Case 021Paper LBOsCore
A paper LBO where the interviewer keeps changing the terms: build the base case for a specialty chemicals buyout, then answer fast what happens to the IRR if the exit multiple falls, if leverage rises, and if the hold shortens.
1The situation
Ruvani Specialty Chemicals makes additives for paints and plastics. EBITDA is Rs 150 crore and a fund buys it at 9x, Rs 1,350 crore, with 5x of debt at 9%. EBITDA grows 6% a year. Cash conversion is 50%: half of each year's EBITDA is available before interest, after tax, capex and working capital. Interest is on the opening balance and everything left repays debt. Exit at 9x after five years.
Once you have the base case, the interviewer asks three quick questions in turn: exit at 8x; leverage of 6x; a four-year hold. The interviewer wants direction and rough size in seconds, then the number.
2Your task
Give the base case MOIC and IRR, then for each change say which way the IRR moves, roughly how much, and why, before computing it.
Quick check
The interviewer says the exit multiple drops from 9x to 8x. Before computing: roughly how much equity disappears?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Base case: Rs 600 crore of equity becomes Rs 1184 crore, 1.97x and 14.6%. Exit at 8x takes Rs 201 crore off exit equity and the IRR to 10.4%. Leverage at 6x cuts equity in to Rs 450 crore and lifts the IRR to 16.2%, with less debt paid down. A four-year hold gives a lower multiple, 1.73x, but a higher IRR, 14.8%, because the return comes mostly from entry leverage and arrives sooner.
Step 1How do you build the base case in your head?
Sources and uses first: 9 times 150 is Rs 1,350 crore, debt 5 times 150 is Rs 750 crore, equity Rs 600 crore. Then the cash: year 1 EBITDA is Rs 159 crore, half of it is Rs 79.5 crore, interest is 9% of Rs 750 crore, Rs 67.5 crore, so only Rs 12.0 crore repays debt. At 5x leverage and 9% the interest eats almost all the cash in year 1, and paydown only grows as EBITDA grows and the balance shrinks: about Rs 127 crore over five years. Exit EBITDA is Rs 200.7 crore, EV at 9x Rs 1,807 crore, less debt of Rs 623 crore gives Rs 1184 crore, 1.97x. A 2x in five years is about 15%; 1.97x is a little below, so call it 15%.
| Year | EBITDA | Cash before interest (50%) | Interest at 9% | Debt repaid | Debt at year end |
|---|---|---|---|---|---|
| 1 | 159.0 | 79.5 | (67.5) | 12.0 | 738.0 |
| 2 | 168.5 | 84.3 | (66.4) | 17.9 | 720.1 |
| 3 | 178.7 | 89.3 | (64.8) | 24.5 | 695.6 |
| 4 | 189.4 | 94.7 | (62.6) | 32.1 | 663.6 |
| 5 | 200.7 | 100.4 | (59.7) | 40.6 | 622.9 |
| Exit | 200.7 x 9 = 1,807 | paid down 127 | 622.9 |
Step 2What happens when the exit multiple drops to 8x?
Direction: down, and by a lot, because the whole turn comes off equity. Size: one turn on exit EBITDA of Rs 200.7 crore is Rs 201 crore, which is 17% of the exit equity. Exit equity falls to Rs 983 crore, 1.64x, and the IRR to 10.4%, a drop of 4.2 points for one turn. The rule to say out loud: at 5x leverage, every turn of exit multiple is worth about a third of the equity you put in, so the deal is a bet on the multiple holding as much as on the business.
Step 3And if leverage goes to 6x, or the hold to four years?
Leverage 6x: debt Rs 900 crore, equity Rs 450 crore. Interest rises to Rs 81.0 crore in year 1, more than the Rs 79.5 crore of cash, so debt actually rises in year 1 and paydown over the hold is smaller. Exit equity is Rs 953 crore, but on Rs 450 crore in that is 2.12x and 16.2%: a higher IRR on less money, with a thinner cushion, which is the trade leverage always offers. Four-year hold: exit EBITDA is Rs 189.4 crore and debt Rs 664 crore, so equity is Rs 1041 crore, 1.73x, but over four years that is 14.8%, above the base. The fifth year only adds about 14% to the multiple, less than the 15% IRR the first four years earned, so it dilutes the rate.
| Case | Equity in | Exit equity | MOIC | IRR | Change |
|---|---|---|---|---|---|
| Base: 9x exit, 5x debt, 5 years | 600 | 1184 | 1.97x | 14.6% | |
| Exit at 8x instead of 9x | 600 | 983 | 1.64x | 10.4% | -4.2 pts |
| Leverage 6x instead of 5x | 450 | 953 | 2.12x | 16.2% | +1.6 pts |
| Exit after 4 years, not 5 | 600 | 1041 | 1.73x | 14.8% | +0.2 pts |
The method for a live paper LBO is to know what each lever touches before touching it. The exit multiple changes only exit EV; leverage changes equity in, interest and paydown; the hold changes exit EBITDA, debt and the exponent. Say the direction, give the size from the one line that moves, then do the arithmetic. The limit is the 50% cash conversion handed to you: in a chemicals business a plant expansion or a working capital swing can halve it, and a candidate who notes that paydown is the fragile input has read the deal, not just the sheet.
Where candidates lose it
The usual loss is freezing when the terms change and rebuilding from scratch each time. Each change touches one line: the multiple changes exit EV, leverage changes equity in and interest, the hold changes the exponent. Know which, say the direction, then compute.
The second miss is saying a shorter hold lowers the return. It lowers the multiple and raises the IRR here, because the fifth year adds less to the multiple than the rate the first four years earned.
What the interviewer asks next
- Growth is 10% instead of 6%. What does that do to paydown and to the IRR?
- Interest rises to 11% at the same leverage. Which year does the debt stop falling?
- How would you explain to the interviewer which of the three changes you would actually worry about?
Asked at Neuberger Berman, Private Equity, London, 2026 (Wall Street Oasis): Paper LBO where terms changed constantly (had to quickly answer what happens to x if y changes)
Company names and figures are illustrative.