medium · Investment Banking

How does a 'Cash Sweep' in an LBO debt agreement affect the IRR for the private equity sponsor?

1. It decreases IRR because that excess cash could instead be redeployed toward acquisitions.
2. It generally increases IRR by accelerating the reduction of debt and increasing the exit equity value.
3. It has no effect on IRR because total Enterprise Value remains fundamentally unchanged throughout.
4. It increases IRR primarily by reducing the company's overall blended weighted average cost of capital over time.

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