Cookie- und Privatsphäre-Einstellungen

Diese Webseite nutzt Cookies, um essenzielle Funktionen wie den User-Login und Sessions zur Verfügung zu stellen. Wir nutzen zudem Cookies und Software von Dritten, um Dein Surf-Erlebnis auf preplounge.com zu verbessern. Du kannst entweder nur essenzielle Cookies oder alle Cookies akzeptieren. Du kannst Deine Einstellungen jederzeit in unseren Cookie- und Privatsphäre-Einstellungen ändern. Dieser Link ist im Footer unserer Seit zu finden. Wenn Du mehr Informationen benötigst, besuche bitte unsere Datenschutz-Erklärung.

Datenverarbeitung in den USA: Indem Du auf "Ich akzeptiere" klickst, willigst Du zugleich gem. Art. 49 Abs. 1 S. 1 lit. a DSGVO ein, dass Deine Daten in den USA verarbeitet werden (von Google LLC, Facebook Inc., LinkedIn Inc., Stripe, Paypal).

Individuell einstellen Ich akzeptiere
3

Is this ROI good or not for an average PE firm?

Hi PrepLounge community,

I was not sure about a case answer regarding the evaluation of an investment for a PE firm

Simplified Scenario:

  • Up-front cost: -8M (beginning of year1) - CAPEX lasting 5 years
  • Cash Flow: +2M every year for five years
  • ROI over 5 years: (2M * 5 - 8M)/8M = 2M/8M = 25%
  • Profitability: - Annual Revenue: 2M - Annual Cost: 8M/5 = 1.6M --> Profit Margin = 0.4M / 2M = 20%
  • Time-value is not considered
  • No synergies / extra-revenues / extra-costs

Doubts

Is ROI 25% over 5 years enough? I don't understand if I can say that annual ROI is roughly 5%, nor if this is a good benchmark.

More in detail:

1. What should a PE fund do with this investment? (Of course, generally speaking)
2. What should an industrial company do? The annual profit margin is solid (20%)

Thank you so much

Anonymous

Hi PrepLounge community,

I was not sure about a case answer regarding the evaluation of an investment for a PE firm

Simplified Scenario:

  • Up-front cost: -8M (beginning of year1) - CAPEX lasting 5 years
  • Cash Flow: +2M every year for five years
  • ROI over 5 years: (2M * 5 - 8M)/8M = 2M/8M = 25%
  • Profitability: - Annual Revenue: 2M - Annual Cost: 8M/5 = 1.6M --> Profit Margin = 0.4M / 2M = 20%
  • Time-value is not considered
  • No synergies / extra-revenues / extra-costs

Doubts

Is ROI 25% over 5 years enough? I don't understand if I can say that annual ROI is roughly 5%, nor if this is a good benchmark.

More in detail:

1. What should a PE fund do with this investment? (Of course, generally speaking)
2. What should an industrial company do? The annual profit margin is solid (20%)

Thank you so much

Anonymous

3 Antworten

  • Upvotes
  • Datum aufsteigend
  • Datum absteigend
Beste Antwort

Hello,

Just to give a ballpark figure, typical Buyout-focused PE firms target +20% IRR over a period of 5 years, implying a Multiple on Invested Capital (MoIC) of at least 3.0x. Notice that the profitability of the underlying asset is not so important; it's more of an input to achieve that.

On the case you presented:

  • ROI of 25%, thus MoIC of 1.25x is way too small
  • A key driver of profitability is the exit value, which you are not considering.. and what is the entry price? or is it a greenfield investment? (usually a PE firm acquires an established company)
  • Difficult to imagine a situation of annual cash flows of $2M and profits of $0.4M
  • Aren't you mixing CapEx and annual costs? Or is it a coincidence they are the same? And CapEx of 4x revenues is huge

In a nutshell, I would not invest in this deal and I believe you are making too simplistic assumptions.

Best,

Francisco

Hello,

Just to give a ballpark figure, typical Buyout-focused PE firms target +20% IRR over a period of 5 years, implying a Multiple on Invested Capital (MoIC) of at least 3.0x. Notice that the profitability of the underlying asset is not so important; it's more of an input to achieve that.

On the case you presented:

  • ROI of 25%, thus MoIC of 1.25x is way too small
  • A key driver of profitability is the exit value, which you are not considering.. and what is the entry price? or is it a greenfield investment? (usually a PE firm acquires an established company)
  • Difficult to imagine a situation of annual cash flows of $2M and profits of $0.4M
  • Aren't you mixing CapEx and annual costs? Or is it a coincidence they are the same? And CapEx of 4x revenues is huge

In a nutshell, I would not invest in this deal and I believe you are making too simplistic assumptions.

