Should You Invest in Leveraged Buyout? Or in a Private Island?

Return on Invested Capital, Return on Equity, Cost Opportunity. Here are some of the terms that we somewhat became familiar with, and that are used on a daily basis after two months in the INSEAD MBA. Actually, looking back, it’s quite incredible to think about the amount of material we’ve covered so far, and this is because the program is intensive. So intensive that you don’t ask for more. Because trying to make the INSEAD MBA more intensive would be like trying to improve Indian food by making it spicier, or making tequila more likely to give you a headache, or to ask a French person to complain more. By strengthening its main feature, it would make something awesome actually a bit less good.

So, imagine my reaction when the Private Equity Club informed us that we could take an optional training on Leveraged Buyout Modelling over the weekend.

And this brings me neatly on to Joyo Island, or Pulau Joyo, as they call it in Indonesia. It is a private island resort located in Riau Archipelago, which is blessed with pristine white sandy beaches and turquoise waters. Easily accessible from Singapore and Bintan, Joyo offers an ideal beach getaway with comprehensive traditional healthy massage, fabulous food and much more—all of which complement the island’s romantic location. I’m not making this up, it’s actually on the website. And as it turns out, this is precisely the destination that my INSEAD friends had chosen for the weekend. Why renting a private island, I asked. Well, because why not, they replied.

Obviously, this got me interested in private islands, and I started browsing online. It turns out that if the best luxury resorts feels too crowded for your taste, you can indeed buy your own private island. Prices in Asia start at USD 400,000 for 2.19ha of paradise in the Philippines, and go as high as price upon request.

Unfortunately for me, I’m somewhat looking to transition into a finance role upon graduation, which makes a training on LBO Modelling quite relevant. Furthermore, I had already signed up for the training when this renting-a-private-island project came together. I was therefore on my way to spend my weekend counting incremental steps of a circular model on an Excel sheet. But none of this matters, because I have a plan, and a rather brilliant one if I'm honest.

Leveraged Buyout, or LBO, is the favourite investment instrument for most Private Equity firms. In simple words, it consists of acquiring a firm that generates a steady cash flow by increasing its debt to equity ratio, improving its cash from operation over a period of four to seven years, then sell it at a premium. The rate of return of the capital invested in equity is leveraged by the amount of debt involved, hence the name: Leveraged Buyout. Over the weekend, we learned how to structure this debt, building and using a model in Microsoft Excel. We also learned the difference between long-term loans, subordinated debt, revolvers and payment-in-kind bonds.

The trainer had significant experience in Investment Banking and Private Equity and gave us tips for interviewing with such firms.

It was quite fun and I must admit that I truly enjoyed my weekend.

Now, it’s true that my LBO Modelling non-educated friends in Pulau Joyo were sending me paradisiac pictures with comments such as “LBO: Lying By the Ocean”. But because of my genius plan, it’s ok. Now I can fire up Excel, Leverage Buyout stuff, make money, buy a private island, invite my friends, lie by the ocean. I mean, what could possibly go wrong?