Using the MoIC-to-IRR approximation, roughly what IRR corresponds to a 2.5x MoIC over 5 years? A 2.0x MoIC over 3 years?
General educational practice only. This is not an actual, confidential, leaked, or firm-provided interview question. Check important technical details against primary learning materials.
The answer
For a 2.5x MoIC over 5 years the approximate IRR is about 20 percent. For a 2.0x MoIC over 3 years it is closer to 26 percent. Those numbers come straight from the MoIC-to-IRR lookup table every paper LBO candidate memorizes. The pattern to remember is that doubling your money over 5 years gives you roughly a 15 percent IRR, while doubling it over 3 years gives you about 26 percent. From there you can interpolate.
Moving from a 2.0x to a 2.5x over the same 5-year hold pushes the IRR from about 15 percent up to 20 percent. Cutting the hold period down to 3 years on a 2.0x return shifts the IRR from 15 percent to roughly 26 percent because the same multiple is achieved faster.
This approximation keeps you from attempting a literal nth root by hand under time pressure, which almost always produces a wrong number or eats up valuable minutes.
Sources & uses
| Term Loan B | 400 |
| Senior notes | 250 |
| Sponsor equity | 370 |
| Total sources | 1,020 |
| Purchase of equity | 900 |
| Refinance existing debt | 100 |
| Financing & advisory fees | 20 |
| Total uses | 1,020 |
Also asked as
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- Walk through why a paper LBO simplifies the debt schedule down to a single FCF assumption rather than a full mandatory-amortization-plus-sweep waterfall.
- Entry EBITDA $75M at 8x, 4.5x leverage. EBITDA grows to $100M over 5 years, exit multiple is 7.5x (a half-turn contraction), and cumulative debt paydown is $150M. Compute MoIC and estimate IRR.
- Explain what happens to the return decomposition once debt is fully retired mid-hold and the remaining free cash flow simply accumulates as cash. Does this help or hurt the equity return, and why is it categorized differently from 'deleveraging'?
- A fund needs a 3.0x MoIC over 4 years. If EBITDA doubles over the hold and the exit multiple equals the entry multiple, what does that imply about how much debt must be paid down, assuming entry leverage of 5x EBITDA on $90M of entry EBITDA? Set up (but don't necessarily fully solve) the equation you'd use.
- Reverse paper LBO: the fund requires a 2.8x MoIC over 5 years. Entry EBITDA is $95M, growing to $133M at exit. Leverage is capped at 5x EBITDA, exit multiple is fixed at 8.0x, and the debt schedule retires $280M of debt over the hold. Solve for the maximum entry EV/EBITDA multiple, ignoring fees.
- You compute a 2.6x MoIC over 5 years but the interviewer then says the deal actually closed 8 months late relative to your assumed entry date, compressing the hold to 4.33 years with the same exit equity value. Explain qualitatively (no need for exact math) which direction IRR moves and why, referencing how IRR treats non-integer hold periods.
- A candidate tells you they always assume the exit multiple equals the entry multiple by default. Critique this habit: when is it a reasonable default, and what specific interview cue should prompt them to challenge it rather than just apply it silently?
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The rest of this topic
LBO returns: IRR, MoIC and the value bridge