What Is a Paper LBO?
A paper LBO is a stripped-down version of a full leveraged buyout model, condensed to the point where it can be solved in five to ten minutes without a computer. The interviewer provides a short set of assumptions, typically purchase multiple, EBITDA, debt financing, growth rates, and exit multiple, and the candidate walks through the math out loud to arrive at the sponsor's return.
The exercise deliberately removes spreadsheet complexity so the interviewer can see whether a candidate grasps the underlying mechanics: how leverage amplifies equity returns, how debt paydown builds value, and how entry and exit pricing drive the outcome. It is a near-universal step in private equity recruiting, especially during the fast-moving on-cycle process.
How to Work Through One
Start with the purchase price: if a company generates $100 million of EBITDA and the sponsor pays 8x, enterprise value is $800 million. With 50% debt financing, the deal uses $400 million of debt and $400 million of sponsor equity. Next, project EBITDA forward using the given growth rate and estimate cumulative free cash flow, which reduces the debt balance over the holding period.
At exit, apply the exit multiple to final-year EBITDA to get exit enterprise value, subtract remaining debt, and compare exit equity to the initial equity check. If exit equity is $800 million against a $400 million investment, the multiple on invested capital is 2.0x. A useful shortcut for the IRR: doubling money over five years is roughly a 15% IRR, while tripling it is roughly 25%.
Why It Matters in Recruiting
Paper LBOs separate candidates who have memorized model templates from those who actually understand returns. Interviewers watch for clean arithmetic under pressure, sensible simplifying assumptions such as ignoring taxes when told to, and an intuitive read on whether the answer makes sense. Getting flustered by mental math is one of the most common reasons otherwise strong candidates stumble in first-round private equity interviews.
Preparation is straightforward: practice a handful of variations until the sequence of entry valuation, debt paydown, exit valuation, and return calculation becomes automatic. Candidates should also be ready for follow-up questions, such as how returns change if leverage increases or if the sponsor exits at a lower multiple than it paid.
