How can I add an IPO exit to my LBO?

IPO Exits can be added to new or existing Mosaic LBOs through the Special Situations panel. 

Including IPO Exits in a New LBO

In a new LBO, as you complete the various stages in the assumptions "Wizard," navigate to the Special Situations Step and check the box for IPO Exits: 

Advance to the next step, and complete the required fields and update any default fields as required for your deal.

Adding IPO Exits to an Existing LBO

When viewing an existing LBO, navigate to the lefthand sidebar, then down to the "Special Situations" sections, then to "IPO Exit" as shown below:

Complete the required fields and update any default fields as required. Mosaic will recalculate automatically and produce IPO outputs as shown above.

Viewing IPO Exit Details (Dashboard)

To view detailed calculations supporting the IPO Exit IRR and MOIC displayed on the Summary tab, navigate to the IPO tab as shown below:

Viewing IPO Exit Details (Excel)

Detailed calculations supporting the IPO Exit can be reviewed in full transparency by downloading the model to Excel. Click the download button on the top navigation bar as shown below:

When the Excel file opens, navigate to the IPO tab to review the calculations therein.  

For further information supporting the methodology employed by Mosaic's IPO Exit functionality, please visit our technical guide hosted at Mosaic Academy linked below:

IPO Exit Modeling Guide

• IPO Date. Select a date in the forecast period when you will sell the first shares to public investors. We’ll call this the IPO date. Most sponsors will assume they will IPO in year 3 or 4 of their investment period, to give the company time to (a) continue to grow and show historical growth rates necessary for a successful IPO, and (b) produce enough history of high-quality financial statements under the sponsor’s management to be able to file an S1 (the IPO registration document filed with the SEC).
• Sell-Down Period. Select a period of time – stated in number of years – that it will take to sell all of the sponsors shares to public investors. Firms typically assume it will take 2-4 years to sell down the remaining shares post-IPO. This is because the public market can only support so much supply of shares available for a given issuer at a given time.
• Exit Multiple. The valuation multiple that public market investors will apply to this company when they buy shares sold in the IPO and thereafter (i.e., follow-on share sales).
• Maximum Leverage at IPO. When it comes time to IPO, private equity deals are often too highly levered (i.e., too much debt) to be attractive to public markets investors. Public markets investors will only accept modest amounts of leverage – typically this is around 3.5x Debt / LTM EBITDA or less. Place here an assumption that reflects what you believe is the maximum leverage the current public markets would tolerate for your company.
• Size of Initial Offering. A key assumption in an IPO exit analysis is how much equity you want to sell in the IPO itself (i.e., the first moment shares are sold to the public). Bankers usually size this as a percentage of the total equity value of the business – often ~20% - referred to as the “float” or the amount available for purchase by public shareholders (i.e., the amount “floated” to the public vs. held privately). In reality, like anything else the actual amount will be dictated by market demand for the issuance at the valuation on offer.
• Initial Price per Share. This is just illustrative – most PE firms start with $10 as a nice round number – but it doesn’t really matter what you pick (will just drive the number of shares created at IPO holding equity value constant).
• IPO Discount. Remember, investment banks market IPO shares to new investors at a discount to compensate them for the risk of buying a new / unproven stock – typically in the range of ~10-15%. This is the “Discount at IPO” field in Mosaic. To compute the discounted share price at IPO, multiply the undiscounted initial share price you selected by (1 – the IPO Discount). For example, a $10.00 share sold at a 15% discount would be purchased by IPO investors at $8.50 / share. We recommend setting up two assumptions for discounts – one for the discount at IPO which is typically high (i.e., 10-15%) and one for follow-on offerings post IPO, which typically require a lower discount (e.g., 7-10%).
• IPO Underwriter Fees. These fees are paid to the investment banks who market the company ahead of its IPO. An investment bank like Goldman or JPMorgan will fly the private equity firm and management team around the country to meet with large institutional investment managers (e.g., Fidelity, Blackrock, Vanguard) to tell the company’s story and “build a book” of orders for the company’s stock at IPO. They typically get 4-7% of the IPO proceeds as a fee for providing this service. As with the discount, we recommend setting up two assumptions for these fees – one for fees at IPO and one for follow-on offerings post IPO, which are typically lower.