medium · Private Equity accounting-flow
A sponsor increases the PIK component of a deal to preserve cash flow for a 'Buy-and-Build' strategy.
Under what condition does this improve the Sponsor's IRR?
- If the add-on acquisitions are completed at the same multiple as the original platform deal.
- If the return on capital from the add-on acquisitions exceeds the compounded cost of the PIK debt.
- If the PIK interest happens to qualify for tax-deductible treatment under the credit agreement.
- Always, since preserving cash inherently improves IRR through the time value of money.
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