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Generally, an IRR calculation is part of an LBO model and its purpose is to determine that annualized return rate on invested capital. Rather than go into detail just go to wiki or investopedia and then come back and ask specific questions.
PE firms want to realize an IRR of > 20%, using a lot of leverage. This can be executed through an LBO. If a firm has stable (free) cash flows, it can repay its debt obligations. At the same time, equity will rise, because debt is declining. Given the time horizon (usually 5 year), the IRR can therefore be calculated by the difference in equity value from the starting point to the exit point, adjusted for the time horizon. Starting point and exit point can be determined through an multiple analysis btw.
It depends how the waterfall structure of the PE firm is structured. The key point here is IRR needs to beat the hurdle rate.
I think Junkbondswap pretty much summarized it. I dont know what the hell you other clowns are talking about... beginning equity and ending equity and waterfall structure of the PE firm? Save the bullshit for your class discussions.
Everything said above is correct, our models always include a waterfall tab to account for the various equity participants (common, pref, etc.) and there is always a hurdle rate that must be taken into account.
Below is a simple example of a standard XIRR calc (assumes an exit in 2013)
LTM EBITDA $200M Exit Multiple 8x EV = $1600M
Less Debt -$200 Equity Value $1400
Investor 1 IRR (Owns 50%) Cash Flow 1/1/2008 1/1/2009 1/1/2010 1/31/2013 (80.0) (50.0) (50.0) 700.0 (700=.5*Equity Value)
XIRR = 36.6% Investor 1 equity invested = $180M Equity Proceeds at exit = $700M Equity multiple 3.89x
Marcus Halberstram stfu noob. The IRR is a time-weighted return expressed as a percentage. You calculate this annualized return over your invested equity. That is why I said beginning and ending.
I hope you're atleast in the industry.
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