Private Equity Interview Questions: The Complete Guide for Middle-Market Professionals

Middle-market and lower-middle-market private equity interview questions reward precision under pressure. Most guides are written for mega-fund scenarios; this one is built for MM/LMM roles where you actually touch the model and the company. Inside: battle-tested frameworks, mini-formulas, and mental-math drills to practice aloud (just make sure to keep your answers under two minutes).

TL;DR Cheat Sheet

• IRR rules: 2×/3y ≈ 26.0%; 3×/5y ≈ 24.6%; 2×/5y ≈ 14.9%

• Leverage/coverage bands: Total 4–6×; Senior ~3×; ICR > 2.0×; FCCR sanity check: target ≥1.25× (post-deal), definitions vary by lender; ABLs often have a springing FCCR test

• 5-line paper LBO pattern: Sources & Uses → EBITDA→FCF → Debt paydown → Exit EV/net debt → MOIC/IRR + 2-var sensitivity

• EV vs Equity reminder: EV = Equity + Net Debt (+ Pref + Minority − Cash / non-operating)

• Deal walkthrough rubric: Thesis → Role → Numbers → Risks/Diligence → Outcome → Lessons (≤120 seconds)

• ABL cheat: Availability ≈ 85% Eligible AR + 50% Eligible Inventory − Reserves; springing FCCR if Availability < threshold

• Technical knowledge: Strong technical knowledge of financial modeling, valuation techniques, and the ability to clearly explain complex concepts is essential for private equity interview success.

Behavioral & Fit

Walk me through your background

What they’re testing: Ability to connect past experiences to private equity in a logical progression, demonstrating judgment and self-awareness. Candidates often compete with investment bankers for private equity roles, so it’s important to show how your background stands out in this highly competitive landscape.

Behavioral Facts

• An effective way to prepare for behavioral questions is to structure responses using the CARL method: Context, Action, Result, Lesson.

• Behavioral questions in private equity interviews assess cultural fit and one’s ability to work in a team.

• Common behavioral questions include personal achievement, team collaboration, and handling conflicts to gauge a candidate’s values and interpersonal skills.

• Demonstrating strong soft skills is as important as technical expertise during interviews, particularly in illustrating one’s personality and teamwork capabilities.

3-step framework (Past → Present → Future):

1. Past: Highlight 2-3 specific experiences that built relevant skills

2. Present: Connect current role to private equity skill development

3. Future: Articulate why this firm fits your trajectory

Example: “Started in investment banking at [Bank], where I modeled $2B+ in M&A transactions and learned to work under tight deadlines. Moved to [Consulting Firm] to develop operational expertise, spending 18 months helping a $50M EBITDA manufacturing company optimize procurement—saved 8% on COGS. Now I’m ready to combine financial analysis with hands-on value creation in middle-market private equity, where I can own entire deal processes rather than just building models. Unlike investment banking interviews, private equity interviews focus more on investment judgment and deal analysis, and I’ve prepared to demonstrate my ability to think like an investor.”

Red flags: Over 2 minutes, duty listing without connecting themes, no lessons learned or growth demonstrated.

Why private equity?

What they’re testing: Understanding the advisor vs. principal distinction and genuine motivation for ownership mindset.

A strong foundation in corporate finance is essential for success in private equity and is a key motivator for many candidates pursuing this field.

3 pillars framework:

1. Deep analysis: Longer investment horizon enables thorough due diligence

2. Long-term partnership: Working alongside management teams for 3-5 years

3. Ownership/accountability: Principal investing with skin in the game

Example: “Three reasons: First, the analytical depth—spending months understanding a business versus weeks in investment banking. Second, the partnership element—working with management teams to execute operational improvements rather than just advising. Third, the accountability that comes with principal investing—my recommendations directly impact fund returns and portfolio company outcomes.”

Red flags: Generic “I like deals” answer, focusing only on compensation, misunderstanding the role as pure financial engineering.

Why our firm? Why middle-market?

