How does debt repayment affect IRR?
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Every euro of debt repaid transfers value from lenders to equity holders. If you enter with €250M debt and exit with €150M (repaid €100M from FCF), that €100M flows directly to equity value at exit. This is 'free' equity growth — no EBITDA growth or multiple expansion needed. In a no-growth scenario, deleveraging alone can generate 8-12% IRR.
WHAT INTERVIEWERS LISTEN FOR
- ✓Debt repayment transfers value to equity
- ✓Free equity growth from deleveraging
- ✓No EBITDA growth required
- ✓Deleveraging can generate 8-12% IRR
COMMON MISTAKES
- ✗Ignoring debt repayment in IRR calculation
- ✗Assuming IRR requires revenue growth
- ✗Confusing debt repayment with cash flow
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