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  1. 020A sponsor buys a company at 10x EBITDA of 100, funded with 60% debt. EBITDA stays flat for five years and the exit is also at 10x. What is the MOIC if no debt is repaid, and what is it if 300 of debt is repaid over the five years?Leverage and capital structureWarm upMid-market buyout fund

    Try it first

    With 300 of debt repaid and nothing else changing, the MOIC is:

    Show the worked solution

    1.0x with no paydown and 1.75x with 300 repaid. The purchase price is 1,000, with 600 of debt and 400 of equity. With flat EBITDA and the same multiple, the exit value is again 1,000. If debt is still 600, equity is still 400: 1.0x. If 300 has been repaid, debt is 300 and equity is 700, which is 1.75x, an IRR of about 12% over five years.

    Where does the return come from if nothing grows?

    Think of buying a flat for 1 crore with a 60 lakh home loan, then renting it out and using the rent to pay down 30 lakh of the loan over five years. If the flat is still worth 1 crore, your share has gone from 40 lakh to 70 lakh, though the flat itself is unchanged. Debt paydown moves value from the lenders to the owner: the business is worth the same, but a larger slice of it belongs to the sponsor. The company's own cash flow is doing the repaying, so the sponsor's cheque never changes.

    Same 1,000 of value at entry and exit: paydown moves it to the sponsordebt 600equity 400Entrydebt 600equity 400: 1.0xExit, no paydowndebt 300Exit, 300 repaidEV 1,000 = 10x 100EV 1,000, flatEV 1,000, flatequity 700: 1.75x+300 from lendersFive years at 1.75x is an IRR of 11.8%, with no growth and no multiple expansion.
    The business is worth 1,000 at entry and at exit, but repaying 300 of debt cuts the lenders' claim from 600 to 300 and lifts the sponsor's equity from 400 to 700, a 1.75x multiple and a 11.8% IRR with no growth at all.

    What are the numbers, step by step?

    Entry: 10 x 100 is 1,000. Sixty per cent debt is 600, so equity is 400. Exit with nothing repaid: 1,000 less 600 is 400 of equity, 1.0x, a zero return over five years. Exit with 300 repaid: 1,000 less 300 is 700 of equity, and 700 over 400 is 1.75x. Over five years, 1.75x is about 11.8% a year: 1.12 to the fifth is 1.76, so a shade under 12%.

    The relationship
    MOIC=EVexit−DexitEentry=1000−300400=1.75x\text{MOIC} = \frac{EV_{\text{exit}} - D_{\text{exit}}}{E_{\text{entry}}} = \frac{1000 - 300}{400} = 1.75x
    EV_exitexit enterprise value, 10x EBITDA of 100
    D_exitdebt left at exit, 600 less 300 repaid
    E_entrythe sponsor's equity cheque, 400
    What it says in wordsThe sponsor's multiple is exit equity, enterprise value less remaining debt, over the equity it put in.

    Is 300 of paydown realistic, and what is left out?

    It means 60 a year of free cash flow after interest and tax on a business with EBITDA of 100, which is possible for a capital-light company and unlikely for a capital-hungry one. Paydown is the most reliable of the three return levers, alongside EBITDA growth and multiple change, because it depends on cash the business already generates rather than on the future. Say what the simple version ignores: transaction fees at entry and exit, any cash left on the balance sheet, and the risk that interest rates or a downturn absorb the cash meant for repayment.

    Where candidates lose it

    The common error is saying flat EBITDA and a flat multiple mean no return. That ignores the capital structure, which is exactly what the interviewer is testing.

    The second slip is computing the return on enterprise value, 1,000 to 1,000, rather than on equity. The sponsor owns the equity; say 400 in and 700 out.

    What the interviewer asks next

    • What exit multiple would give 2.0x with the same paydown?
    • If EBITDA grows to 120 as well, what is the MOIC?
    • Why do lenders accept higher leverage for businesses with stable cash flow?