LBO & Paper LBO
Paper LBO sensitivity: a deal returns 2.0x in 5 years (~15% IRR). The sponsor instead exits in year 3 at the same 2.0x. What happens to IRR and why does that matter?
Model answer
Same 2.0x but over 3 years: IRR = 2^(1/3) - 1 ≈ 26%. Hitting the same multiple faster sharply raises IRR because IRR is time-weighted. This is why sponsors prize early exits, dividend recaps,…
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