Best,

Francisco

Coaching mit Emily vereinbaren

100% Empfehlungsrate

92 Meetings

2.143 Q&A Upvotes

209 USD / Coaching

Hi,

Agree with Francisco that the 25% ROI over 5 years would be way to low for PE investment. It doesn't sound like a good investment.

As for the company itself, 20% might sound solid, but you really need to compare with other players in the industry to test whether 20% is good or bad.

Best,

Emily

Hi,

Agree with Francisco that the 25% ROI over 5 years would be way to low for PE investment. It doesn't sound like a good investment.

As for the company itself, 20% might sound solid, but you really need to compare with other players in the industry to test whether 20% is good or bad.

Best,

Emily

Coaching mit Francesco vereinbaren

100% Empfehlungsrate

3.539 Meetings

18.753 Q&A Upvotes

479 USD / Coaching

Hi there,

the answer depends on the goal of the company which you should clarify at the beginning, but a 25% return in 5 years seems low for a PE.

Not sure what you mean with What should an industrial company do?, as from what I understood the client is a PE firm and not an industrial company.

Best,

Francesco

Hi there,

the answer depends on the goal of the company which you should clarify at the beginning, but a 25% return in 5 years seems low for a PE.

Not sure what you mean with What should an industrial company do?, as from what I understood the client is a PE firm and not an industrial company.

Best,

Francesco

Verwandte Cases

zeb case: Quo vadis, Kunde?

61,4 Tsd. mal gelöst
zeb case: Quo vadis, Kunde? Die Bank zum Kurfürst Clemens August, eine national agierende Retail- und Privatkundenbank, ist in einer schwierigen Situation. Die Gewinne sind durch das anhaltende Niedrigzinsumfeld über die letzten Jahre beträchtlich gesunken. Parallel leidet die Bank an einem stetigen Abgang von Kunden. Zusätzlich macht sich der Vorstand Gedanken über die Digitalisierung der Finanzbranche und fragt sich, ob die Bank ausreichend vorbereitet ist.  Analysieren Sie die Situation der Bank und entwickeln Sie eine Lösung, um die Gewinnsituation nachhaltig zu verbessern. Berücksichtigen Sie dabei die Bedenken des Vorstandes in Bezug auf die Digitalisierung.
4.6 5 4545
| Bewertung: (4.6 / 5.0)

Die Bank zum Kurfürst Clemens August, eine national agierende Retail- und Privatkundenbank, ist in einer schwierigen Situation. Die Gewinne sind durch das anhaltende Niedrigzinsumfeld über die letzten Jahre beträchtlich gesunken. Parallel leidet die Bank an einem stetigen Abgang von Kunden. Zusätzli ... Ganzen Case öffnen

Caribbean Island – MBB Final Round

8,1 Tsd. mal gelöst
Caribbean Island – MBB Final Round A wealthy client has recently bought an island in the Caribbean. She has engaged us to identify possible uses for her new island.
4.6 5 395
| Bewertung: (4.6 / 5.0)

A wealthy client has recently bought an island in the Caribbean. She has engaged us to identify possible uses for her new island. Ganzen Case öffnen

PE Portfolio Strategy

6,8 Tsd. mal gelöst
PE Portfolio Strategy We are a private equity firm operating primarily in the automotive industry. We would like you to figure out whether we should increase our portfolio in the sensor market or not. We would like you to do a profit/margin growth potential analysis and tell us how we can add value to this company given the other companies in our portfolio.
4.1 5 365
| Bewertung: (4.1 / 5.0)

We are a private equity firm operating primarily in the automotive industry. We would like you to figure out whether we should increase our portfolio in the sensor market or not. We would like you to do a profit/margin growth potential analysis and tell us how we can add value to this company given ... Ganzen Case öffnen

Cutting Carbs - Divestiture in the Electrical Power Market

2,4 Tsd. mal gelöst
Cutting Carbs - Divestiture in the Electrical Power Market Our client is Energy England, one of northern England’s largest electric utility companies. They were created over the past decade through an aggressive series of mergers of existing utility companies each specializing in a single energy generation source. Recently, the CEO has embarked on an initiative to return to the core of the business. She is looking to increase free cash flow and cash reserves in order to prepare the business for evolving future trends.   The following can be verbally provided to interviewee if asked: Energy England is made up of assets across the energy-generation space. These include coal, gas, nuclear, and wind We are looking to divest from just one of our previous acquisitions (i.e one target is sufficient) There are no specific goals/metrics – the client trusts our judgement
4.2 5 46
| Bewertung: (4.2 / 5.0)

Our client is Energy England, one of northern England’s largest electric utility companies. They were created over the past decade through an aggressive series of mergers of existing utility companies each specializing in a single energy generation source. Recently, the CEO has embarked on an initi ... Ganzen Case öffnen