Paper LBO
A simplified leveraged buyout analysis done by hand, without Excel, usually in under ten minutes. Used in PE interviews to test whether a candidate understands LBO mechanics (entry, leverage, growth, debt paydown, exit) well enough to estimate returns quickly.
Why Paper LBO matters in interviews
The paper LBO is the standard live technical in private equity interviews: no Excel, no calculator, five to ten minutes to get from an entry price to an approximate IRR. It exists because it tests arithmetic, structure and composure at once, and because a candidate who can do it on paper genuinely understands what the model is doing.
How it works in practice
The sequence: set entry enterprise value from the EBITDA and entry multiple; split it into debt and sponsor equity; project EBITDA forward over the hold; estimate cumulative free cash flow available to repay debt; compute exit enterprise value from exit EBITDA and exit multiple; subtract remaining net debt to get exit equity; then compute MoIC and convert to an approximate IRR.
A worked case: $50m EBITDA, entry at 8.0x, so $400m enterprise value, funded with $240m debt (4.8x) and $160m equity. EBITDA grows 8% a year to roughly $73m by year five. Cumulative free cash flow of about $110m repays debt down to $130m. Exit at 8.0x on $73m gives $588m, less $130m debt, leaving $458m of equity.
That is $458m / $160m = 2.9x MoIC over five years. Use the rule-of-thumb IRR ladder rather than a calculator: over five years, 2.0x is roughly 15%, 2.5x roughly 20%, 3.0x roughly 25%. So 2.9x is approximately a 24% IRR.
What candidates get wrong
- Reaching for precision. The interviewer wants a defensible approximation delivered cleanly, not four decimal places.
- Not memorising the MoIC-to-IRR ladder. Over five years: 1.5x ≈ 8%, 2.0x ≈ 15%, 2.5x ≈ 20%, 3.0x ≈ 25%. Over three years: 2.0x ≈ 26%, 2.5x ≈ 36%.
- Forgetting to deduct remaining debt at exit — the single most common arithmetic slip under time pressure.
- Working silently. Narrate each step; if you make an error the interviewer can redirect you, and the reasoning is most of the mark.
Paper LBO: frequently asked questions
How long should a paper LBO take?
Five to ten minutes. Anything longer suggests you are calculating rather than structuring. Interviewers are watching whether you set the problem up correctly and narrate your assumptions, not whether your IRR is exact.
How do you estimate IRR without a calculator?
Memorise the MoIC-to-IRR ladder for common hold periods. Over five years: 1.5x is about 8%, 2.0x about 15%, 2.5x about 20%, 3.0x about 25%, 4.0x about 32%. Interpolate between them and state that you are approximating.
Go deeper
This term comes up constantly in private equity interviews and on the desk.
Private Equity interview prepRelated Private Equity terms
Go further than reading
The written material is free. These are the ways to get it applied to your own work.
CV Review by a Human
Written margin-note feedback on structure, impact bullets and ATS-readability. Reviewed by Suro, not an AI score.
$25 48h turnaround
Cover Letter Review by a Human
Line-by-line review of argument, tailoring and tone, with a rewritten opening as a worked example.
$50 48h turnaround
Inner Circle
Membership: premium tools, role intros, the private community and members-only intel.
$79 /month
Browse the full glossary — 150+ finance recruiting and technical terms, in plain English.