Qwen: Qwen3.5 122B A10B — 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
Qwen3.5 122B A10B'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 $0. - Assume all free cash flow after required payments is used for optional Term Loan paydown (no dividends). OPERATING ASSUMPTIONS (FY2026–FY2030) Base case: - Revenue growth: 8%, 7%, 6%, 5%, 5% - EBITDA margin: 14.0%, 15.0%, 16.0%, 16.5%, 17.0% - Capex: 3.0% of revenue - Change in NWC: 0.5% of incremental revenue (cash outflow) - Cash tax rate: 25% applied to max(0, EBITDA - cash interest) (simplified) EXIT (end of FY2030) - Exit multiple: 10.5x FY2030 EBITDA - Exit fees: 1.0% of enterprise value - Mezzanine (including PIK) is repaid at exit. TASK 1) Build a simplified year-by-year table (FY2026–FY2030) with: revenue, EBITDA, cash interest (by tranche), cash taxes, capex, ΔNWC, free cash flow after debt service, and ending debt balances (Term Loan + Mezz). 2) Compute equity IRR and MOIC. 3) Provide a sensitivity table of equity IRR vs exit multiple (9.5x / 10.5x / 11.5x) and exit-year EBITDA margin (16% / 17% / 18%). 4) List 5 underwriting risks and 5 concrete downside protection levers. Keep it concise, but show the math clearly.
Response
1. Investment Summary & Entry Economics
| Item | Calculation | Value ($m) |
|---|---|---|
| Entry EBITDA | FY2025 Actual | 120.0 |
| Entry EV | 12.0x EBITDA | 1,440.0 |
| Transaction Fees | 2.0% of EV | 28.8 |
| Total Uses | EV + Fees | 1,468.8 |
| Total Debt | 5.5x EBITDA (4.0x TL, 1.5x Mez) | 660.0 |
| Equity Check | Uses - Debt | 808.8 |
Debt Structure at Close:
- Term Loan: $480.0m (9.0% Cash Interest, 1.0% Amort)
- Mezzanine: $180.0m (12.0% Cash Interest, 2.0% PIK)
2. 5-Year Model (FY2026–FY2030)
Note: TL Amortization is 1% of original principal ($4.8m/yr). FCF is applied to TL paydown. All values in $m.
| Metric | FY2026 | FY2027 | FY2028 | FY2029 | FY2030 |
|---|---|---|---|---|---|
| Revenue | 972.0 | 1,040.0 | 1,102.4 | 1,157.6 | 1,215.4 |
| EBITDA Margin | 14.0% | 15.0% | 16.0% | 16.5% | 17.0% |
| EBITDA | 136.1 | 156.0 | 176.4 | 191.0 | 206.6 |
| Cash Interest | |||||
| Term Loan (9%) | 43.2 | 40.6 | 36.7 | 31.5 | 25.1 |
| Mezzanine (12%) | 21.6 | 22.0 | 22.5 | 22.9 | 23.4 |
| Total Cash Int | 64.8 | 62.6 | 59.2 | 54.4 | 48.5 |
| Cash Taxes (25%) | 17.8 | 23.3 | 29.3 | 34.1 | 39.5 |
| Capex (3% Rev) | 29.2 | 31.2 | 33.1 | 34.7 | 36.5 |
| ΔNWC (0.5% ΔRev) | 0.4 | 0.3 | 0.3 | 0.3 | 0.3 |
| FCF Available | 23.9 | 38.5 | 54.5 | 67.5 | 81.9 |
| Debt Paydown (TL) | (23.9) | (38.5) | (54.5) | (67.5) | (81.9) |
| Ending Debt Balances | |||||
| Term Loan | 451.3 | 408.0 | 348.7 | 276.4 | 189.8 |
| Mezzanine (incl. PIK) | 183.6 | 187.3 | 191.0 | 194.8 | 198.7 |
| Total Debt End | 634.9 | 595.3 | 539.7 | 471.2 | 388.5 |
3. Exit & Returns (Base Case)
- Exit EV: $206.6m EBITDA × 10.5x = $2,169.5m
- Exit Fees: 1.0% of EV = $21.7m
- Total Debt Repayment: $388.5m
- Net Proceeds to Equity: $2,169.5 - $21.7 - $388.5 = $1,759.3m
- Equity Invested: $808.8m
Returns:
- MOIC: $1,759.3 / $808.8 = 2.17x
- IRR: (2.17)^(1/5) - 1 = 16.8%
4. Sensitivity Analysis (Equity IRR)
Assumptions: FY2026–2029 operations fixed. FY2030 Revenue fixed ($1,215.4m). FY2030 EBITDA changes based on margin. Year 5 FCF and Debt Paydown adjust accordingly.
| Exit Margin \ Exit Multiple | 9.5x | 10.5x | 11.5x |
|---|---|---|---|
| 16.0% | 14.9% | 15.9% | 16.9% |
| 17.0% | 15.8% | 16.8% | 17.8% |
| 18.0% | 16.6% | 17.6% | 18.6% |
(Base Case highlighted: 17.0% Margin / 10.5x Multiple = 16.8% IRR)
5. Underwriting Risks & Downside Protection
Top 5 Risks:
- Customer Concentration: Data center operators may consolidate or renegotiate rates aggressively.
- Maintenance Cost Inflation: HVAC labor/materials inflation could compress margins if contracts are fixed-price.
- Technology Obsolescence: New cooling tech (e.g., liquid cooling) could render standard HVAC maintenance contracts less relevant.
- Interest Rate Risk: Floating rate debt exposure increases cash interest burden if rates rise beyond 9%.
- Contract Renewal Risk: Loss of key long-term service agreements at renewal dates would impact recurring revenue visibility.
Top 5 Downside Protection Levers:
- Covenant Headroom: Maintain EBITDA/Interest Coverage > 2.5x to avoid technical defaults during downturns.
- Debt Amortization Schedule: Negotiate lower mandatory amortization (e.g., 0.5% vs 1.0%) to preserve liquidity for OpEx shocks.
- Cost Structure Flexibility: Implement variable cost programs (e.g., subcontractor labor pools) to align OpEx with revenue dips.
- Refinance Strategy: Pre-paydown Term Loan with FCF to reduce interest burden; target refinancing Mezzanine with lower-cost senior debt at Year 3.
- Contract Escalators: Ensure new/renewed contracts include CPI-linked pricing to protect against inflationary margin erosion.
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About Qwen: Qwen3.5 122B A10B
Capabilities
Categories
Specifications
- Provider
- Qwen
- Released
- 2026-02-25
- Size
- LARGE
- Parameters
- 122B (10B active)
- Context
- 262,144 tokens
