Paper LBO: The PE Interview Exercise
After a Case: Distressed Company Turnaround, the next interview drill asks whether a private equity buyer can underwrite a target and earn attractive returns. The Paper LBO is the single most important exercise for PE/IB analyst roles because Goldman, JPMorgan, Avendus, KKR, and all major PE funds will ask you to do this in your head in under 5 minutes. Master this framework.
- The Paper LBO is a quick back-of-envelope PE interview exercise used to estimate equity IRR from entry price, leverage, operating assumptions, debt paydown, and exit.
- IRR in LBO = f(Entry Multiple, Exit Multiple, EBITDA Growth, Debt Paydown, Time Horizon).
- The core sequence is Sources & Uses, Operating Model, Debt Paydown, Exit Valuation, and Returns (IRR).
- Key metric: Can you achieve 20%+ IRR?
- Typical PE hold: 4-6 years and entry multiple: 6-10x EBITDA.
- In the TargetCo India example, ₹320 Cr entry equity becomes ₹1,502 Cr exit equity value, producing 4.7x MOIC and approximately 36% IRR.
- Always state your assumptions upfront because this shows PE readiness.
Paper LBO in One View
A Paper LBO is a quick, assumption-led interview drill: compute purchase price, split debt and equity, model 5-year EBITDA growth and debt paydown, exit at a multiple, and calculate equity return and IRR. The question behind the exercise is simple: can the deal clear the typical PE hurdle rate of 20-25%?
IRR in LBO = f(Entry Multiple, Exit Multiple, EBITDA Growth, Debt Paydown, Time Horizon)
Worked Example: Acquisition of TargetCo India
The TargetCo India exercise starts with EBITDA of ₹100 Cr and an 8x EV/EBITDA entry multiple, giving an Enterprise Value of ₹800 Cr. The deal is financed with 60% debt and 40% equity, so the PE fund contribution is ₹320 Cr and the initial debt is ₹480 Cr.
The operating model then estimates revenue growth, margin expansion, FCF available for debt repayment, remaining debt at exit, and final equity proceeds. All figures are illustrative/approximate and for educational purposes only.
5-Year Operating Model
Debt Paydown Schedule
The Paper LBO uses FCF to debt repayment. As interest falls and FCF improves, debt reduces from ₹480 Cr opening debt in FY1 to ₹145 Cr closing debt in FY5.
Exit Analysis & IRR Calculation
At exit, the model applies a 9x exit multiple to FY5 EBITDA of ₹183 Cr. After subtracting remaining debt of ₹145 Cr, exit equity value is ₹1,502 Cr versus entry equity of ₹320 Cr.
Quick IRR Approximation
In a paper LBO, use the rule of thumb: 2x in 5 years ≈ 15% IRR; 3x in 5 years ≈ 25%; 4x in 5 years ≈ 32%; 5x in 5 years ≈ 38%. For 4.7x in 5 years, interpolate: ≈ 36%.
This deal clears the typical PE hurdle rate of 20-25%.
Structuring a Paper LBO Interview Answer
"Walk me through a paper LBO."
Always state your assumptions upfront. This shows PE readiness.
The most frequent error is jumping straight to IRR without clearly stating entry multiple, debt/equity split, EBITDA growth, debt paydown, exit multiple, and time horizon. It costs points because the interviewer is testing whether you can build the Paper LBO sequence cold in under 5 minutes!
Conclusion
The Paper LBO is a fast PE/IB interview exercise built around purchase price, leverage, operating model, debt paydown, exit valuation, MOIC, and IRR. If you can state assumptions upfront and move cleanly from Sources & Uses to returns, you show the PE readiness interviewers are looking for.