What they’re testing: Research depth, strategic fit understanding, and genuine interest in the firm’s approach.

Framework:

1. Strategy fit: Connect your background to their investment approach

2. Specific portfolio/deal reference: Demonstrate research with recent examples

3. Cultural alignment: Reference firm values or operational philosophy

4. Particular firm knowledge: Show understanding of the particular firm’s specialization, mission, values, and how your interests align with the firm’s culture

Example: “Your focus on founder-owned businesses in business services aligns with my experience helping entrepreneurs scale operations. Your recent investment in [Portfolio Company] demonstrates the hands-on approach I’m seeking—where associates lead entire work streams rather than just supporting. The fact that you typically hold companies for 4-6 years shows commitment to sustainable value creation, not financial engineering. I have developed firm knowledge of your investment strategies and exit history, and I am particularly drawn to how your firm’s culture values collaboration and thoughtful risk management, which matches my own approach.”

Red flags: Generic compliments, misstating the firm’s strategy, no specific deal or portfolio references.

Strengths/weakness; leadership/conflict

What they’re testing: Self-awareness, learning ability, and professional maturity under pressure situations.

STAR structure: Situation → Task → Action → Result, plus one lesson learned.

Example (weakness): “Early in my banking career, I focused too heavily on model precision at the expense of strategic thinking. During a sell-side process, I spent hours perfecting DCF assumptions while missing a key competitive threat the buyer raised. Learned to balance analytical rigor with big-picture perspective—now I start with strategic questions before diving into spreadsheets.”

Red flags: Self-aggrandizing stories, no real weakness or self-awareness, conflicts where you’re clearly in the wrong.

Time budget: Keep each answer ≤ 2 minutes (practice with a timer).

Deal Walkthroughs

Use the 2-minute drill rubric: Thesis → Your Role → Numbers → Risks/Diligence → Outcome → Lessons. Target length: 90–120 seconds; one lesson learned.

In many interviews, candidates may be asked to discuss a proposed deal, outlining the key assumptions and deal terms that define the transaction under consideration.

Your favorite deal (illustrative)

What they’re testing: Ability to synthesize complex transactions, quantify impact, and extract meaningful lessons, including understanding the roles of the acquiring company, acquired company, target company, and the companies involved in the transaction.

6-step framework:

1. Thesis: Investment rationale in 1-2 sentences, including the target company and the companies involved

2. Role: Your specific responsibilities and contributions

3. Numbers: Key financial metrics and outcomes

4. Risks/Diligence: Major concerns and how addressed

5. Outcome: Transaction result and value creation for both the acquiring company and acquired company

6. Lessons: One specific learning takeaway

Example (anonymized): “Advised a $30M EBITDA specialty manufacturing company (target company) on strategic alternatives. The companies involved included the target company, several potential acquirers, and private equity firms. Thesis was that private equity could accelerate add-on acquisitions in fragmented market. Led financial modeling and identified $15M synergy opportunity from three bolt-on targets. Key risk was customer concentration—top 3 clients represented 60% of revenue. Coordinated customer interviews and contract analysis with management. Ultimately, the acquiring company, a strategic buyer, purchased the acquired company at 9.5× EBITDA versus 7× initial expectations. Learned that operational due diligence often matters more than financial models in driving valuation.”

Red flags: Process dump without strategic thinking, weak or missing numbers, no clear personal contribution.

Accounting & Valuation (compact)

EV vs Equity bridge

Formula: Enterprise Value = Equity Value + Net Debt + Preferred Stock + Minority Interest – Cash – Non-operating Assets

After determining equity value, it’s important to note that intangible assets such as patents, copyrights, and trademarks are considered in purchase accounting. Identifying and adjusting the value of these intangible assets can impact the calculation of goodwill.

“Who gets paid” logic: Enterprise value represents what you pay for the entire business. Equity value is what common shareholders receive. Debt holders, preferred shareholders, and minority investors get paid before common equity.

