hard · Investment Banking
Two LBO structures fund the same $500m equity check on the same business with identical operations and exit. Structure A uses a cash-pay term loan at 10%; Structure B uses a PIK note at 12% (interest accrues to principal, no cash service). The business generates ample cash and the sponsor sweeps debt where possible.
Holding the exit enterprise value fixed, which structure tends to produce the higher equity MOIC, and what is the subtle driver experts most often misjudge?
- Structure A; cash-pay debt lets the sponsor sweep principal so the debt balance and interest both fall over time, whereas the PIK's compounding balance crowds out deleveraging and leaves a larger claim ahead of equity at exit.
- Structure B; the PIK's accrued interest is non-cash, so it never reduces equity value and the lower cash burden mechanically lifts MOIC regardless of the compounding balance.
- Structure A; the only driver is the rate differential, so 10% cash debt beats 12% PIK by exactly the 2-point spread applied to the opening balance each year.
- Structure B; PIK debt is tax-shielded on accrual just like cash interest, so it deleverages the equity claim faster while preserving cash for the sweep.
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