenue (cash outflow).
- Term‑Loan Amortization = 1 % of the beginning‑of‑year principal.
- Optional pay‑down = all remaining cash after required payments is used to reduce Term‑Loan principal.
- Mezz‑Principal grows each year by the PIK interest (2 % of principal).
- Ending Total Debt = Term‑Loan Principal + Mezz‑Principal.
2. Equity Returns
Equity cash‑flow at close (t = 0):
- Purchase price = 12 × EBITDA = $1,440.0
- Transaction fees = 2 % × EV = $28.8 (paid by equity)
- Equity outlay = $1,440.0 – $660.0 + $28.8 = $808.8
Equity cash‑flow at exit (t = 5):
- FY 2030 EBITDA = $206.5
- Exit EV = 10.5 × EBITDA = $2,168.9
- Exit fees = 1 % × EV = $21.7
- Debt repaid = Term‑Loan $324.7 + Mezz $198.7 = $523.4
- Net proceeds to equity = $2,168.9 – $21.7 – $523.4 = $1,623.7
| Metric | Value |
|---|---|
| Equity IRR (5‑yr) | ≈ 14.9 % |
| MOIC | ≈ 2.01× |
IRR calculation: ((1,623.7 / 808.8)^{1/5} - 1 ≈ 14.9 %).
3. Sensitivity – Equity IRR & MOIC
| Exit Multiple | EBITDA Margin | EBITDA (FY 2030) | Exit EV | Net Equity Proceeds | IRR | MOIC |
|---|---|---|---|---|---|---|
| 9.5 × | 16 % | $194.3 | $1,847.3 | $1,305.4 | 10.0 % | 1.61× |
| 9.5 × | 17 % | $206.5 | $1,961.2 | $1,418.2 | 11.9 % | 1.75× |
| 9.5 × | 18 % | $218.6 | $2,077.1 | $1,533.9 | 13.7 % | 1.90× |
| 10.5 × | 16 % | $194.3 | $2,041.9 | $1,497.1 | 13.2 % | 1.85× |
| 10.5 × | 17 % | $206.5 | $2,168.9 | $1,623.7 | 14.9 % | 2.01× |
| 10.5 × | 18 % | $218.6 | $2,295.8 | $1,749.4 | 16.7 % | 2.16× |
| 11.5 × | 16 % | $194.3 | $2,236.6 | $1,680.8 | 15.8 % | 2.08× |
| 11.5 × | 17 % | $206.5 | $2,375.9 | $1,828.7 | 17.8 % | 2.26× |
| 11.5 × | 18 % | $218.6 | $2,514.1 | $1,965.6 | 19.4 % | 2.43× |
All other assumptions (revenue growth, capex, NWC, tax, debt structure) remain unchanged.
4. Underwriting Risks & Downside Protection Levers
| Risk | Description |
|---|---|
| Revenue growth slowdown | Market contraction or loss of key data‑center customers reduces top‑line growth below the 8‑5 % trajectory. |
| Margin erosion | Rising component, labor, or energy costs compress EBITDA margin despite operational improvements. |
| Customer concentration | Heavy reliance on a few large contracts; loss of one could materially affect cash flow. |
| Regulatory / compliance changes | New HVAC or data‑center standards increase compliance costs or require costly retrofits. |
| Operational risk | Failure to maintain service quality could trigger contract penalties or churn. |
| Protection Lever | How it mitigates the risk |
|---|---|
| Diversify customer base | Expand into smaller data centers and other industries (e.g., cloud providers) to reduce concentration. |
| Fixed‑price contracts with escalation | Lock in margins and protect against cost inflation. |
| Predictive‑maintenance & cost‑control programs | Lower OPEX and improve utilization, buffering against margin pressure. |
| Conservative debt service coverage | Maintain a DSCR > 1.5 by retaining cash, providing a cushion for revenue or margin dips. |
| Covenants & performance triggers | Include debt covenants that allow early repayment or require additional equity if key metrics fall below thresholds. |
All calculations are based solely on the supplied data and simplified assumptions. No external data were used.
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About Inception: Mercury
Capabilities
Categories
Specifications
- Provider
- Inception
- Released
- 2025-06-26
- Size
- MEDIUM
- Parameters
- Not disclosed
- Context
- 32,000 tokens
