In LBO modeling, what is a typical IRR target range?

In LBO modeling, what is a typical IRR target range?

• A. 15-25%
• B. 5-10%
• C. 30-40%
• D. 40-60%

Answer: (A)

In LBO modeling, the return expectation for the equity investors is captured by the internal rate of return (IRR), which reflects the annualized gain after debt is paid down and the business is exited. A typical IRR target range is 15-25%. This range balances the amplified upside that leverage provides with the risk and uncertainty of operating improvements, exit timing, and debt covenants. It represents a credible, attractive return for investors given the leverage used and market conditions. Choosing a much lower range, like 5-10%, would not adequately compensate for the risk and capital at stake. On the other hand, ranges like 30-40% or 40-60% imply extraordinarily high and often unrealistic performance expectations, which are not representative of ordinary deals.

In LBO modeling, the return expectation for the equity investors is captured by the internal rate of return (IRR), which reflects the annualized gain after debt is paid down and the business is exited. A typical IRR target range is 15-25%. This range balances the amplified upside that leverage provides with the risk and uncertainty of operating improvements, exit timing, and debt covenants. It represents a credible, attractive return for investors given the leverage used and market conditions.

Choosing a much lower range, like 5-10%, would not adequately compensate for the risk and capital at stake. On the other hand, ranges like 30-40% or 40-60% imply extraordinarily high and often unrealistic performance expectations, which are not representative of ordinary deals.