What's the difference between maintenance capex and growth capex?
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Maintenance capex keeps the business running at current levels (replacing old machines, IT upkeep). Growth capex expands capacity or capability (new factory, new market entry). In an LBO model, maintenance capex is a cost (reduces FCF). Growth capex is an investment (should generate incremental EBITDA). PE targets businesses where maintenance capex is <5% of revenue and growth capex is funded from FCF.
WHAT INTERVIEWERS LISTEN FOR
- ✓Maintenance vs growth definition
- ✓Impact on free cash flow
- ✓LBO model treatment
- ✓PE preference for low maintenance capex
- ✓Growth capex funded from FCF
COMMON MISTAKES
- ✗Confusing maintenance with growth capex
- ✗Ignoring FCF impact
- ✗Assuming all capex is growth
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