Can a buyout survive a weaker exit?
Paper LBO · 15 min · Fictional interview case
The situation
A private equity team is considering a packaging business with steady demand. The deal team expects cash generation to repay some borrowings before it sells the company. The investment committee wants to know what happens if buyers offer a lower price at exit.
Estimate the sponsor’s return in both outcomes and compare it with a 15% annual hurdle. Use a simple five-year model without distributions.
- Entry value / entry debt
- ₹160 crore / ₹90 crore
- Year-five EBITDA / net debt
- ₹26 crore / ₹50 crore
- Base / downside exit multiples
- 8× / 6×
Your task
What are the equity multiple and annualized return in each outcome?
Reveal step-by-step solution
Find the sponsor’s initial equity
₹160 − ₹90 = ₹70 crore. Fees and interim cash flows are ignored.
Estimate base exit proceeds
8 × ₹26 = ₹208 crore enterprise value. Subtract ₹50 crore net debt to get ₹158 crore equity. That is 2.26× and about 17.7% annualized.
Estimate downside proceeds
6 × ₹26 − ₹50 = ₹106 crore. That is 1.51× and about 8.7% annualized. The base clears 15%, but downside does not.
Interviewer follow-up
What if downside debt is ₹65 crore instead?
Compare your answer
Equity proceeds fall to ₹91 crore, or 1.30× invested equity and about 5.4% annualized. Test whether lower earnings and weaker debt repayment should occur together.