Every concept, endless questions
Each concept is a small financial model. Read how it works, then draw a real interview question from it: forwards, backwards or what-if, with fresh numbers and a worked solution every time.
Forward runs a concept the usual way. Inverse runs it backwards, which is what separates understanding from memorizing.
LBO Returns
6 conceptsValue creation bridge: growth, multiple and deleveraging
Equity gain in a buyout has exactly three sources. The business earned more (EBITDA growth, valued at the price you paid for it), the market paid more per dollar of earnings (multiple expansion, applied to the bigger exit EBITDA), and the cash the business threw off repaid debt that would otherwise have come out of the equity (deleveraging). Add the three and you get the change in equity to the dollar. Investment committees care about the split because growth and paydown are things the sponsor can plan for; the multiple is a bet on the market.
IRR versus MOIC across hold periods
MOIC says how many dollars came back per dollar in; IRR says how fast. With a single check in and a single check out they are tied together by the hold period alone: the same multiple over fewer years is a higher IRR, and the same IRR over more years needs a bigger multiple. Funds are judged on both. A quick 1.5x flatters the IRR but earns little carry; a 3x that takes eight years earns the carry but drags the IRR the LPs quote. The tension between the two is most of what an exit-timing debate is about.
Dividend recapitalisation
A dividend recap borrows against a business that has deleveraged and hands the proceeds to the sponsor as a dividend. It does not make the company worth more; it moves a slice of the exit proceeds forward in time. Ignoring the extra interest, the sponsor gets the same total dollars — a bigger check early and a smaller one at exit — so MOIC is unchanged. IRR rises because money returned in year two or three is worth more, in IRR terms, than the same money in year five. The recap also takes risk off the table: once the dividend has returned the original equity, the rest of the hold is played with house money.
Entry multiple sensitivity
Lenders size debt off cash flow, not off price. So when a sponsor pays one more turn of EBITDA at entry, every dollar of it is equity — the debt does not move, the exit does not move, and the same exit equity is divided by a bigger check. That is why the entry price is the single most powerful lever on returns, and why "we can fix it with growth" is the most expensive sentence in private equity. Run the price up a turn and read the IRR; run it backwards and you get the most you can pay for a required return.
Management rollover and the incentive pool
When a sponsor buys a business, the managers who own part of it are asked to reinvest a slice of their sale proceeds alongside the sponsor. That rollover buys them a stake in the new deal at the sponsor’s price, and it reduces the check the sponsor has to write. On top of it sits the management incentive plan: a share of exit equity carved out for management before the ordinary equity is divided. Both exist for the same reason — a management team with real money in the deal and a real share of the upside behaves like an owner. The sponsor pays for that alignment with a lower multiple on its own check, and the arithmetic of exactly how much is what this recipe tests.
Bolt-on acquisitions and multiple arbitrage
Small companies trade at lower multiples than large ones. A platform bought at eleven times can buy a competitor at seven, and the moment the two are combined the market values the acquired EBITDA at eleven — the same earnings, re-rated four turns higher simply because they now sit inside a bigger business. That gap is multiple arbitrage. It lowers the blended entry multiple, it lifts the combined return above what the platform alone would earn, and it works whether or not there are synergies. The catch is that the exit multiple has to hold for the combined business: buy enough low-quality EBITDA and the market re-rates the platform down instead of the bolt-on up.