LBO Interview Questions

The sponsor — the general partner, or GP — is the private equity firm that raises and manages the fund and makes the investment decisions. Limited partners supply almost all of the capital, stay passive, and receive the bulk of the profits after the GP's fees and profit share.

Price/Book equals P/E multiplied by ROE, since P/B = (P/EPS) × (EPS/B), where EPS cancels; this means a high P/B implies either a high earnings multiple, high return on equity, or both.

You could pursue sale-leasebacks of owned assets for immediate cash proceeds, defer discretionary capex, elect accelerated depreciation to maximize tax shields, and optimize working capital by tightening receivables, extending payables, and reducing inventory.

The IRR is approximately 17.6%, derived from a 2.25x MOIC ($1,800mm exit equity on $800mm invested) over a 5-year holding period: (2.25)^(1/5) − 1 ≈ 17.6%.

Yes — even with no change in enterprise value or multiple, the PE firm can achieve a return through debt paydown during the holding period, which increases the equity value at exit relative to the initial equity invested.

Set NPV of all cash flows equal to zero and solve for the discount rate r by trial-and-error and linear interpolation; in the example, investing $100M and receiving $10M–$100M over four years yields an IRR of approximately 15.3%.

The IRR is approximately 20%: $400mm entry equity grows to $1,000mm exit equity (2.5x MOIC) over 5 years, driven by EBITDA growth (+$450mm), debt paydown (+$250mm), partially offset by multiple contraction (−$150mm).

Under the standard interview simplification, adding $100mm to EBITDA has the bigger impact because it is capitalized at the exit multiple, while paying down $100mm of debt increases equity value by exactly $100mm. For example, at an 8.0× exit multiple, $100mm of incremental EBITDA would increase enterprise value — and therefore equity value, assuming no other changes — by about $800mm, versus only $100mm from debt paydown.

Sources include debt tranches (for example, revolver if drawn, term loans, senior notes, mezzanine), rollover equity or seller financing, excess target cash if it is used to fund the deal, and sponsor equity as the plug. Uses include the equity purchase price paid to shareholders, repayment or refinancing of existing debt, transaction fees, financing fees, and any minimum cash left on the balance sheet.

The terminal value is 772.5, calculated by growing the last discrete period's UFCF of 75 by 3% to get 77.25, then dividing by (13% − 3%) = 10% using the Gordon Growth Model.

The LBO method is highly sensitive to leverage, exit multiple, and cash flow assumptions, uses a subjective IRR target, only reflects a financial buyer's perspective (producing a valuation floor), and depends on an assumed hold period.

Common errors include mixing equity value and enterprise value across methodologies, using inconsistent share counts or bridge assumptions, including outlier comps, double-counting control premiums, misaligned axes, stale inputs, and unexplained ordering differences such as precedents screening below trading comps.