What drives LBO returns (Advanced)
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
5 min read · updated July 30, 2026
The basic version tells you three things drive returns. The level 4 and 5 questions ask you to split a specific deal into those three buckets with numbers, then say which one you'd actually underwrite to.
Returns attribution with real numbers
Set up a deal. Entry at 8.0x on $100 of EBITDA, so a $800 purchase price, funded with $500 of debt and $300 of sponsor equity. Five years later EBITDA is $140, the exit multiple is 9.0x, and net debt has been paid down to $300.
Exit enterprise value is $1,260. Exit equity is $960. Against $300 in, that's a 3.2x MOIC and about a 26% IRR.
Now attribute the $660 of equity value creation. Do it in this order and the buckets don't overlap:
- EBITDA growth, valued at the entry multiple: $320
- Multiple expansion, applied to exit EBITDA: $140
- Debt paydown: $200
Total: $660. It reconciles.
The order matters and it is not arbitrary. Value EBITDA growth at the entry multiple and multiple expansion at exit EBITDA, and each dollar is counted once. Do it the other way and you double-count the interaction between growth and re-rating. If an interviewer asks you to attribute returns and your three buckets don't sum to the change in equity value, you've hit that overlap.
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Frequently asked
- How do you attribute LBO returns to their drivers?
- Split the change in equity value into three buckets. EBITDA growth is the exit EBITDA less entry EBITDA, valued at the entry multiple. Multiple expansion is the change in multiple applied to exit EBITDA. Debt paydown is the reduction in net debt over the hold. The three should reconcile to the total change in equity value, and a sponsor will always claim credit for the first bucket.
- Which return driver do sponsors actually control?
- EBITDA growth and debt paydown. Multiple expansion depends on where the market is trading at exit, which nobody controls, so a disciplined sponsor underwrites to a flat or lower exit multiple. If a deal only clears the return hurdle because the multiple expands, the investment committee will treat that as a market bet rather than an operating plan.
- Why can IRR and MOIC point in different directions?
- MOIC ignores time and IRR does not. Doubling money in three years is a 26% IRR; doubling it in seven is 10%. So a deal with the higher MOIC can have the lower IRR if it takes longer. Sponsors are measured on both because IRR alone rewards selling early and MOIC alone rewards holding forever.
- How does a dividend recap change returns?
- It pulls cash forward. Re-levering the company to pay the sponsor a dividend mid-hold raises IRR substantially because early cash flows dominate the IRR calculation, while MOIC barely moves since total dollars returned are similar. It is the clearest case where the two metrics disagree by construction.
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