Paper LBO
Definition
A paper LBO is a simplified LBO walked through verbally or on paper with round numbers and no spreadsheet — a standard private equity interview exercise. You are given entry multiple, leverage, basic operating assumptions, and an exit multiple, and asked to estimate the sponsor's MOIC and approximate IRR.
Standard steps: (1) entry — purchase price = entry multiple × EBITDA; split into debt and equity; (2) project EBITDA growth over the hold; (3) estimate annual free cash flow (EBITDA minus interest, taxes, capex, and working capital) to get cumulative debt paydown; (4) exit — exit enterprise value = exit multiple × exit EBITDA; exit equity = exit EV minus remaining net debt; (5) MOIC = exit equity ÷ entry equity, then convert to IRR.
Useful approximations for the conversion: 2.0x over 5 years is roughly a 15% IRR, 2.5x over 5 years roughly 20%, and 3.0x over 5 years roughly 25%. Interviewers expect clean mental math with rounded numbers, not precision.
Why interviewers ask
The paper LBO is the signature PE screening exercise and increasingly appears in banking interviews for sponsors-heavy groups. Interviewers grade your structure, calm arithmetic, and knowledge of the MOIC-to-IRR rules of thumb.
Related terms
Interviews don't test definitions — they test recall under pressure.
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