Direct answer. A paper LBO is an LBO solved without Excel — entry multiple, debt, EBITDA growth, paydown, exit, MOIC and IRR — done out loud in five minutes.
PE interviewers use it to filter mental math and sponsor intuition. Banking analysts who never practiced it often freeze.
Definition
A paper LBO is a structured pen-and-paper sponsor problem. Interviewer gives entry EBITDA, multiple, leverage, growth and exit assumptions. Candidate solves MOIC and approximate IRR aloud.
Structure
Six blocks.
- Entry. EBITDA × entry multiple = enterprise value.
- Sources & uses. Debt at given multiple, equity plugs the rest.
- Growth. Apply EBITDA growth or margin expansion over hold period.
- Paydown. FCF sweeps to debt; estimate paydown by hold period.
- Exit. Exit EBITDA × exit multiple = exit EV.
- Equity. Exit equity = exit EV − remaining debt. MOIC = exit equity / initial equity.
Why PE Asks It
Sponsors test if you internalized mechanics, not if you can build a model. For the wider sponsor stack, drill LBO interview questions and rehearse end-to-end in an investment banking mock interview.
Interview Answer Framework
Use this every time.
- 1. Restate. Repeat assumptions back to lock them in.
- 2. Entry math. EV, debt, equity.
- 3. Hold period. EBITDA growth and paydown.
- 4. Exit math. Exit EV, exit equity.
- 5. MOIC and IRR. Convert MOIC to IRR with benchmarks.
Numeric Example
Illustrative end-to-end.
| Step | Value |
|---|---|
| Entry EBITDA | $100 |
| Entry multiple | 10.0x |
| Enterprise value at entry | $1,000 |
| Debt (6.0x EBITDA) | $600 |
| Sponsor equity (4.0x) | $400 |
| Year-5 EBITDA (50% growth) | $150 |
| Debt paydown (assume $200) | Remaining debt: $400 |
| Exit multiple | 10.0x |
| Exit EV | $1,500 |
| Exit equity (1,500 − 400) | $1,100 |
| MOIC (1,100 / 400) | ~2.75x |
| IRR (5y, ~2.75x) | ~22% |
MOIC and IRR Benchmarks
Memorize these for instant conversion.
| MOIC over 5 years | Approx IRR |
|---|---|
| 1.5x | ~8% |
| 2.0x | ~15% |
| 2.5x | ~20% |
| 3.0x | ~25% |
| 4.0x | ~32% |
Common Traps
Where candidates lose points.
- Forgetting paydown. Without paydown, MOIC understates returns.
- Mismatched exit multiple. Default to entry multiple unless thesis justifies expansion.
- Confusing EV and equity. MOIC uses equity, not EV.
- Ignoring transaction fees. Strict paper LBO usually skips fees; mention them as a sanity caveat.
- Not memorizing benchmarks. MOIC↔IRR table must be cold.
How to Practice This Concept
Run three paper LBOs out loud daily for two weeks. Cross-train with accretion/dilution interview framework and rehearse live with an investment banking mock interview. For the broader career angle, read private equity vs investment banking.
What Candidates Get Wrong
- Reaching for Excel mentally. Paper LBO rewards structure, not precision.
- Skipping the restate step. Restating assumptions buys thinking time.
- Forgetting MOIC↔IRR. If you can't convert in your head, you cannot finish.
- Not practicing out loud. Silent practice does not build verbal reps.
Real Interview Insight
Common failure: candidate freezes mid-problem because they never practiced verbalizing. Strong candidates restate, write the entry block, walk paydown, then exit, then MOIC and IRR — out loud, no hesitation. The fix is reps, not more reading.
Stop reading. Run one out loud.
Reading the framework is not the same as running a paper LBO cold. Practice now.
Frequently Asked Questions
Keep going
Continue with the wider topic: LBO Interview Questions