medium · Investment Banking ma-lbo
How does a 'Cash Sweep' in an LBO debt agreement affect the IRR for the private equity sponsor?
- It decreases IRR because that excess cash could instead be redeployed toward acquisitions.
- It generally increases IRR by accelerating the reduction of debt and increasing the exit equity value.
- It has no effect on IRR because total Enterprise Value remains fundamentally unchanged throughout.
- It increases IRR primarily by reducing the company's overall blended weighted average cost of capital over time.
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