The Rule of 72 (with Private Equity Interview Questions)

[@ChiefBeef3]

Watch your vids, bought the PE course, and learned a ton. I'm at a small/middle-market investment bank and I was hoping you could do a video on small/middle-market private equity as I'm looking to transition into that sector. Another user said something akin to this as well & you were going to look into something like that, but there wasn't a whole lot of empirical data to go off of unlike firms with $1B+ of capital.

[@michaelking1647]

Great video for quick LBO mental math! I will be using this for sure. Rule of 72, 114, 144 - no having to memorize IRR tables 🙌🏻

[@ksjb85]

Dig your vids - I'm an Economics major (3 classes left!) considering getting an MBA in finance from a T15 school. Ultimately I want to become an Impact investor in the Private Equity space (btw I'm 36 so time is of the essence 😅) but thanks for the vids. You have a knack for breaking down things!

[@PeakFrameworks]

Good luck, impact investing space seems really cool!

[@Woodshadow]

Awesome video as always. You made this extremely simple to understand.

[@HouseofGhibili]

Thank you so much for this, absolute lifesaver! Do you have any tips on 5x, 6x, 7x ... return on multiples though?

[@PeakFrameworks]

I think you can kind of do it for multiples of 2 and 3, but there's not one for 5x and 7x to my knowledge. Rule of 216 works well for 8x. I just quickly checked a Rule of 186 (72 + 114) for 6x, but it's not quite as accurate. In an interview setting, they'll generally give you numbers that you can work backwards from. In a non-interview setting... you should probably be using Excel for returns that big

[@ArbitraryThought]

If you are down to memorize numbers, please refer to the below for the "Rules" for 5x and beyond. E.g., for MoM of 7x in 4 years, applying the Rule of 250, you would get 250/4 >> 62.5%, while the actual IRR is 62.7%. The table can be found in 11:20 of a video I made, link: kzbin.info/www/bejne/l3Srd5qFeL1knrc 5x: 198 6x: 226 7x: 250 8x: 272 9x: 292 10x: 311 11x: 328 12x: 344 13x: 359 14x: 373 15x: 387 16x: 400 17x: 412 18x: 424 19x: 435 20x: 446 21x: 456 22x: 466 23x: 476 24x: 485 25x: 494 26x: 503 27x: 511 28x: 520 29x: 528 30x: 536 31x: 543 32x: 551 33x: 558 34x: 566 35x: 573 36x: 579 37x: 586 38x: 593 39x: 599 40x: 606

[@HelloColorClear]

Matt in your LBO example you don’t count the value of the cash flows you receive as the owner over the course of the investment?

[@PeakFrameworks]

Well, we assume that the cash flows are used to pay down debt. We also aren't explicitly told that there is positive cash flow here (only EBITDA).

[@andrewpj7]

Hello, I appreciate your content on providing educational and intuitive approach to finance, especially private equity. But do you provide courses in corporate development (it can be basic understanding, career path, or any related topics)? If so, can you link me to the course? If not, do you plan to tackle it in the future?

[@PeakFrameworks]

We don't have a corp dev course (though we have an overview of corp dev video coming out in a bit). We have a general corporate finance / valuation course, but that might be different from what you're looking for: www.peakframeworks.com/valuation-finance-starter-kit Honestly I think corp dev recruiting is pretty similar to IB, but more focus on specific company research

[@derekliu8512]

Hey Matt, for the last question, I was just wondering, does paying down the debt not counteract the IRR in someway? If you had bought the company with just debt, then would that mean you have an infinite IRR as the debt is paid off as you sell the company?

[@PeakFrameworks]

I'll first clarify that in an LBO, we're focused on the IRR of the equity investor. The debt investor by definition doesn't actually get access to any of the profits of the company. Debt investors only get the interest on the debt and their principal. That's why we calculate this using levered free cash flow. Paying down the debt does not counteract the IRR (though I'm not sure what you mean by counteract). Paying down debt generally is actually going to increase the investment's IRR because you're reducing the amount of total interest you have to pay. For your second question, the mechanics don't work quite like that because debt only gets their interest / principal. You don't get the whole company for debt. But even if you were a debt investor who received the whole company, it still wouldn't be infinite IRR. You'd have to map out the cash inflows and see what your return would be. It's not like the basis of your investment shrinks to 0 because the debt is paid down. Getting your debt paid down would count as a cash inflow. You should check out the LBO video if you haven't already to make sure you know the mechanics.

[@blakeandrews3613]

Hey Matt, I am currently looking at pursuing an MBA from Ivey business school at western as well as the CFA designation, in order to obtain a position at an investment bank. However, my bachelors degree is from Athabasca University which is by no means a top tier school. If I get an MBA from Ivey and a CFA designation, will anyone care where I did my bachelors? Please let me know your thoughts on this. Thanks!

[@ArbitraryThought]

@PeakFrameworks Hi Matt - thank you for the video! Learnt a lot from you in general. For IRR/CAGR estimation, I have formulated the Rule of 40M, where M is the MoM. If you use [40 * M / No. of Years] for the questions in the video, it provides decent approximations. The neat part is, The Rule of 40M also works for MoM that are not whole numbers. For MoM of 2.8x in 3.5 years, the Rule of 40M gives us that the IRR is 40*2.8/3.5 >> 32%, while the actual IRR is 34%. I have made a video about it, feel free to check it out! Link: kzbin.info/www/bejne/l3Srd5qFeL1knrc

[@EdmundKirk-c6j]

Perez Robert Gonzalez Shirley Robinson Deborah

[@tootplox]

Damn your ideas must be running out huh

[@PeakFrameworks]

😂 I mean this is pretty important!