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FRM Part II · FRM Exam Part II · Private Markets Investing

In a leveraged buyout, which change would most directly increase the sponsor's equity return if the exit enterprise value is unchanged?

Greater debt repayment from free cash flow during the holding period most directly raises the sponsor's return. With exit enterprise value fixed, lower remaining net debt means higher exit equity value, while a higher entry price, longer holding without paydown, or costlier debt reduces returns.

  1. AA higher amount of debt repaid from the company's free cash flow during the holding periodCorrect
  2. BA higher purchase price paid at entry funded entirely with equity
  3. CA longer holding period with no cash flow to repay debt
  4. DA lower interest coverage ratio due to higher borrowing costs

Explanation

With fixed exit enterprise value, exit equity equals EV minus net debt, so greater debt paydown raises exit equity and the return. A higher entry price funded with equity raises cost, a longer period without paydown lowers IRR, and higher borrowing costs reduce cash available.

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