Top 20 PE Technical Interview Questions (With Answers)

Private equity interviews are notorious for their technical rigour. Unlike investment banking interviews that focus on process mechanics, PE interviews test whether you can think like an investor. This guide covers the 20 questions you are most likely to face, with the depth of answer interviewers actually expect.

LBO Fundamentals

1. Walk me through a basic LBO model.

Start with the acquisition: enterprise value, sources and uses of funds, and the initial capital structure. Then build a five-year operating model projecting revenue, EBITDA, and free cash flow. Use free cash flow to pay down debt each year (the cash sweep). At exit, apply an exit multiple to year-five EBITDA, subtract remaining net debt, and calculate equity returns. The key outputs are IRR and MOIC.

A strong answer quantifies: "If I buy a business for 8x EBITDA with 60% leverage, grow EBITDA at 5% annually, pay down debt from free cash flow, and exit at 8x, I am generating roughly a 2.5x MOIC and a 20% IRR over five years."

2. What are the main value creation levers in an LBO?

There are three primary levers: revenue growth (organic and inorganic), margin expansion (cost reduction, pricing power, operational efficiency), and multiple expansion (entering at a lower multiple than you exit at). Additionally, deleveraging — using cash flow to pay down acquisition debt — creates equity value even if the enterprise value stays flat. Financial engineering through capital structure optimisation is often considered a fourth lever.

3. What makes a good LBO candidate?

Stable, predictable cash flows are paramount — you need to service debt. High margins (ideally 20%+ EBITDA margins) provide a cushion. Low capital expenditure requirements mean more free cash flow for debt repayment. A defensible market position reduces downside risk. Identifiable value creation opportunities (bolt-on acquisition targets, pricing power, operational inefficiencies) give the sponsor a clear thesis. Finally, a realistic exit path — whether trade sale, secondary buyout, or IPO — matters enormously.

4. Why does leverage amplify returns?

Leverage works because you are buying an asset worth £100m but only investing £40m of equity. If the asset appreciates to £130m and you repay £20m of debt, your equity is now £90m on a £40m investment — a 2.25x return. Without leverage, the same appreciation on a £100m all-equity investment gives you only 1.3x. The flip side is that leverage also amplifies losses; if the asset declines to £80m and you owe £60m in debt, your equity is only £20m — a 50% loss on a 20% decline in enterprise value.

Valuation and Structuring

5. How do you value a private company for an LBO?

Start with comparable company analysis (trading multiples from public peers), then precedent transaction analysis (M&A multiples from similar deals). Layer on a DCF for a fundamental view, but in PE the most critical valuation tool is the LBO model itself. The maximum price you can pay is the price at which you still hit your return hurdle (typically 20%+ IRR). This is called an "LBO floor valuation." Adjustments for control premiums, synergies, and illiquidity discounts are applied depending on the situation.

6. What is the difference between enterprise value and equity value?

Enterprise value is the total value of the business to all capital providers: equity holders plus debt holders minus cash. Equity value is the residual value after subtracting net debt. The bridge between them: Equity Value = Enterprise Value minus Net Debt (where Net Debt = Total Debt minus Cash). In an LBO context, the sponsor cares about equity value because that is what they are putting in and getting back.

7. Walk me through a sources and uses table.

Uses side: purchase enterprise value, transaction fees (advisory, legal, accounting), and financing fees (debt arrangement fees, OID). Sources side: term loans (senior secured), high-yield bonds or mezzanine debt, and sponsor equity. The total sources must equal total uses. A typical LBO might use 50-60% debt and 40-50% equity, though leverage levels vary by market conditions and asset quality.

8. How does working capital affect an LBO?

Changes in net working capital (NWC) directly impact free cash flow. If a target has inefficient working capital management — say, 90 days sales outstanding instead of an industry average of 60 — that represents an opportunity. Improving NWC by 30 days releases cash that can pay down debt faster, improving returns. Conversely, a business with growing working capital requirements consumes cash and reduces the cash available for deleveraging. Always model NWC as a percentage of revenue and stress-test the assumptions.

