Case 054LBOCore

In the Kirnav Engineering buyout, management rolls Rs 40 crore of equity alongside the sponsor and also gets an incentive plan. How is the exit equity split, what does the sponsor earn, and what is the difference between the rollover and the incentive?

CitiNew York · 2026

The situation

A sponsor buys Kirnav Engineering, a maker of industrial gearboxes, and puts in Rs 400 crore of equity. The founders and the management team owned part of the old company. They take Rs 40 crore of their sale proceeds and put it back into the new company as ordinary equity, on exactly the same terms as the sponsor. Entry equity is Rs 440 crore in total.

On top of that, the sponsor grants a management incentive plan: at exit, management receives 10% of the equity value created above the Rs 440 crore of entry equity. Five years later the business is sold and the equity, after repaying all debt, is worth Rs 1,000 crore.

Your task

Split the Rs 1,000 crore between the incentive pool, management's rolled stake and the sponsor. Give the sponsor's money multiple and IRR, and explain how the rollover differs from the incentive.

Quick check

Who pays for the Rs 56 crore incentive pool?

Worked solution

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

30-second answerThe answer to give first

The sponsor gets Rs 858.2 crore, 2.15x its money and about 16.5% a year. The gain above entry is Rs 560 crore, so the incentive pool is Rs 56 crore. The remaining Rs 944 crore splits 400 to 40, giving management's rollover Rs 85.8 crore. The rollover is management's own money at risk on the same terms as the sponsor; the incentive is a promote that costs nothing and pays only if value is created.

Step 1What is the difference between rolling equity and an incentive plan?

Picture a chef joining a new restaurant. In one deal she puts Rs 5 lakh of her savings in alongside the owner and owns a slice: if the restaurant fails, her savings go with it. In another she puts in nothing but is promised a tenth of the profit above a target. The first is a rollover, money at risk on the same terms as the sponsor; the second is an incentive, a share of the upside with no downside. A sponsor wants both, because each fixes a different problem.

The rollover makes management lose alongside the sponsor if the deal goes wrong, so they do not take reckless bets with the sponsor's money. The incentive, often called sweet equityShares or options given to management at little or no cost, which only pay out once the value of the company rises above a set level. or a promote, gives them a far larger percentage gain than the sponsor if the plan works, so they push for the upside.

Two ways management shares in Kirnav: its own money, and a slice of the gainEntry equity, Rs 440 croreSponsor 400Management rollover 40, its own moneyGain above entry: 560. The incentive pool takes 10% of itExit equity, Rs 1,000 croreSponsor 858.2Management rollover 85.8Incentive pool 56Sponsor and rollover both earn 2.15xRollover: 40 in, risk on the way down85.8 out, the same 2.15x as the sponsorIncentive: nothing in, nothing lost56 out, paid only from the gain above 440
Kirnav's exit equity of Rs 1,000 crore splits into an incentive pool of Rs 56 crore, 10% of the Rs 560 crore gain above entry, and Rs 944 crore shared 400 to 40, so the sponsor gets Rs 858.2 crore and management's rolled stake Rs 85.8 crore.
Step 2How do you split the Rs 1,000 crore at exit?

Work from the top in three steps. First the gain the plan is measured on: Rs 1,000 crore less Rs 440 crore of entry equity is Rs 560 crore. The incentive pool is 10% of the gain, Rs 56 crore, not 10% of the whole exit equity. Second, the Rs 944 crore left belongs to the ordinary shares. Third, split it by money put in: the sponsor owns 400 of 440, or 90.9%, so it gets Rs 858.2 crore, and management's rollover gets Rs 85.8 crore.

HolderPut inTakes outMultipleIRR
Sponsor400.0858.22.15x16.5%
Management rollover40.085.82.15x16.5%
Incentive pool0.056.0n/an/a
Total440.01,000.02.27x17.8%
Rs crore over five years. The ordinary shares, sponsor and rollover alike, earn 2.15x after the pool; the whole equity earns 2.27x before it.
The relationship
MOICsponsor=(1,000−0.10×560)×400440400=2.145×IRR=2.1451/5−1=16.5\text{MOIC}_{\text{sponsor}} = \frac{(1{,}000 - 0.10 \times 560) \times \tfrac{400}{440}}{400} = 2.145\times \qquad \text{IRR} = 2.145^{1/5} - 1 = 16.5%
1,000exit equity after all debt is repaid
0.10 x 560the incentive pool, 10% of the gain above Rs 440 crore of entry equity
400/440the sponsor's share of the ordinary equity, by money put in
What it says in wordsTake the pool out first, give the sponsor its share of what is left, then divide by what it put in and annualise over five years.
Step 3Who actually pays for the incentive plan?

Everyone who holds ordinary shares, in proportion. Without the plan the sponsor would take 400/440 of Rs 1,000 crore, Rs 909.1 crore. With it, Rs 858.2 crore. The plan costs the sponsor Rs 50.9 crore and about 1.4 points of IRR, and it costs management's own rolled stake Rs 5.1 crore. Management pays a small part of its own promote, which is a detail interviewers like to hear you catch.

Who earns what multiple once the incentive pool is paidWhole equity, before the pool2.27x (17.8% a year)Sponsor, after the pool2.15x (16.5% a year)Management, rolled money only2.15x (same terms as the sponsor)Management, rollover plus pool3.55x (28.8% a year)
The sponsor and management's rolled money both earn 2.15x after the incentive pool, but management's total of Rs 141.8 crore on Rs 40 crore invested is 3.55x, about 28.8% a year, because the pool came at no cost.
Step 4Why would a sponsor give away Rs 56 crore?

Because the pool is paid only out of value that would not exist without management. If exit equity were Rs 440 crore or less, the pool would be worth nothing and the sponsor would lose nothing to it. The sponsor gives up a tenth of the gain to make the gain more likely. Management's total of Rs 141.8 crore on Rs 40 crore, 3.55x, is what makes five years of hard work worth it to them.

Say the limits. Real plans vest over time, carry leaver terms that take the shares back from anyone who quits early, and often only pay once the sponsor clears a return hurdle, such as 2.0x its money. The tax treatment of a rolled stake and of incentive shares can differ sharply, so the structure is drafted with tax advice; check the current rules rather than assuming one treatment. The arithmetic here is the version you should be able to do on paper.

Where candidates lose it

The common mistake is taking 10% of the whole exit equity, Rs 100 crore, instead of 10% of the gain above entry. That nearly doubles the pool and understates the sponsor's return. Read the hurdle in the plan before you multiply.

The second is treating the rollover as free shares for management. It is their own money on the same terms as the sponsor, so it earns the sponsor's multiple and bears its share of the pool. Only the incentive is a promote.

What the interviewer asks next

  • The plan instead pays 10% of exit equity above a 2.0x return to the sponsor. What does management receive?
  • Management rolls Rs 80 crore instead of Rs 40 crore. How do the sponsor's multiple and IRR change?
  • Why might a sponsor insist on a rollover even when management has little cash to spare?
  • What is a ratchet in a management plan, and why do sponsors use one?

Asked at Citi, Mergers and Acquisitions, New York, 2026 (Wall Street Oasis): Talk about the mechanics of an LBO. What is the difference between management rollover and incentives.

Company names and figures are illustrative.