A solved paper LBO, what interviewers actually evaluate, and the mistakes that cost candidates the offer
The technical round is where many private equity processes are decided. You may have the right school, the right bank and a polished story, but if you cannot size up a leveraged buyout under time pressure, the process usually ends there. This guide explains the formats you will face, what interviewers are looking for, and walks through a complete paper LBO.
The three formats you will face
| Format | Typical setup | What it tests |
|---|---|---|
| Paper LBO | 20-45 minutes, no Excel, calculator or pen and paper | Structure, speed, mental math, sanity checks |
| Modeling test | 2-3 hours in Excel with a data pack | Accuracy, model hygiene, speed under pressure |
| Take-home case study | Several days, with a memo or presentation | Investment judgment, risk analysis, communication |
Formats vary by fund, so ask the recruiter what to expect.
What interviewers actually evaluate
- Structure. Do you follow a logical order and state your assumptions out loud?
- Accuracy and speed. Round sensibly, but do not make arithmetic errors.
- Sanity checks. Does the answer make sense? Would a 40% IRR on a mature business make you suspicious?
- Judgment. After the numbers, do you have a view on the deal, its risks and what has to be true?
- Communication. Can you explain your reasoning clearly, as you would to an investment committee?
The number is often the least important part. A candidate with a slightly wrong answer and strong judgment frequently beats one with the right answer and no view.
A solved paper LBO
The question: A company has LTM EBITDA of €100m. A fund can buy it at 8.0x EBITDA, financing 4.0x with debt at 10% interest. EBITDA grows €10m per year for five years. Cash flow before interest (after tax, capex and working capital) equals 50% of EBITDA. The fund exits after five years at the same multiple it paid. Ignore fees. What are the MOIC and IRR?
Step 1: Sources and uses
| Uses | €m | Sources | €m |
|---|---|---|---|
| Enterprise value (8.0x × 100) | 800 | Debt (4.0x × 100) | 400 |
| Sponsor equity (plug) | 400 | ||
| Total | 800 | Total | 800 |
Step 2: EBITDA path. Years 1-5: 110, 120, 130, 140, 150. Cumulative EBITDA = 650.
Step 3: Cash available for debt paydown
- Cash flow before interest: 50% × 650 = 325
- Interest (simplification: 10% on the initial €400m, held flat) = 40 × 5 = 200
- Cumulative free cash flow after interest = 325 − 200 = 125
Simplifying interest to the opening balance slightly overstates the interest cost, since debt falls over time. In an interview, state this explicitly and move on. In a modeling test, you would build the debt schedule properly.
Step 4: Exit
- Exit EBITDA: 150
- Exit EV: 150 × 8.0x = 1,200
- Net debt at exit: 400 − 125 = 275
- Exit equity: 1,200 − 275 = 925
Step 5: Returns
- MOIC = 925 / 400 = 2.31x
- IRR = 2.31^(1/5) − 1 ≈ 18%
Step 6: Where did the return come from?
Equity value created: 925 − 400 = 525.
| Driver | €m | Share |
|---|---|---|
| EBITDA growth (50 × 8.0x) | 400 | 76% |
| Multiple expansion | 0 | 0% |
| Debt paydown | 125 | 24% |
| Total | 525 | 100% |
Step 7: Sensitivity to exit multiple
| Exit multiple | Exit equity (€m) | MOIC | IRR |
|---|---|---|---|
| 7.0x | 775 | 1.94x | ~14% |
| 8.0x | 925 | 2.31x | ~18% |
| 9.0x | 1,075 | 2.69x | ~22% |
Step 8: Give a view. This is the step many candidates skip. A strong answer might say:
“The return clears a typical hurdle of around 15-20% IRR but depends on 50% growth in EBITDA over five years. Three-quarters of the value comes from EBITDA growth, which is healthier than relying on multiple expansion, but it means diligence should focus on whether that growth is achievable. Leverage looks tight: first-year interest of €40m against pre-interest cash flow of €55m gives only about 1.4x cash cover. I would want to understand the downside case before committing.”
That last paragraph is what separates strong candidates from adequate ones.
Mental math cheat sheet: MOIC to IRR
| MOIC | 3-year hold | 5-year hold |
|---|---|---|
| 1.5x | ~14% | ~8% |
| 2.0x | ~26% | ~15% |
| 2.5x | ~36% | ~20% |
| 3.0x | ~44% | ~25% |
Memorize the 5-year column. It lets you check a result in seconds and spot an error.
The most common mistakes
- Starting without stating assumptions. Always list them out loud first.
- Forgetting to subtract net debt at exit. This is the most common arithmetic slip.
- Mixing up EV and equity value. Returns are measured on equity.
- Ignoring interest, or taxes on interest. Cash for paydown is after interest.
- Treating fees as immaterial without saying so. If you ignore them, say that you are doing so.
- Stopping at the number. The interviewer wants a view on the deal.
- Over-precision. Spending 10 minutes on decimals instead of structure and sense checks.
- Not asking clarifying questions. Confirming whether fees, minimum cash or other items matter is a positive signal.
How to prepare
- Build 3-5 LBOs from scratch in Excel until the logic is automatic.
- Practice paper LBOs against a timer, aiming to finish in under 20 minutes.
- Memorize the MOIC-to-IRR table above.
- Practice explaining a deal aloud, ending each time with a recommendation and key risks.
- Review fundamentals: IRR and MOIC, valuation multiples, leverage and covenants.
FAQ
How long is a paper LBO? Typically 20-45 minutes, though some interviewers give an initial 10-15 minute version.
Do I need to calculate exactly? No. Sensible rounding is expected. Errors in logic matter far more than rounding.
What do PE firms look for in a case study? Structure, accuracy, judgment about risk and the ability to defend a recommendation under questioning.
This article is for educational purposes only. The example is illustrative and not a recommendation.
