The paper LBO is the most common technical filter in private equity interviews: a leveraged buyout you solve out loud, on paper or in your head, in five to ten minutes. It tests whether you understand what actually drives returns — not whether you can build a 500-row model. Here is the standard structure, a fully worked example, and the shortcuts that keep you fast. When you finish reading, run reps on the free Paper LBO Trainer in L3VLUP Labs — a fresh deal every time, with the worked math shown after each attempt.
The five-step structure every paper LBO follows
Interviewers vary the numbers, not the structure. Internalise the sequence and every paper LBO becomes the same problem.
- 1. Entry: purchase price = entry EBITDA × entry multiple. Split into debt and equity.
- 2. Project EBITDA: apply the growth rate for the hold period (usually 5 years).
- 3. Cash generation: estimate free cash flow available for debt paydown each year.
- 4. Exit: exit value = exit-year EBITDA × exit multiple. Subtract remaining debt for exit equity.
- 5. Returns: MOIC = exit equity ÷ entry equity. Convert MOIC to IRR with the standard approximations.
A fully worked example
The setup: a firm buys a company with £100m EBITDA at 8.0x, using 5.0x leverage. EBITDA grows 10% a year for 5 years. Assume 40% of EBITDA converts to cash available for debt paydown each year. Exit at the same 8.0x multiple.
Entry: purchase price = £800m. Debt = £500m, so equity cheque = £300m.
EBITDA path: £100m grows at 10% for 5 years → roughly £161m in year 5 (1.1^5 ≈ 1.61 — memorise it).
Debt paydown: cash for paydown ≈ 40% of EBITDA each year. Average EBITDA across the hold is about £130m, so ~£52m a year × 5 years ≈ £260m repaid. Remaining debt ≈ £500m − £260m = £240m.
Exit: £161m × 8.0x = £1,288m enterprise value. Exit equity = £1,288m − £240m ≈ £1,048m.
Returns: MOIC = £1,048m ÷ £300m ≈ 3.5x over 5 years. A 3.5x over 5 years is roughly a 28% IRR.
The MOIC-to-IRR conversions to memorise
Interviewers expect the conversion instantly. Memorise the 5-year table and interpolate for anything between.
- 2.0x over 5 years ≈ 15% IRR
- 2.5x over 5 years ≈ 20% IRR
- 3.0x over 5 years ≈ 25% IRR
- 4.0x over 5 years ≈ 32% IRR
- Rule of thumb: doubling in 3 years ≈ 26%, in 4 years ≈ 19%, in 5 years ≈ 15% (the rule of 72 works in reverse).
Where candidates lose the offer
The maths above is not hard. Candidates fail paper LBOs for predictable, avoidable reasons.
- Forgetting to subtract remaining debt at exit — the single most common error.
- Confusing EBITDA growth with revenue growth when the interviewer gives margin assumptions.
- Grinding through 1.1^5 long-hand instead of knowing compounding factors cold (1.05^5 ≈ 1.28, 1.10^5 ≈ 1.61, 1.15^5 ≈ 2.01).
- Not sanity-checking: if your MOIC comes out at 8x on market assumptions, say "that looks too high — let me re-check the debt paydown" out loud. Catching your own error scores points.
- Silence. Narrate the steps — the interviewer is assessing your process, not just the answer.
How to attribute the returns (the follow-up they always ask)
The classic follow-up is "where did the returns come from?" — and it maps to the three levers: debt paydown, EBITDA growth, and multiple expansion. In the example above, there was no multiple expansion (in at 8x, out at 8x), so the 3.5x came from deleveraging (~£260m of debt repaid accrues to equity) and EBITDA growth (£61m of growth × 8x = ~£488m of value). Being able to decompose returns this way is what separates a memorised answer from an understood one — it is exactly what the LBO Sanity Check workflow in L3VLUP Skills walks through on real deals.
Frequently asked questions
How long should a paper LBO take?
Five to ten minutes talking it through. Under three minutes with clean narration is the standard that stands out in on-cycle interviews, where you may do several back to back.
Do I need to model taxes and interest in a paper LBO?
Only if the interviewer gives you the assumptions. Many versions simplify to "X% of EBITDA converts to cash for paydown". If they give you interest rates and tax rates, build the simple cash flow: EBITDA − capex − interest − taxes = cash for paydown.
What if I blank on a compounding factor?
Approximate and say so: "1.1 to the fifth is roughly 1.6". Interviewers accept sensible approximation; they do not accept silence or wildly wrong answers presented confidently.
Where can I practise paper LBOs for free?
L3VLUP Labs has a free, no-signup Paper LBO Trainer that generates a fresh deal every attempt, checks your MOIC and IRR, and shows the full worked math with a returns waterfall.
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