Walk me through an LBO.
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
A PE firm acquires a company using a mix of debt (60-70%) and equity (30-40%). The company's cash flows repay the debt over 4-6 years. At exit, the firm sells the company — ideally at a higher EBITDA and/or higher multiple — and the equity return is amplified because leverage means the sponsor put in less of their own money upfront. Returns come from 3 sources: EBITDA growth, deleveraging, and multiple expansion.
WHAT INTERVIEWERS LISTEN FOR
- ✓Debt and equity mix
- ✓Cash flows repay debt
- ✓Exit via sale or IPO
- ✓Three return sources
- ✓Leverage amplifies equity returns
COMMON MISTAKES
- ✗Ignores debt repayment source
- ✗Confuses LBO with venture capital
- ✗Omits multiple expansion or EBITDA growth
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