Example: $100M enterprise value company with $30M debt and $5M cash = $75M equity value.

3-statement link: $10 D&A walk-through

Mastery of financial statements is essential for technical interview questions and modeling exercises.

Income Statement: $10M D&A reduces EBIT and net income (assuming 25% tax rate, net income decreases by $7.5M)

Cash Flow Statement: Add back $10M D&A to net income (non-cash expense), no change to free cash flow

Balance Sheet: Reduce PP&E by $10M, reduce retained earnings by $7.5M (net income impact), increase cash by $2.5M (tax savings)

Working capital basics

Days math:

• AR Days = (Accounts Receivable / Revenue) × 365

• AP Days = (Accounts Payable / COGS) × 365

• Inventory Days = (Inventory / COGS) × 365

Working Capital = AR + Inventory – AP

Changes in working capital flow through to free cash flow. Increases in working capital reduce FCF; decreases increase FCF.

Valuation methodologies

EV/EBITDA comps: Best for comparing companies with different capital structures, standard for private equity

Revenue multiples: Used for high-growth companies with minimal EBITDA or loss-making businesses

When each applies: EV/EBITDA for mature, profitable businesses; revenue multiples for growth companies or asset-light models

Discounted cash flow (DCF) analysis relies on net present value calculations to determine the intrinsic value of a business.

Cash vs PIK interest; debt schedule overview

Cash interest: Paid in cash, reduces free cash flow available for debt paydown

PIK interest: Added to principal balance, compounds over time without immediate cash impact

Cash sweep concept: Excess free cash flow automatically pays down debt principal, improving leverage ratios and reducing interest expense in future periods.

Essential LBO & Technical Questions

Walk me through a basic LBO model — testing ability to explain mechanics

What they’re testing: Understanding of leveraged buyout fundamentals, ability to connect financing to returns, and grasp of key value drivers. Mastery of LBO models and LBO modeling is crucial for technical interviews, as it demonstrates your ability to structure, analyze, and interpret leveraged buyout transactions.

Lbo Basic Facts:

• The typical capital structure in LBO transactions has shifted from 80/20 debt to equity ratios in the 1980s to around 60/40 in recent years.

• The cash-on-cash return does not consider the time value of money, making it necessary to look at both cash-on-cash return and IRR when measuring returns.

• Rollover equity is viewed positively as it aligns incentives between the financial sponsor and the management team.

• The ‘tax shield’ in an LBO refers to tax savings from the tax-deductible interest payments on debt.

• PIK interest is a form of non-cash interest that adds to the debt balance, reflecting higher risk to investors.

• In LBOs, a higher write-up of intangible assets leads to less goodwill being created on the balance sheet at closing.

• An LBO analysis often provides a ‘floor valuation’ indicating the maximum amount a financial sponsor can pay to still meet return expectations.

3-step framework: Sources/Uses → 3-stmt + Debt schedule → Exit & Returns

1. Sources/Uses: Calculate purchase price (EBITDA × entry multiple), add transaction fees and working capital needs. Fund with debt financing (typically 4-6× EBITDA) and equity plug—debt financing is a key component of funding the transaction.

2. Three-statement model: Project revenue/EBITDA growth, model debt paydown via cash sweep, track interest expense, interest rates, and leverage ratios.

3. Exit & Returns: Apply exit multiple to Year 5 EBITDA, subtract remaining debt, calculate equity returns and IRR.

Example (illustrative): “$100M EBITDA company at 6× entry multiple = $600M enterprise value. Add $30M fees and working capital = $630M total uses. Fund with $350M debt (5.5× leverage) and $280M equity. Project 5% EBITDA growth, $40M annual FCF after capex. Debt pays down to $200M by Year 5. Exit at 6.5× on $125M EBITDA = $812M enterprise value. Net debt = $612M equity value. Returns: 2.2× MOIC, ~17% IRR. Note: Changes in revenue growth or interest rates can significantly impact IRR and overall deal returns.”

