In the LBO example, what is the approximate IRR?

In the LBO example, what is the approximate IRR?

• A. 10%
• B. 20%
• C. 30%
• D. 40%

Answer: (B)

In a leveraged buyout, the IRR shows the annual return to equity investors after financing, debt repayment, and the sale of the business. The leverage amplifies returns because you put in a relatively small amount of equity upfront, while debt financed a large portion of the purchase. As the debt is paid down over the holding period, the portion of value attributed to equity grows, boosting the IRR. When the company is eventually sold at a reasonable EBITDA multiple after a multi-year hold, the equity you initially invested is returned at a higher multiple, and you can annualize that gain to around twenty percent. A lower IRR would mean weaker growth, less leverage, or a longer time horizon than the scenario implies, while a much higher IRR would require stronger than assumed growth or an unusually rich exit those conditions don’t reflect.

In a leveraged buyout, the IRR shows the annual return to equity investors after financing, debt repayment, and the sale of the business. The leverage amplifies returns because you put in a relatively small amount of equity upfront, while debt financed a large portion of the purchase. As the debt is paid down over the holding period, the portion of value attributed to equity grows, boosting the IRR. When the company is eventually sold at a reasonable EBITDA multiple after a multi-year hold, the equity you initially invested is returned at a higher multiple, and you can annualize that gain to around twenty percent. A lower IRR would mean weaker growth, less leverage, or a longer time horizon than the scenario implies, while a much higher IRR would require stronger than assumed growth or an unusually rich exit those conditions don’t reflect.