Returns and Analysis

9. What IRR do PE firms typically target?

Most PE firms target a gross IRR of 20-25% and a net IRR (after fees and carry) of 15-20%. The actual hurdle varies by strategy: large-cap buyouts may accept 15-18% gross given lower risk, while mid-market and growth equity targets run higher at 25-30%. Distressed and special situations funds may target 30%+ given the elevated risk. In the current environment with higher base rates, return expectations have adjusted upward relative to the low-rate era.

10. What is the difference between IRR and MOIC? When does each matter more?

IRR measures annualised returns and is sensitive to timing — a 2x return in two years is a 41% IRR, but a 2x return in five years is only 15%. MOIC measures absolute cash-on-cash return regardless of timing. IRR favours shorter holds; MOIC favours total value creation. LPs care about both: IRR tells them how efficiently capital was deployed, MOIC tells them how much wealth was created. A 3x MOIC at a 15% IRR is often preferred over a 1.5x at a 25% IRR because total dollars returned matter.

Portfolio and Operations

11. What happens after a PE firm acquires a company?

The first 100 days are critical. The firm installs its value creation plan: board composition, management incentive alignment (MIPs), operational improvement initiatives, and strategic priorities. Ongoing, the deal team monitors financial performance against the investment case, supports add-on acquisitions, manages the capital structure, and prepares for eventual exit. Operating partners may work directly with portfolio company management on specific initiatives.

12. What is a bolt-on acquisition and why do PE firms pursue them?

A bolt-on (or add-on) acquisition is when a portfolio company acquires a smaller business to complement its existing operations. PE firms love bolt-ons because they often occur at lower multiples than the platform was acquired at, creating immediate multiple arbitrage. They also drive revenue synergies (cross-selling, geographic expansion), cost synergies (shared overhead), and strategic value (capability or product gaps). A successful buy-and-build strategy can transform a 7x entry into an 11x exit multiple.

13. How do you think about downside protection?

This is what separates good PE investors from mediocre ones. Downside cases model what happens when revenue declines 10-20%, margins compress, or the exit multiple contracts by 1-2 turns. Key questions: Can the company still service its debt? Is there asset value to recover? Are there levers management can pull (cost cuts, asset sales, working capital release)? The best PE investors structure deals with protective covenants, conservative leverage, and strong asset coverage so that even in a downside case, the equity is not wiped out.

Behavioural and Judgement

14. Tell me about a deal you have looked at recently.

This is your chance to demonstrate genuine investor thinking. Pick a publicly reported PE deal, walk through the thesis (why this asset, why now, what the value creation plan likely is), identify the key risks, and give your view on whether it was a good deal. Interviewers are testing whether you read the FT or PE trade press, whether you can form independent views, and whether you can articulate an investment thesis concisely.

15. What sector would you invest in right now and why?

Have a prepared answer with a genuine thesis. Example: "Healthcare IT services. Public-sector digitalisation is a multi-decade tailwind, switching costs are high once systems are embedded, and valuations have come down from 2021 peaks. I would look for a mid-market platform with recurring revenue that can consolidate smaller regional players at 6-8x EBITDA while the platform trades at 12x." The key is specificity and demonstrating you understand both the opportunity and the risks.

16-20: Rapid Fire

16. What is a dividend recapitalisation? — The portfolio company takes on additional debt to pay a special dividend to the PE sponsor, returning capital without selling the business.

17. What is a management rollover? — Existing management reinvests a portion of their sale proceeds into equity alongside the PE sponsor, aligning incentives.

18. How do you calculate debt capacity? — Typically expressed as total debt to EBITDA (usually 4-6x for LBOs), constrained by debt service coverage ratio (DSCR > 1.2x) and lender appetite.

19. What is a ratchet in a MIP? — Performance thresholds that increase management's equity share if certain return targets are exceeded, usually tied to IRR or MOIC hurdles.

20. What happens in a covenant breach? — The lender can accelerate repayment, but typically the first step is negotiation. The borrower may request a covenant holiday, amend the facility, or inject equity to cure the breach.

How to Prepare

Do not memorise answers. Understand the concepts deeply enough to explain them in your own words, with numbers. Practice by building a simple LBO model from scratch — if you can build one from a blank spreadsheet, you can answer any technical question about one. Use Eternal PE Game's challenge simulations to practice answering under pressure with real consequences for wrong answers.