Red flags: Mixing EV/equity values, ignoring transaction fees or working capital changes, no leverage ratio or coverage checks.

Mental math tip: 3×/5y ≈ ~25% IRR; 2×/3y ≈ ~26% IRR. Use round numbers for speed.

Key leverage ratios & covenants

Definitions:

• Total leverage: (Senior + Subordinated Debt) / EBITDA

• Senior leverage: Senior Debt / EBITDA

• ICR (Interest Coverage Ratio): EBITDA / Cash Interest

• Springing covenant: Only tested when certain trigger is breached (e.g., excess borrowings)

• Minimum liquidity: Minimum cash plus available credit facility

  FCCR — Fixed Charge Coverage Ratio
  Plain English: “How many dollars of recurring cash flow do we have to cover each dollar of fixed charges?”

  Common lender formula:
  FCCR = (EBITDA − Cash Taxes − Maintenance CapEx) ÷ (Cash Interest + Required Principal Amortization)

  Notes that keep you out of trouble

  • Definitions vary by credit agreement. Some add items to “fixed charges” (e.g., rent/lease payments, mandatory distributions) or tweak the numerator (EBITDAR when rent is added below). Always anchor to the defined terms.

  • Typical MM covenant underwrites to ≥1.25× (safer at 1.4×–1.6× cushion).

  • In ABLs, FCCR is often springing—only tested when availability dips below a threshold.

  Common variants you might see

  • EBITDAR version (rent added below): (EBITDAR − Cash Taxes − Maintenance CapEx) ÷ (Cash Interest + Required Principal + Rent).

  • DSCR-ish version: (EBITDA − Cash Taxes − CapEx) ÷ (Total Debt Service), where “debt service” may include bullets due within the period.

  Tiny example (so you can speak it smoothly)

  • EBITDA 25, Cash Taxes 2, Maintenance CapEx 3 → Numerator = 20

  • Cash Interest 6, Scheduled Amortization 2 → Denominator = 8

  • FCCR = 20 ÷ 8 = 2.5× (comfortably above a 1.25× covenant).

Mid-market bands:

• Total leverage: 3.0-6.0×

• Senior leverage: ~3.0×

• ICR: >2.0×

• FCCR: >1.25×

Products: Senior debt offers lowest cost but strictest covenants. Unitranche provides speed and simplicity at higher cost. Mezzanine includes PIK components and equity participation. Expect maintenance covenants in MM private credit.

Red flags: Over-reliance on headline leverage without considering cash flow coverage, ignoring seasonal working capital needs.

Deal Analysis & Investment Thesis Questions

What makes a good LBO target — business quality fundamentals

What they’re testing: Understanding of business characteristics that support leverage and generate consistent returns for private equity investors.

Framework: Cash-flow predictability → Position/Moat → Growth runway

1. Cash-flow predictability: Recurring revenue, non-cyclical demand, stable margins

2. Market position: Defensible competitive advantages, pricing power, customer loyalty

3. Growth runway: Organic expansion opportunities, add-on acquisition potential, operational improvements

4. Major factors influencing LBO success: Synergies, purchase price, consideration type, and other key drivers that impact deal outcomes

Example (illustrative): “Software company with 85% recurring SaaS revenue, 45% EBITDA margins, and < 5% annual churn. Serves mission-critical functions for small businesses with high switching costs. Fragmented market offers add-on acquisition opportunities, plus international expansion potential. Low capex requirements and predictable cash flows support 5-6× leverage. The management team is crucial in driving value creation and operational improvements post-acquisition.”

Growth capital can also be an alternative investment strategy for companies seeking expansion funding without a full buyout, providing resources to fuel growth.

Red flags: Focusing purely on financial metrics without understanding operational drivers, ignoring competitive risks or market dynamics.

Ideal traits:

• 15%+ EBITDA margins (cash flow generation)

• < 3% CapEx/Revenue (asset-light model)

• Low customer concentration and churn

• Defensible market position

Industries to watch/avoid: High cyclicality (commodities, construction), disruption risk (traditional retail, legacy media), regulatory uncertainty (healthcare reimbursement changes).

