Question of the day
2026-09-15
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?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
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, and quick operational wins — and why interviewers stress that MOIC and IRR can diverge: a deal can have a great IRR but mediocre MOIC (fast small win) or great MOIC but mediocre IRR (slow large win).
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