Private equity investment simulation : analysing the optimal multiple and leverage ratio using an LBO simulation

This research uses a Leveraged Buyout simulation model to determine the optimal financial structure in a Private Equity deal for multiple different sectors. We assess the impact of the leverage ratio and valuation multiple and find that risks taken in one parameter should be offset by the other. A 1% increase in leverage ratio should optimally be accompanied by a decrease of 0.66% to 0.96 % in the multiple, depending on the sector. Conservative financial deal structures, leading to slightly lower returns, reduce the risks involved in the transaction significantly.