Returns & Sensitivities

Two-variable sensitivity analysis — value drivers under uncertainty

What they’re testing: Understanding of key value drivers, ability to model scenarios, and appreciation for downside risk in leveraged investments.

Framework: Exit multiple (−1×/base/+1×) × Entry leverage (4×/5×/6×) → MOIC/IRR grid

Create sensitivity table showing how returns change based on:

• Exit multiple expansion/compression (±1-2 turns)

• Entry valuation (different leverage assumptions)

• Revenue/EBITDA growth rates (±200-300 bps)

• Key assumptions should also consider the impact of market trends and industry trends, as shifts in these areas can significantly affect growth rates, exit multiples, and overall deal returns.

Example (illustrative): “Entry at 8× vs 10× EBITDA multiple. Exit scenarios of 7×, 9×, and 11×. Base case EBITDA CAGR of 5%, with scenarios of 3% and 7%. Shows IRR range of 12-28% depending on assumptions. Downside case (entry 10×, exit 7×, 3% growth) still generates 12% IRR due to debt paydown. Sensitivity analysis should incorporate relevant market trends and industry trends, such as shifts in sector demand or regulatory changes, which may impact key value drivers.”

Red flags: Single-variable sensitivity only, no multiple compression scenario, unrealistic growth assumptions.

Quick IRR approximations: Use rule of 72 for doubling scenarios. MOIC can mislead on shorter hold periods—always calculate IRR.

Capital Structure & Credit (MM nuance)

Debt sizing and credit metrics — financing feasibility

What they’re testing: Understanding of credit analysis, appropriate leverage levels for middle-market companies, and ability to assess financing risk. Candidates should also recognize how investment banks play a key role in structuring debt financing, especially for middle market funds, by advising on optimal leverage and market terms.

Framework: Cash-flow coverage → Asset backing → Market terms

1. Cash-flow coverage: Model interest and principal payments against projected EBITDA and free cash flow

2. Asset backing: Consider asset quality and liquidation value for secured debt

3. Market conditions: Current credit availability and pricing for similar companies, often informed by recent transactions led by investment banks

Example (illustrative): “$50M EBITDA manufacturing company. 5.0× total leverage = $250M debt at ~10% blended rate. ICR of 2.0× provides adequate cushion. FCCR of 1.5× after $8M annual capex and $3M taxes. Strong asset base supports senior debt. Current market allows 3.5× senior + 1.5× subordinated structure. Investment banks typically assist in structuring these deals for middle market funds, ensuring the right balance of risk and return.”

Red flags: >7× total leverage without strong justification, thin liquidity position, ignoring covenant requirements or seasonal cash flow patterns.

Critical ratios:

• ICR >2.0× (interest coverage)

• FCCR >1.25× (fixed charge coverage)

• DSCR vs FCCR distinction: DSCR includes all debt service, FCCR focuses on required payments

Private credit vs syndicated: Maintenance covenants more common in MM private credit. Direct lending offers certainty but higher cost.

Comparison: Unitranche = speed/simplicity, higher spread (typically L+600-800bps). Senior+Mezz = cheaper headline cost, more documentation complexity, multiple lender relationships.

Note: Middle market funds often focus on niche sectors and offer more hands-on value creation compared to larger mega-funds, with investment banks frequently facilitating tailored financing solutions for these transactions. Investment banks also serve as a key pathway for candidates entering private equity, especially at the middle market fund level.

ABL / Borrowing-Base Basics (distribution & manufacturing)

Borrowing base (BB) formula
BB ≈ 85% × Eligible A/R + (Inventory advance) − Reserves
Inventory advance is usually 50% of Eligible Inventory at cost or (55–85%) × NOLV (per third-party appraisal).
Availability = BB − ABL borrowings − LCs − any availability block, capped by the facility limit.

