PE InterviewModeling
LBO return drivers
Rank the components of MOIC/IRR and when each dominates the outcome.
Direct answer
Return is driven by EBITDA growth, multiple change, and deleveraging; deal structure and entry price set the ceiling.
Step-by-step
Walk through the structured answer
1
EBITDA growth and margin expansion
Operational improvements and add-ons lift EBITDA, compounding equity value and reducing leverage ratios.
2
Multiple expansion or contraction
Entry vs. exit multiple movement can swing returns dramatically; base case should assume flat multiples unless justified.
3
Deleveraging
Paying down debt with cash flow increases equity value and IRR even if multiples stay flat.
4
Timing and capital structure
Hold period, interest rates, and PIK features change cash build and equity contribution, influencing IRR vs. MOIC.
Pitfalls to avoid
- Counting multiple expansion twice (in both base and upside cases).
- Ignoring cash drag from high minimum liquidity in debt docs.
- Assuming aggressive EBITDA growth without linked operational initiatives.
Follow-up angles
- Which of these drivers is most reliable for this target?
- How do covenant packages change deleveraging speed?
- How does a dividend recap alter the return mix?
Related questions
Keep drilling the set
Put this answer into a mock interview
Launch the simulator or jump into the dedicated prep path to rehearse this flow with real-time feedback.