AI Tools for Private Equity Associates

Four key criteria: (1) EBITDA margin stability — LBOs require predictable cash generation to service debt; (2) Free cash flow conversion — target at least 60% of EBITDA converting to FCF; (3) Revenue predictability — recurring and subscription revenue is most highly valued; (4) Capex intensity — asset-light businesses support higher leverage. The ideal LBO candidate has 35%+ EBITDA margins, 70%+ FCF conversion, 60%+ recurring revenue, and capex below 5% of revenue.

Work backwards from your return hurdle (typically 20% IRR or 2.5x MOIC for a 5-year hold). Build the LBO model at base case assumptions, then solve for the entry EV where IRR = 20%. That is your maximum bid. Sanity-check against recent sector comps — if your max bid is more than 1–2x turns above comparable transactions, you need a specific premium justification such as superior growth, proprietary deal, or synergies with an existing portfolio company.

At minimum: (1) Screen the company and all C-suite executives for SEC enforcement actions and FINRA disciplinary history using the Regulatory Actions tool; (2) Search for DOJ investigations and civil class action lawsuits in news databases; (3) Check for FCPA (Foreign Corrupt Practices Act) issues if the company has international operations; (4) Review the most recent 10-K risk factors section for government investigation disclosures; (5) Check state regulatory licenses for any disciplinary actions (particularly for healthcare, financial services, or environmental businesses).

A sponsor-to-sponsor secondary is buying a company from another PE firm — typically after the seller has owned it 4–7 years and completed initial value creation. Entry multiples are usually higher. A platform acquisition is buying the first company in a new sector where you intend to add bolt-on acquisitions — entry multiples may be lower but complexity grows with each add-on. Platform strategies require more intensive operations work but can generate higher returns through multiple expansion and scale.

When credit markets are tight — spreads wide, OID high, lenders unwilling to finance certain sectors — PE sponsors must either use more equity (reducing returns) or accept less leverage (modeling lower IRRs). In 2022–2023, TLB spreads widened 100–150bp and OID moved from 98 to 95–96 cents, adding 2–3% to effective borrowing costs and compressing IRRs by 3–5 percentage points for deals with identical EBITDA growth and exit multiple assumptions. Research current market conditions using the Deep Research tool before finalizing your debt structure assumptions.