Core Frequently asked InternAnalyst

Walk me through an LBO.

What the interviewer is testing

Whether you understand the mechanics and the logic of leveraged returns.

Answer it out loud first

Take 30–60 seconds, as you would in the room. Then compare with the model answer.

 Show the model answer
In the interview — the 30-second answer

A private-equity fund buys a company using a large amount of debt — often 50–70% of the price — and a smaller equity cheque. The company's cash flows pay the interest and repay debt over three to seven years, while the sponsor works to grow earnings. At exit — a sale or IPO — the equity is worth the exit value minus the remaining debt. The return is measured as the money multiple and the IRR on the equity invested.

The full answer

  1. Entry: purchase price = EBITDA × entry multiple, plus fees.
  2. Sources and uses: debt sized on what the cash flows can support (a multiple of EBITDA), the rest equity.
  3. Projections: revenue, EBITDA, capex, working capital, tax.
  4. Debt schedule: interest each year; free cash flow sweeps the debt down.
  5. Exit: EBITDA in the exit year × exit multiple = exit EV; minus remaining net debt = exit equity.
  6. Returns: money multiple = exit equity ÷ equity invested; IRR over the holding period.

Paper LBO (€m)

Buy at 10x €100m EBITDA = 1,000, with 600 of debt and 400 of equity. In five years EBITDA is 150; exit at 10x = 1,500; net debt down to 350. Exit equity = 1,150: a 2.9x money multiple, IRR ≈ 23.5%.

Mistakes to avoid

  • Forgetting that debt paydown adds to equity value at exit.

Follow-ups they may ask

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