The Paper LBO: Calculate IRR in Your Head in Under 5 Minutes

The paper LBO is the first filter in PE recruiting. No spreadsheet. No calculator. Just you, a set of assumptions, and the ability to estimate returns in your head. Here's how to nail it.

The Setup

You'll be given a simplified scenario: "A company has $100M of EBITDA, is acquired at 8.0x for $800M. The sponsor puts in 40% equity. Assume 5% annual EBITDA growth, no multiple expansion, and the exit happens in Year 5."

Your job: estimate IRR and MOIC in under 5 minutes.

Step 1: Calculate the Equity Check

Total purchase price: $100M EBITDA x 8.0x = $800M. Sponsor equity at 40%: $800M x 0.4 = $320M. Total debt: $800M - $320M = $480M (implied 4.8x leverage).

Step 2: Project Exit Enterprise Value

EBITDA in Year 5 with 5% growth: $100M x (1.05)^5 ≈ $128M. Use the shortcut: 5% growth for 5 years ≈ 28% cumulative growth. So $100M x 1.28 = $128M. Exit at same 8.0x: $128M x 8.0 = $1,024M.

Step 3: Estimate Debt Paydown

Assume annual FCF is roughly 40-50% of EBITDA (after taxes, CapEx, working capital). Call it $45M per year in Year 1, growing to ~$55M by Year 5. Total cumulative FCF over 5 years: roughly $250M of debt paydown. Remaining debt: $480M - $250M = $230M.

Step 4: Calculate Exit Equity and MOIC

Exit equity: $1,024M enterprise value - $230M remaining debt = $794M. MOIC: $794M / $320M = ~2.5x.

Step 5: Convert MOIC to IRR

• The MOIC-to-IRR cheat sheet:
• 2.0x in 3 years → ~26% IRR
• 2.0x in 5 years → ~15% IRR
• 2.5x in 5 years → ~20% IRR
• 3.0x in 5 years → ~25% IRR

So 2.5x over 5 years ≈ 20% IRR. That's a solid deal.

The Rule of 72 and Rule of 115

• Two mental math tools every PE professional uses:
• Rule of 72: Years to double = 72 / annual rate. At 20% IRR, money doubles in 3.6 years
• Rule of 115: Years to triple = 115 / annual rate. At 20% IRR, money triples in 5.75 years

Working backwards: if you 2.5x your money in 5 years, the IRR sits between doubling (Rule of 72) and tripling (Rule of 115) — roughly 20%.

How to Present Your Answer

Structure it as: context, math, conclusion. "Given the $800M acquisition at 8.0x with 40% equity, I'd estimate a 2.5x MOIC and roughly 20% IRR over 5 years. The returns are driven by about $250M of cumulative debt paydown and 28% EBITDA growth. The key sensitivity is whether we can maintain that 5% organic growth — if it drops to 3%, MOIC falls to roughly 2.2x."

Common Traps

Interviewers test your judgment, not just math: - "What if leverage increases to 6.0x?" — More debt means higher returns but also higher risk. Discuss covenant headroom - "What if there's a dividend recap in Year 3?" — Earlier cash distributions improve IRR (time value of money) even if MOIC is similar - "What drives returns more: growth or deleveraging?" — In this case, deleveraging contributes roughly 0.8x of the 1.5x gain. Be specific

Practice This Concept

Apply paper LBO mechanics in the Project Skyfall challenge — a full SaaS LBO with cascading consequences for modeling errors.