Series 79 practice questionhardLeveraged Buyouts
A private equity firm is evaluating an LBO where the target company has $50 million EBITDA, $400 million debt capacity at 6x leverage, and the sponsor targets a 25% IRR over five years. Which factor most directly increases the sponsor's IRR?
- ARaising additional debt above 6x leverage
- BPaying a higher purchase price for the target
- CRestricting operational improvements post-acquisition
- DAchieving a higher exit multiple at sale✓ Correct answer
Explanation
Why D — Achieving a higher exit multiple at sale
A higher exit multiple increases the sponsor's exit value, directly boosting IRR. The trap is believing leverage alone or a higher purchase price would increase returns, which is not always true.
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