I suspect the line is actually far more vertical. The current generation of LBO/PE investors have benefitted on the way in, money was easy, and on the way out, rates had often fallen, boosting cashflow during the period and increasing exit multiples.
Now flex the out comes when a) rates rise (and so running cashflow & exit multiples fall, b) real growth and/or margins fall due higher rates as competitors cut real prices desperate to keep up volumes to service their debt. (NB nominal doesnt matter because input costs will be rising).
The nice gentle downward slope of the last 20 years becomes a cliff.
Can you tell me why you start an analysis with EBITDA? I am a bit of an outsider, and never got why analysts use that as opposed to say unlevered free cash flows? Also why not start directly from the cost of capital, as opposed to an exit multiple?
You can see that I'm influenced by some value investing schools, but I'd really like to know about how the industry does things.
Great writing Bear. Getting to Ben Hunt levels of reducing financial complexity to simplicity! Really encapsulates your skeptical take on markets. Also makes clear what happens when liquidity dries up and all the growth at all cost business models can't be supported by ad spending and then the cascade starts as in 2001.
Clear explanation, thank you. So three variables should really be reduced to one critical independent variable and two minor orthogonal ones... and then the non-linearity becomes more obvious.
So why has the simplistic assumption of independent variables seen so much adoption? Maybe it's the reassuring answers...
I really enjoy these educational posts. Not coming from the investment world, they give me great background. I imagine that for those who are embedded in this world, it gives them pause to check their assumptions. Thanks for sharing your knowledge.
Thank you Bear! This is a great lesson!
Thanks for throwing that one in. Appreciate a glimpse into the VC side of things!
Interest only debt? No principal pay down on the debt incurred in the LBO?
I suspect the line is actually far more vertical. The current generation of LBO/PE investors have benefitted on the way in, money was easy, and on the way out, rates had often fallen, boosting cashflow during the period and increasing exit multiples.
Now flex the out comes when a) rates rise (and so running cashflow & exit multiples fall, b) real growth and/or margins fall due higher rates as competitors cut real prices desperate to keep up volumes to service their debt. (NB nominal doesnt matter because input costs will be rising).
The nice gentle downward slope of the last 20 years becomes a cliff.
I have absolutely no idea what this is about, but l see how clear it is to you.
This writing makes me think of an Escher drawing,love the execution but l don’t always comprehend the underlying principles
Hope that comparison doesn’t disqualify my appreciation
Great work,thank you
Great read I enjoyed it. So did he get the job?
I always enjoy reading your work.
Can you tell me why you start an analysis with EBITDA? I am a bit of an outsider, and never got why analysts use that as opposed to say unlevered free cash flows? Also why not start directly from the cost of capital, as opposed to an exit multiple?
You can see that I'm influenced by some value investing schools, but I'd really like to know about how the industry does things.
Thank you!
Great writing Bear. Getting to Ben Hunt levels of reducing financial complexity to simplicity! Really encapsulates your skeptical take on markets. Also makes clear what happens when liquidity dries up and all the growth at all cost business models can't be supported by ad spending and then the cascade starts as in 2001.
Clear explanation, thank you. So three variables should really be reduced to one critical independent variable and two minor orthogonal ones... and then the non-linearity becomes more obvious.
So why has the simplistic assumption of independent variables seen so much adoption? Maybe it's the reassuring answers...
Really great article.
Thank you! Very informational.
I really enjoy these educational posts. Not coming from the investment world, they give me great background. I imagine that for those who are embedded in this world, it gives them pause to check their assumptions. Thanks for sharing your knowledge.