PE Interview Question

‼️Private Equity Interview Question ‼️ ✅ LTM EBITDA: $80 ✅ Purchase TEV (Total Enterprise Value): $640 ✅ Leverage: 4× EBITDA (i.e., $320 of debt) ✅ EBITDA Growth: Expands from $80 at acquisition to $100 at exit over 5 years. ‼️Assume no distributions over the life of the LBO. ⁉️How much cumulative free cash flow must the company generate over 5 years to achieve the 20% IRR? Explanation: Step 1: First, calculate the equity investment at acquisition. With a purchase TEV of $640 and debt equal to 4× EBITDA (4 × $80 = $320), the remaining equity contribution is $640 – $320 = $320. Step 2: Next, determine the exit enterprise value. Since EBITDA grows from $80 to $100 over 5 years and assuming the same EV/EBITDA multiple as at entry (which is $640 / $80 = 8×), the exit EV is 8 × $100 = $800. Step 3: Then, assume that all cumulative free cash flow generated over the 5 years is used to pay down the debt. After generating a total free cash flow of X, the remaining debt will be $320 – X. Therefore, the exit equity value will be the exit EV minus the remaining debt, or $800 – ($320 – X) = $480 + X. Step 4: To meet a 20% IRR target, the investor’s $320 equity must grow to 2.5× its original amount, meaning it needs to reach $320 × 2.5 = $800 at exit. Setting the exit equity value equal to $800, we have: $480 + X = $800. Solving for X, we find X = $800 – $480 = $320. Thus, the company must generate $320 in cumulative free cash flow over 5 years to achieve a 20% IRR, making the correct answer A) $320. #LBO #privatequity #interviewprep #financejobs