IB INTERVIEW FOUNDATIONS
LBO returns & debt paydown
Connect operating cash generation to sponsor equity returns.
Leverage changes the distribution of risk and returns, but it does not make EBITDA available cash. Track cash interest, taxes, reinvestment and cash constraints before debt paydown. At exit, bridge business value to equity proceeds and distinguish timing-sensitive IRR from MOIC.
Ask yourself: Where does the sponsor return come from: growth, debt paydown, multiple change or timing?
Put it into practice
Calculate the exit equity bridge first, then discuss the operational and financing assumptions that make debt paydown possible.
Beyond the calculation
State assumptions before calculating. Explain the result in plain English, then identify what information could change your conclusion. A numerical match alone does not show that your reasoning is sound.