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 397B A17B'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 $0. - Assume all free cash flow after required payments is used for optional Term Loan paydown (no dividends). OPERATING ASSUMPTIONS (FY2026–FY2030) Base case: - Revenue growth: 8%, 7%, 6%, 5%, 5% - EBITDA margin: 14.0%, 15.0%, 16.0%, 16.5%, 17.0% - Capex: 3.0% of revenue - Change in NWC: 0.5% of incremental revenue (cash outflow) - Cash tax rate: 25% applied to max(0, EBITDA - cash interest) (simplified) EXIT (end of FY2030) - Exit multiple: 10.5x FY2030 EBITDA - Exit fees: 1.0% of enterprise value - Mezzanine (including PIK) is repaid at exit. TASK 1) Build a simplified year-by-year table (FY2026–FY2030) with: revenue, EBITDA, cash interest (by tranche), cash taxes, capex, ΔNWC, free cash flow after debt service, and ending debt balances (Term Loan + Mezz). 2) Compute equity IRR and MOIC. 3) Provide a sensitivity table of equity IRR vs exit multiple (9.5x / 10.5x / 11.5x) and exit-year EBITDA margin (16% / 17% / 18%). 4) List 5 underwriting risks and 5 concrete downside protection levers. Keep it concise, but show the math clearly.
Response
1. Sources & Uses (Entry FY2025)
| Uses ($m) | Sources ($m) | ||
|---|---|---|---|
| Enterprise Value (12.0x $120m) | $1,440.0 | Term Loan (4.0x) | $480.0 |
| Transaction Fees (2.0% EV) | $28.8 | Mezzanine (1.5x) | $180.0 |
| Total Uses | $1,468.8 | Equity (Plug) | $808.8 |
| Total Sources | $1,468.8 |
- Entry Equity Check: $808.8m
- Total Debt: $660.0m ($480m TL + $180m Mezz)
2. 5-Year Financial Model (FY2026–FY2030)
All figures in $m. Interest calculated on opening debt balance. TL Amortization = 1% of opening TL balance. Mezz PIK accrues to principal.
| FY | 2026 | 2027 | 2028 | 2029 | 2030 |
|---|---|---|---|---|---|
| Revenue Growth | 8.0% | 7.0% | 6.0% | 5.0% | 5.0% |
| 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 |
| Debt Service | |||||
| Term Loan (Op Bal) | $480.0 | $456.1 | $417.9 | $364.1 | $297.6 |
| Mezzanine (Op Bal) | $180.0 | $183.6 | $187.3 | $191.0 | $194.8 |
| TL Interest (9.0%) | $43.2 | $41.0 | $37.6 | $32.8 | $26.8 |
| Mezz Cash Int (12%) | $21.6 | $22.0 | $22.5 | $22.9 | $23.4 |
| Mezz PIK (2.0%) | $3.6 | $3.7 | $3.7 | $3.8 | $3.9 |
| Total Cash Interest | $64.8 | $63.1 | $60.1 | $55.7 | $50.2 |
| Cash Flow | |||||
| Cash Taxes (25%)* | $17.8 | $23.2 | $29.1 | $33.8 | $39.1 |
| 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 Before Debt | $88.7 | $101.2 | $113.9 | $122.2 | $130.8 |
| Less: Cash Interest | ($64.8) | ($63.1) | ($60.1) | ($55.7) | ($50.2) |
| Less: TL Req. Amor. (1%) | ($4.8) | ($4.6) | ($4.2) | ($3.6) | ($3.0) |
| Optional TL Paydown | $19.1 | $33.6 | $49.7 | $62.8 | $77.6 |
| Total TL Paydown | $23.9 | $38.2 | $53.9 | $66.5 | $80.6 |
| Ending Debt Balances | |||||
| Term Loan | $456.1 | $417.9 | $364.1 | $297.6 | $217.0 |
| Mezzanine (w/ PIK) | $183.6 | $187.3 | $191.0 | $194.8 | $198.7 |
| Total Net Debt | $639.7 | $605.2 | $555.1 | $492.4 | $415.7 |
*Taxable Income = EBITDA - Cash Interest. Tax = 25% of Taxable Income.
3. Returns Analysis (Base Case)
Exit Calculation (End FY2030)
- Exit EBITDA: $206.6m
- Exit Multiple: 10.5x
- Exit Enterprise Value: $2,169.5m
- Less: Exit Fees (1.0%): ($21.7m)
- Less: Total Net Debt: ($415.7m)
- Exit Equity Value: $1,732.1m
Investment Returns
- Entry Equity: $808.8m
- Exit Equity: $1,732.1m
- MOIC: 2.14x
- IRR: 16.4%
4. Sensitivity Analysis (Equity IRR)
Assumptions: Exit Multiple varies on X-axis. EBITDA Margin varies on Y-axis (impacts Exit EBITDA and cumulative debt paydown). Net Debt adjusted for margin scenarios (Low Margin ~$440m, Base ~$416m, High ~$390m).
| Exit Multiple ↓ / Margin → | 16.0% | 17.0% (Base) | 18.0% |
|---|---|---|---|
| 9.5x | 12.1% | 13.6% | 15.2% |
| 10.5x (Base) | 14.4% | 16.4% | 18.4% |
| 11.5x | 16.6% | 19.1% | 21.5% |
5. Underwriting Risks & Mitigations
| Underwriting Risks | Downside Protection Levers |
|---|---|
| 1. Customer Concentration: Data center clients may be concentrated among hyperscalers; loss of one contract impacts recurring revenue significantly. | 1. EBITDA Covenants: Set minimum consolidated EBITDA covenants on Term Loan to trigger early warning if margins compress. |
| 2. Margin Expansion Execution: Base case assumes 370bps margin expansion (13.3% → 17.0%); failure to automate monitoring ops limits cash flow. | 2. Cost Control Rights: Board control over OpEx budget and hiring freezes if quarterly EBITDA misses budget by >5%. |
| 3. Interest Rate Exposure: 9% TL + 12% Mezz is high; any further rate hikes or refinancing risk at exit could compress returns. | 3. Mandatory Prepayment: Sweep 100% of excess cash flow (as modeled) to pay down highest-cost debt (Mezz optional prepay if allowed, else TL). |
| 4. Technology Obsolescence: New HVAC monitoring tech could render HTS legacy monitoring contracts obsolete before renewal. | 4. Capex Escrow: Ringfence 3% revenue capex specifically for tech upgrades; cannot be diverted to dividends or fees. |
| 5. Exit Multiple Compression: Entry at 12.0x, Exit at 10.5x. Market sentiment shift could push exit multiple below 9.5x (see sensitivity). | 5. Dividend Recaps: If performance exceeds base case (e.g., 18% margin), take interim dividend at Year 3 to return capital early. |
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About Qwen: Qwen3.5 397B A17B
Capabilities
Categories
Specifications
- Provider
- Qwen
- Released
- 2026-02-16
- Size
- XLARGE
- Parameters
- 397B (17B active)
- Context
- 262,144 tokens
