Private Equity Interview Questions (LBO, returns & fit)

Free sample from the Deskcraft question bank

PE interviews test the LBO cold: what makes a good target, the paper LBO in your head, IRR versus MOIC, value creation and how you discuss a deal. These questions come straight from the Deskcraft bank.

1. Walk me through a simple LBO.

Model answer

A sponsor buys a company using mostly debt and some equity. Set the purchase price as entry EBITDA times an entry multiple, fund it with debt (a leverage multiple of EBITDA) plus an equity plug. Over the hold the company's cash flow pays down debt and EBITDA grows. At exit, value the company as exit EBITDA times an exit multiple, repay remaining debt, and the equity left is the return, measured as MOIC (exit equity over entry equity) and IRR.

2. What makes a good LBO candidate?

Model answer

Stable, predictable cash flows to service debt; low capex and working-capital needs; strong margins; a defensible market position; room for operational improvement; a clean balance sheet with debt capacity; and a clear exit path. Mature, non-cyclical businesses are ideal.

3. What makes an acquisition accretive or dilutive to EPS?

Model answer

Compare the cost of the acquisition financing to the earnings you buy. An all-stock deal is generally accretive when the acquirer's P/E is higher than the target's (paying with expensive stock for cheaper earnings). A cash or debt deal is accretive when the after-tax cost of cash or debt is below the target's earnings yield. Synergies and financing effects then adjust the result.

4. A company with a P/E of 20 acquires one with a P/E of 15 in an all-stock deal. Accretive or dilutive?

Model answer

Accretive, before premium and synergies: the acquirer's earnings yield of 5% is lower than the target's 6.7%, so it issues relatively expensive shares to buy cheaper earnings and combined EPS rises. In general a higher-P/E company acquiring a lower-P/E one in stock is accretive.