🏗️ Private Equity Interview Questions

Entry: a sponsor acquires a company at an entry multiple, funding the purchase with roughly 40% to 60% debt and the balance in equity. Sources and uses: sources are the debt tranches plus sponsor equity, and uses are the purchase of equity, refinancing of existing debt and fees. Hold: over three to seven years operating cash flow, after cash interest and capex, sweeps down the debt while EBITDA ideally grows. Exit: the business is sold at an exit multiple, debt outstanding is repaid, and whatever remains is equity proceeds to the sponsor.

EBITDA growth, from revenue growth or margin expansion. Multiple expansion, selling at a higher multiple than you paid, which is the least controllable and should never be the base case. Debt paydown, where cash flow retires debt so a larger share of exit enterprise value falls to equity. Leverage amplifies all three, and it amplifies losses on the way down just as efficiently.

Stable and predictable cash flow above all, because debt service is contractual. Beyond that: low capex intensity so cash converts, a defensible market position, a non-cyclical end market, a clean balance sheet with room to add leverage, tangible assets that support secured borrowing, and identifiable operational improvement. A credible exit route matters too, since returns are only realised on sale.

MoIC is money out divided by money in, so a 2.5x MoIC means you received two and a half times what you invested, a gain of 1.5x your original stake, ignoring time entirely. IRR is the annualised discount rate that sets the net present value of the cash flows to zero, so it is highly sensitive to timing. A 2.5x over three years is roughly a 36% IRR, while the same 2.5x over six years is roughly 16.5%. Sponsors quote both because MoIC captures absolute value created and IRR captures the speed of creating it.

Three reasons. It amplifies equity returns, because the same enterprise value gain accrues to a smaller equity base. Interest is tax deductible, so the tax shield lowers the effective cost of capital. And it imposes discipline, since a fixed debt service schedule forces management to prioritise cash generation. The cost is fragility: leverage magnifies downside just as strongly, and a covenant breach can transfer control to lenders.

Uses are what the money buys: the equity purchase price, repayment of existing debt, transaction and financing fees, and any cash left on the balance sheet at close. Sources are where it comes from: each debt tranche in order of seniority, any rollover equity from existing management, cash already on the balance sheet, and finally sponsor equity as the plug. The two sides must equal, and sponsor equity is normally solved as the residual once debt capacity is fixed.

The classic structure is 2 and 20. The manager charges a 2% annual management fee on committed capital during the investment period, then typically on invested capital afterwards. Carried interest is 20% of profits, paid only after limited partners receive their capital back plus a preferred return, commonly 8%. Many funds then include a catch-up, where the general partner takes most or all of the next distributions until they have received 20% of total profits, after which distributions split 80/20.

DPI, distributions to paid-in, measures cash actually returned to investors divided by capital drawn. It is realised and cannot be argued with. RVPI, residual value to paid-in, is the remaining unrealised holdings as a share of paid-in capital, and rests on the manager's own marks. TVPI is simply DPI plus RVPI, the total value multiple. Early in a fund's life TVPI is nearly all RVPI, which is why a young fund's headline number deserves scepticism until distributions arrive.

Equity value at exit equals exit enterprise value less remaining net debt. If EBITDA and the exit multiple are unchanged, exit enterprise value is unchanged, so every dollar of debt repaid transfers one dollar to equity. That is the debt paydown lever. Consider an entry at $1,000 of enterprise value with $600 of debt and $400 of equity: if you repay $200 of debt and exit at the same $1,000, equity is now $600, a 1.5x MoIC with no operational improvement whatsoever.

The portfolio company raises new debt and uses the proceeds to pay a dividend to the sponsor, rather than to fund the business. It returns capital early, which improves IRR sharply because of the timing benefit, without requiring a sale. It does not create operating value: leverage rises, the equity cushion thins, and future flexibility is reduced. Lenders generally allow it only when leverage is comfortably below covenant levels and cash generation is strong.

The prudent base case assumes you exit at or slightly below the entry multiple, because multiple expansion depends on market conditions you do not control. Paying a high entry multiple raises the bar on every other lever, since more of the return must then come from EBITDA growth and paydown. Modelling exit above entry is sometimes defensible when the business will genuinely be larger, more diversified or higher margin at exit, but it should be argued explicitly, never assumed.

Private equity buys control of mature, cash generative businesses using significant leverage, and drives returns through operational improvement and debt paydown. Growth equity takes minority stakes in companies that are already scaling, uses little or no leverage, and relies on revenue growth. Venture capital funds young, often pre-profit companies with equity only, accepting that most positions fail and that returns come from a small number of very large outcomes. Leverage, control and loss rates are what separate them.