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A private-equity return check
You run the case. Read the prompt, answer questions from the notes below, and share data only when the candidate asks for it or gets stuck. Score at the end.
Case timer
00:00
1. Read the prompt aloud
Read it slowly, then pause. Let the candidate ask questions before they structure.
A European private-equity fund can buy a packaging maker for EUR 100 million, which is 10 times its EBITDA of EUR 10 million. It would pay with EUR 60 million of debt and EUR 40 million of the fund's own money (equity). The plan: grow EBITDA to EUR 14 million in five years, pay debt down to EUR 40 million, and sell at the same 10 times multiple. The fund targets about 20 percent a year. Does the plan meet it, and what should due diligence focus on?
Format note: Candidate-led: you choose what to calculate and where due diligence should look; the interviewer challenges your conclusions.
2. Answers to clarifying questions
Give these answers only if the candidate asks. If they ask something not listed, give a sensible answer or say it does not matter here.
If asked: Is the exit multiple the same as the entry multiple?
Answer: Yes, assume 10 times, with no gain from a higher multiple.
If asked: How does the plan grow EBITDA?
Answer: Price increases and a new plant in Poland.
3. The hypothesis a strong candidate states
Listen for an early, testable guess like this one. It does not need to match word for word.
The return will come from growing EBITDA and paying down debt. My hypothesis is that the plan reaches about 2.5 times the money, roughly the 20 percent target, so the real question is whether the EBITDA growth is believable.
4. A model structure
Compare the candidate's structure with this one. A different split can be just as good if it is clean and fits the problem.
- Equity in, equity out, and where the gain comes fromThis comes from return = equity out / equity in, where equity at exit = exit value minus debt.
- Exit value and equity at exit
- MOIC and IRR versus the target
- Key: Value-creation bridge: EBITDA growth and debt paydown
5. The working, step by step
Each step shows how a strong candidate works it out. Share a new fact from it only when the candidate asks or is stuck, and let them do the math: the result in the dark box is what they should reach.
Step 1: Exit value
What a strong candidate does: Candidate: "I will work from equity in to equity out. At exit, EUR 14 million of EBITDA at 10 times is:"
Exit EV (EUR m): 14 × 10 = 140
Step 2: Equity at exit
What a strong candidate does: Exit value minus the remaining debt.
Equity at exit (EUR m): 140 - 40 = 100
Step 3: MOIC
What a strong candidate does: Money back divided by money put in.
MOIC: 100 ÷ 40 = 2.5
Step 4: IRR check
What a strong candidate does: Candidate: "Growing 20 percent a year for five years multiplies money by about 2.5, so the IRR is about 20 percent, right at the target." Interviewer: "So you would buy it?" Candidate: "Not yet. It meets the target only if the plan holds, so I want to see where the gain comes from."
1.2 to the power of 5: 1.2 × 1.2 × 1.2 × 1.2 × 1.2 = 2.49
Step 5: Where the gain comes from
What a strong candidate does: Equity grows from EUR 40 million to EUR 100 million. EUR 40 million comes from the higher EV (EBITDA growth at the same multiple) and EUR 20 million from debt paid down.
Equity gain (EUR m): (140 - 100) + (60 - 40) = 60
Step 6: Downside: EBITDA reaches only EUR 12 million
What a strong candidate does: Candidate: "How confident is management in the Poland plant?" Interviewer: "It is not yet approved. Without it, EBITDA may reach only EUR 12 million." Exit value falls to EUR 120 million and equity to EUR 80 million.
MOIC in the downside: (12 × 10 - 40) ÷ 40 = 2
Step 7: Downside IRR
What a strong candidate does: 2 times in five years is about 15 percent a year, well below target.
1.15 to the power of 5: 1.15 × 1.15 × 1.15 × 1.15 × 1.15 = 2.01
The recommendation to listen for
At the end, say: "The CEO walks in. What is your recommendation?"
The plan meets the fund's target but with no room for error, so due diligence should focus on the EBITDA plan. First, it returns about 2.5 times the fund's money, roughly 20 percent a year, which is exactly the target. Second, EUR 40 million of the EUR 60 million gain comes from EBITDA growth and EUR 20 million from paying down debt, so the growth plan carries most of the return. Third, if EBITDA reaches only EUR 12 million, the return falls to about 2 times, or about 15 percent a year. Interview customers about the price increases and test the cost and timing of the Poland plant; proceed only if the plan holds up, or negotiate a lower entry price.
Risks a strong answer names: Customers may resist price increases; The new plant may be late or over budget; Exit multiples may be lower in five years.
Next steps: Run 15 to 20 customer interviews on price; Get an independent estimate of the plant cost and timeline.
Strong versus weak
A strong answer
Computed MOIC and IRR, split the gain into EBITDA growth and debt paydown, and pointed due diligence at the assumption that drives the return.
A weak answer
Said the deal "looks good" because EBITDA grows, without calculating the return or testing a downside.
Score the candidate
Score each criterion from 1 to 5. A 2 or a 4 sits between the descriptions.
This case has no exhibit. Score Exhibit reading on how the candidate used the data you gave them: did they pick out the number that matters and say what it means?
Total
0 out of 25
Score all five criteria to see the band and the feedback template.