Walk me through a complete paper LBO: purchase at 8x on EUR 50M EBITDA, 60% debt financing, EBITDA grows 8% annually for five years, exit at 8x, assume 40% of EBITDA converts to debt paydown each year.
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Entry: enterprise value 8 × 50 = 400; debt 240, equity check 160. EBITDA path: 50 grows at 8% for five years to roughly 73.5 (50 × 1.08^5 ≈ 1.47). Debt paydown: 40% of EBITDA per year — averaging EBITDA around 61 over the period gives roughly 24.4 per year, so about 120 of cumulative paydown; debt falls from 240 to around 120. Exit: 8 × 73.5 ≈ 588 enterprise value, minus 120 debt leaves about 468 of equity. Multiple of money: 468 / 160 ≈ 2.9x over five years — using the doubling heuristic (2x in five years ≈ 15%), roughly 23-24% IRR. Then the bridge, unprompted: of the ~308 equity gain, EBITDA growth contributes ~188 at constant multiple, deleveraging ~120, multiple expansion zero — the deal works without multiple, which is what makes it underwriteable. Round numbers, stated assumptions, and the bridge: that's the complete answer.
WHAT INTERVIEWERS LISTEN FOR
- ✓entry: EV 400, debt 240, equity 160
- ✓EBITDA compounds to ~73.5; debt paydown ~120 cumulative
- ✓exit equity ~468 → ~2.9x MOIC, ~23% IRR
- ✓return bridge: growth ~188, deleveraging ~120, multiple zero
- ✓state assumptions and round consciously — no false precision
COMMON MISTAKES
- ✗asking for Excel
- ✗no return bridge after the IRR
You've seen the model answer. Now get graded on yours.
In the interview you won't have this page — you deliver your version on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS