Private Equity interview preparation

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September 2026

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1. 042How does operating leverage affect debt holders versus equity holders?Credit and financingHardtechnicalOaktree Capital ManagementCredit · Los Angeles · 2024

   Say this

   High operating leverage amplifies the volatility of EBITDA, which is good for equity and bad for debt. Equity holds the upside option; debt holds a fixed claim and only experiences the extra volatility as risk.

   Then walk it

   1. Operating leverage is the share of fixed costs in the cost base. High fixed costs mean a small revenue change produces a large EBITDA change in both directions.
   2. For equity, that asymmetry is valuable. Upside flows entirely to shareholders, downside is capped at losing the equity. More volatility means a more valuable option.
   3. For debt, the payoff is capped at par plus coupon. Extra volatility adds no upside and materially increases the probability of default, so the lender is strictly worse off.
   4. This is the classic agency conflict between debt and equity: shareholders of a levered company prefer more risk than lenders would choose, and the conflict sharpens as the company approaches distress.
   5. Which is why credit documents restrict exactly these choices: covenants on leverage, restrictions on asset sales and dividends, and limits on acquisitions are all attempts to stop the equity taking risk with the lender's money.
   6. Practically for underwriting: a high-fixed-cost business supports less leverage than a variable-cost business with the same EBITDA, because the downside case is so much worse. That is why lenders price manufacturing and airlines differently from services.

   Where candidates lose it

   Describing operating leverage correctly but not linking it to the option payoffs. The debt-equity agency conflict is the intellectual content, and the practical conclusion, that fixed-cost businesses support less debt, is what shows you can underwrite.

   Expect next

   • So how much leverage would you lend to an airline?
   • What covenants would you want?
   • How does that conflict behave near distress?

   Reported by candidates at Oaktree Capital Management (Credit, Los Angeles, 2024). Source: Wall Street Oasis.

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.