Where does the return in an LBO come from?
The three value-creation levers and how to quantify them.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
Three sources: EBITDA growth (more revenue, better margins), debt paydown (cash flows reduce net debt, so more of the exit value goes to equity) and multiple expansion (selling at a higher multiple than you paid). Plus any cash returned early through dividends. Sponsors want most of the return from the first two — relying on a higher exit multiple is a bet on the market.
The full answer
Value bridge (€m) — the same deal as the paper LBO
Entry: 10x × 100 = 1,000 EV, 600 debt, 400 equity. Exit: 10x × 150 = 1,500, net debt 350, equity 1,150. Equity gain 750.
| Driver | Calculation | €m |
|---|---|---|
| EBITDA growth | (150 − 100) × 10x entry multiple | 500 |
| Multiple expansion | (10x − 10x) × 150 | 0 |
| Debt paydown | 600 − 350 | 250 |
| Total equity gain | 750 |
If the exit multiple were 11x instead, multiple expansion would add 150 and the money multiple would rise from 2.9x to 3.25x.
Leverage as an amplifier
Leverage doesn't create value on its own: it concentrates the gains (and losses) on a smaller equity cheque.
Mistakes to avoid
Listing "leverage" as a value-creation lever on its own.
Follow-ups they may ask
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