This week Graham and Debs try something different.
Rather than dissecting a single deal, they go back to basics with one of the most important concepts in finance — the leveraged buyout — and build up from first principles using two of the biggest real-world examples in the market right now: the $18B acquisition of Hologic and the $55B acquisition of Electronic Arts.
Graham walks through the core LBO framework using an accessible house purchase analogy, explaining how leverage turns a 1.5x equity return into a 3x return, what drives that amplification, and what the key variables in any LBO analysis actually are.
From there the conversation covers what makes a good LBO candidate, the concept of cash conversion, how loan-to-value has evolved since the early days of private equity, and the three main value creation levers available to a private equity owner.
The second half of the episode puts theory into practice.
Graham runs a live napkin LBO on both the Hologic and EA deals — walking through sources and uses, entry multiples, debt paydown assumptions and return calculations — and asks the central question: do the numbers actually make sense?
The episode closes with a broader conversation about the evolution of private equity — from the generalist, high-leverage model of the early 90s to today's specialist, operationally-focused landscape — and what record levels of dry powder mean for returns going forward.
Key Discussion Points:
LBO fundamentals — what a leveraged buyout is, how leverage amplifies equity returns, and the key variables that drive an LBO model.
LBO candidates — what makes a business suitable for a leveraged buyout: cash conversion, recurring revenues, predictable cash flows.
Sources and uses — how deals get financed, what refinancing existing debt means and why a target's cash is a legitimate source of transaction funding.
Money multiple vs. IRR — what each metric measures and why you need both to evaluate a deal properly.
The Hologic LBO walkthrough — entry and exit multiples, debt structure, return sensitivity and the revolving credit facility question.
The EA deal — 30x entry multiple, $20 billion of debt, and why the base case numbers require a significant EBITDA growth story.
Co-investment and sovereign wealth — why mega-deals increasingly rely on structures beyond the traditional GP/LP fund.
The evolution of private equity — dry powder, multiple expansion and why operational improvement matters more than ever.
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Past performance is not indicative of future results.
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