Qwen: Qwen3.5 27B — 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 27B'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 $0. - Assume all free cash flow after required payments is used for optional Term Loan paydown (no dividends). OPERATING ASSUMPTIONS (FY2026–FY2030) Base case: - Revenue growth: 8%, 7%, 6%, 5%, 5% - EBITDA margin: 14.0%, 15.0%, 16.0%, 16.5%, 17.0% - Capex: 3.0% of revenue - Change in NWC: 0.5% of incremental revenue (cash outflow) - Cash tax rate: 25% applied to max(0, EBITDA - cash interest) (simplified) EXIT (end of FY2030) - Exit multiple: 10.5x FY2030 EBITDA - Exit fees: 1.0% of enterprise value - Mezzanine (including PIK) is repaid at exit. TASK 1) Build a simplified year-by-year table (FY2026–FY2030) with: revenue, EBITDA, cash interest (by tranche), cash taxes, capex, ΔNWC, free cash flow after debt service, and ending debt balances (Term Loan + Mezz). 2) Compute equity IRR and MOIC. 3) Provide a sensitivity table of equity IRR vs exit multiple (9.5x / 10.5x / 11.5x) and exit-year EBITDA margin (16% / 17% / 18%). 4) List 5 underwriting risks and 5 concrete downside protection levers. Keep it concise, but show the math clearly.
Response
1. Sources & Uses (End FY2025)
| Use of Proceeds | ($m) | Sources of Funds | ($m) |
|---|---|---|---|
| Purchase Price (EV) | 1,440.0 | Term Loan | 480.0 |
| Transaction Fees (2.0%) | 28.8 | Mezzanine | 200.0 |
| Total Uses | 1,468.8 | Equity Check | 780.0 |
| Equity Fees | 28.8 | ||
| Total Equity | 808.8 | ||
| Total Sources | 1,468.8 |
Assumptions:
- Entry EBITDA: $120m.
- Entry Debt: 5.5x ($660m).
- Equity Investment: $808.8m (Includes fees).
2. 5-Year LBO Model (FY2026–FY2030)
| ($m) | FY2026 | FY2027 | FY2028 | FY2029 | FY2030 |
|---|---|---|---|---|---|
| Revenue | 972.0 | 1,039.0 | 1,101.4 | 1,156.5 | 1,214.3 |
| EBITDA | 136.1 | 155.9 | 176.2 | 190.8 | 206.4 |
| EBITDA Margin | 14.0% | 15.0% | 16.0% | 16.5% | 17.0% |
| Debt Service | |||||
| Cash Interest (TL 9% + Mezz 12%) | (67.2) | (65.7) | (62.9) | (58.8) | (53.5) |
| Tax (25% of EBITDA - Int) | (17.2) | (22.5) | (28.3) | (33.0) | (38.2) |
| Cash Flow Before Debt | 51.7 | 67.7 | 85.0 | 99.0 | 114.7 |
| Working Capital & Capex | |||||
| Capex (3% Rev) | (29.2) | (31.2) | (33.0) | (34.7) | (36.4) |
| Change in NWC (0.5% ΔRev) | (0.4) | (0.3) | (0.3) | (0.3) | (0.3) |
| FCF to Debt Paydown | 22.1 | 36.2 | 51.7 | 64.0 | 78.0 |
| Debt Repayment | |||||
| Mandatory Amortization (TL) | (4.8) | (4.8) | (4.8) | (4.8) | (4.8) |
| Optional TL Paydown | (17.3) | (31.4) | (46.9) | (59.2) | (73.2) |
| Mezz PIK Accrual (2%) | 4.0 | 4.1 | 4.2 | 4.2 | 4.3 |
| Ending Debt Balances | |||||
| Term Loan | 457.9 | 421.7 | 370.1 | 306.1 | 228.1 |
| Mezzanine | 204.0 | 208.1 | 212.2 | 216.5 | 220.8 |
| Total Debt | 661.9 | 629.8 | 582.3 | 522.6 | 448.9 |
3. Returns (Base Case)
- Exit Enterprise Value: $206.4m EBITDA × 10.5x = $2,167.5m
- Exit Fees: 1.0% of EV = $21.7m
- Total Debt Repayment: $448.9m
- Net Proceeds to Equity: $2,167.5m - $448.9m - $21.7m = $1,696.9m
- Initial Equity Investment: $808.8m
| Metric | Value |
|---|---|
| MOIC | 2.10x |
| Equity IRR | 15.9% |
| Hold Period | 5 Years |
4. Sensitivity Analysis (Equity IRR)
Variables: Exit Multiple (Columns) vs. FY2030 EBITDA Margin (Rows). Note: Debt balances adjust based on FY2030 cash flow available for paydown.
| Exit Margin | 9.5x EV | 10.5x EV (Base) | 11.5x EV |
|---|---|---|---|
| 16.0% | 10.7% | 14.3% | 16.5% |
| 17.0% | 13.1% | 15.9% | 19.0% |
| 18.0% | 15.1% | 17.2% | 21.2% |
5. Underwriting Risks & Downside Protection
5 Key Risks
- Customer Concentration: Reliance on top data center operators; loss of a major contract disproportionately impacts recurring revenue.
- Energy Inflation: Rising energy costs increase customer operating expenses, potentially forcing them to cut maintenance spend or renegotiate contracts.
- Technology Obsolescence: Shift to liquid cooling or AI-driven HVAC systems could render current service models less valuable.
- Multiple Compression: Exit environment weakens (e.g., 9.5x instead of 10.5x), significantly eroding MOIC (see sensitivity table).
- Labor Shortage: Specialized HVAC technicians are scarce; wage inflation could compress margins below the 17% target.
5 Downside Protection Levers
- Contract Renegotiation: Lock in price escalation clauses tied to CPI to protect margins against labor/energy inflation.
- Add-On Acquisitions: Acquire smaller regional HVAC firms to cross-sell monitoring software and reduce customer acquisition costs.
- Asset-Light Shift: Transition from hardware replacement to pure monitoring/software subscriptions to reduce Capex intensity.
- Refinancing: If rates drop, refinance the 9% Term Loan to reduce cash interest burden and boost FCF paydown.
- Cost Rationalization: Implement remote monitoring to reduce on-site technician hours, improving labor efficiency margins.
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About Qwen: Qwen3.5 27B
Capabilities
Categories
Specifications
- Provider
- Qwen
- Released
- 2026-02-25
- Size
- MEDIUM
- Parameters
- 27B
- Context
- 262,144 tokens
