How to calculate payback period in PE case

Private Equity
New answer on Apr 01, 2020
5 Answers
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Anonymous A asked on Mar 01, 2020

Hi, I'm wondering how to calculate the payback period in a PE case.

If the goal is to have a payback period less then 2 years, do I need to consider the

the amount earned from selling the company at a higher price?

Or, I only need to consider the profit achieved annually?

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Francesco
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Content Creator
replied on Apr 01, 2020
#1 Expert for Coaching Sessions (3.600+) | 1.300+ Reviews with 100% Recommendation Rate | Ex BCG | 8+ Years of Coaching

Hi there,

The payback period is the time needed for an investment to reach a breakeven point. As a consequence, assuming the company is bought at the beginning of year one, you can simply check the sum of the inflows for profits and the expected selling price at that time would be at least equal to the buying price.

Best,

Francesco

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Andrea
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replied on Mar 06, 2020
OW | HEC Paris | Helped 20+ people entering BCG, OW, ATK etc.

Hi,

As said I would clarify what they meaning.
Having worked in leveraged finance, I can tell you that a key metric is the debt payback period, i.e. in how many years the Free Cash Flow accumulated will cover all the principal debt.
A good metric to keep in mind, especially if you apply for the corporate finance practice :)

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Sidi
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replied on Mar 02, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

Hi! This honestly doesn't make too much sense. The bulk of the cashflow for a PE fund is usually realized in the event of reselling the asset. So ususally the payback is at the end of the ownership period.

Cheers, Sidi

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Clara
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replied on Mar 02, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Agree with Sidi.

Can you share the exact prompt of the case? Something here we are not undestanding.

Cheers,

Clara

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Anonymous B replied on Mar 01, 2020

Doesn't that go hand-in-hand?

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Francesco gave the best answer

Francesco

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