Case 001LBOHard

Paper LBO: a sponsor buys a business at 8x with two debt tranches, one amortising, and adds a bolt-on in year 2. Work out the return.

Bank of AmericaLondon · 2026Moelis & CompanyNew York · 2023

The situation

A sponsor buys Kavara Foods, a packaged foods maker, for 8.0x its EBITDA of Rs 100 crore, so Rs 800 crore. It funds the deal with a term loan A of Rs 300 crore at 8% that must amortise and takes every spare rupee of cash, senior notes of Rs 200 crore at 10% repaid only at exit, and Rs 300 crore of equity.

EBITDA grows by Rs 10 crore a year. At the end of year 2 Kavara buys a small rival with EBITDA of Rs 10 crore for 5.0x, Rs 50 crore, funded by adding to the term loan. Depreciation is Rs 20 crore a year and equals capex, working capital does not move, tax is 25%, and interest is charged on the opening balance. The sponsor exits after five years at 8.0x.

Your task

What are the money multiple and the IRR, and where does the return come from?

Quick check

Before any maths: roughly what IRR do you expect?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

About 3.4x the money and an IRR of about 28%. Exit EBITDA of Rs 160 crore at 8.0x is worth Rs 1,280 crore. Five years of cash flow repay about Rs 288 crore of term loan, leaving Rs 262 crore of debt, so equity is worth about Rs 1,018 crore against Rs 300 crore in. Most of the gain is EBITDA growth; debt paydown is the second engine.

Step 1What do you set up before touching the years?

Write the sources and uses first, because every later number hangs off it. Debt is 5.0x EBITDA split across two tranches that behave differently, and that difference is the point of the question. The term loan shrinks every year as cash sweeps it; the notes sit untouched until exit. Think of a home loan you prepay from every bonus alongside a fixed deposit loan you repay in one go at the end.

Sources and uses at entry, Rs croreBuy the business8.0x EBITDA of 100800Uses300Term loan A3.0x, 8%, amortises200Senior notes2.0x, 10%, bullet300Sponsor equity37.5% of priceSources
Kavara Foods is bought for Rs 800 crore, 8.0x EBITDA of Rs 100 crore, funded by a Rs 300 crore amortising term loan, Rs 200 crore of bullet notes and Rs 300 crore of sponsor equity, 37.5% of the price.
Step 2How does the cash flow each year?

Because capex equals depreciation and working capital is flat, free cash flow each year is simply net income, and all of it goes to the term loan. Interest falls as the loan shrinks, so net income climbs faster than EBITDA. The bolt-on adds Rs 50 crore of debt at the end of year 2 and Rs 10 crore of EBITDA from year 3.

YearEBITDAInterestTaxCash to repay debtBolt-onDebt at year end
1110.044.011.534.5465.5
2120.041.214.744.1+50 bolt-on471.4
3140.041.719.658.7412.7
4150.037.023.269.7343.0
5160.031.427.181.4261.6
Total288.4261.6
Rs crore. Interest is on the opening balance: 8% on the term loan and 10% on Rs 200 crore of notes. Across five years Kavara repays Rs 288.4 crore, leaving Rs 261.6 crore of debt at exit, of which Rs 200 crore is the untouched notes.
Step 3Where does the sponsor's return actually come from?

Split the gain into its engines, because the follow-up question is always which one matters most. EBITDA growth at a constant multiple adds Rs 400 crore, debt paydown adds Rs 288 crore, and the bolt-on adds a net Rs 30 crore: bought at 5x, it is worth 8x inside the bigger business, Rs 80 crore of value for Rs 50 crore of debt. That last piece is multiple arbitrageBuying earnings at a lower multiple than the one they are later valued at, so value appears without the business changing., and interviewers want you to name it.

Where the sponsor's gain comes from, Rs croreEntry equity300EBITDA growth+400Bolt-on at 5x, sold at 8x+30Debt repaid from cash+288Exit equity1,0183.39x the money in five years, an IRR of about 28%
Sponsor equity grows from Rs 300 crore to about Rs 1,018 crore: Rs 400 crore from EBITDA growth, Rs 30 crore from buying the bolt-on at 5x and selling at 8x, and Rs 288 crore from debt repaid out of cash flow.
The relationship
MOIC=1,280−261.6300≈3.39×IRR=3.391/5−1≈27.7%\text{MOIC} = \frac{1{,}280 - 261.6}{300} \approx 3.39\times \qquad \text{IRR} = 3.39^{1/5} - 1 \approx 27.7\%
1,280exit enterprise value, 8.0x EBITDA of 160
261.6debt left at exit: 61.6 of term loan plus 200 of notes
300equity put in at entry
What it says in wordsThe money multiple is exit equity over entry equity; the IRR is the yearly rate that turns one into the other over five years.

On paper, round hard and say you are rounding. Cash flow of roughly 35, 45, 60, 70 and 80 sums to about 290, so debt falls from 550 to about 260. Equity of about 1,020 on 300 is 3.4x, and 3.4x in five years is in the high twenties. An answer within a point or two, reached out loud, beats a precise answer reached in silence.

Where candidates lose it

The usual loss is treating all the debt as one block and repaying the notes as if they amortised too. The question said not a bullet repayment for one tranche precisely to see whether you keep the tranches apart: the notes are still Rs 200 crore at exit.

The second is forgetting that the bolt-on arrives with its own debt. Adding Rs 80 crore of value without the Rs 50 crore of borrowing overstates the gain.

What the interviewer asks next

  • The exit multiple falls to 7.0x. What is the IRR now?
  • Would you rather fund the bolt-on with debt or with new sponsor equity, and why?
  • What if the notes paid PIK interest instead of cash?
  • How does a dividend recap in year 3 change the IRR and the money multiple?

Asked at Bank of America, Investment Banking, London, 2026 (Wall Street Oasis): Super hard paper LBO. Multi-tranche, bolt-ons, not a bullet repayment.
Asked at Moelis & Company, Generalist, New York, 2023 (Wall Street Oasis): Multiple step paper LBO with several follow-up questions

Company names and figures are illustrative.