Key terms (keep these crisp):

• Eligible A/R: Generally <90 days from invoice; cross-aged (e.g., 25–50% rule); excludes intercompany, contra, foreign (unless insured), disputes, credits.

• Eligible Inventory: Finished goods/raw at approved sites; excludes WIP, consignment, in-transit, liened items; subject to periodic appraisal to set NOLV (net orderly liquidation value).

• Advance rate: % of eligible collateral you can borrow against (e.g., 85% A/R; 50% cost or % of NOLV on inventory).

• Reserves: Lender haircut for risk—common buckets: dilution, slow-moving/obsolescence, taxes, landlord (“546”), customer/concentration, and fixed availability blocks.

• Springing FCCR: Fixed-charge covenant only tested when excess availability falls below a threshold (e.g., <$5mm or <12.5% of line).

• Minimum liquidity: Required cushion (excess availability, or cash + excess availability) to avoid springing tests/cash dominion.

• Dominion/lockbox: Cash sweeps to the lender; may “spring” when availability is tight.

Why ABL for dist/manufacturing?
Seasonal/cyclical working-capital swings, short asset lives, and high A/R/inventory intensity. Revolving behavior pairs well with a term loan (TL) that funds the long-lived assets/closing fees; priority and remedies set in an intercreditor.

One-minute example

• Eligible A/R = $40mm → 85% = $34mm

• Inventory NOLV = $25mm → 60% = $15mm

• Reserves = $3mm

• BB = 34 + 15 − 3 = $46mm (capped by line)

• Borrowings $32mm, LCs $2mm, availability block $1mm →

• Excess availability = 46 − 32 − 2 − 1 = $11mm (comfortably above cushion)

Gotchas interviewers like

• Mention eligibility tests (aging, concentration caps), appraisal/NOLV for inventory, and reporting cadence (weekly BBC, AR agings, inventory roll-forward).

• Note springing FCCR and cash dominion triggers, and that definitions live in the credit agreement (they vary—say it out loud).

See our Distribution LBO Case Study for a template and walkthrough.

Dividend Recapitalization and Cash Flows

Dividend recapitalization is a strategic tool frequently used by private equity firms to realize returns from their portfolio companies before an exit. In a dividend recap, the private equity firm works with the portfolio company to raise new debt, using the proceeds to pay a dividend to the firm and its investors. This approach allows private equity professionals to extract value and redeploy capital while still retaining ownership of the company. However, executing a successful dividend recapitalization requires careful financial modeling and a thorough analysis of the company’s cash flows.

Private equity firms must ensure that the portfolio company generates sufficient excess cash to service the new debt without compromising its ability to invest in growth initiatives or maintain financial stability. Assessing the risks and benefits of a dividend recap involves evaluating the impact on the company’s credit profile, future growth prospects, and operational flexibility. Ultimately, a well-structured dividend recapitalization can enhance returns for the private equity fund while supporting the ongoing success of the portfolio company.

Operational Value Creation

Add-on acquisition strategy — growth via M&A

What they’re testing: Understanding of inorganic growth strategies, synergy identification and quantification, and integration execution risks.

Framework: Platform benefits → Synergy quantification → Integration risks

1. Platform benefits: How add-ons leverage existing infrastructure, sales force, or customer relationships, and the strategic rationale for pursuing bolt-on acquisitions—such as realizing synergies, expanding into new markets, and complementing existing product offerings.

2. Synergy quantification: Revenue uplift, cost savings, and timeline for realization. Supplier contracts are a key lever for operational value creation, as effective supplier contract management can enhance financial returns.

3. Integration risks: Cultural fit, systems integration, customer retention during transition.

Example (illustrative): “HVAC services roll-up acquiring regional players at 4-5× EBITDA vs 7× platform multiple. Revenue synergies from cross-selling maintenance contracts to new geographies (5-10% uplift Year 2). Cost synergies from shared procurement, renegotiating supplier contracts to improve EBITDA, and back-office elimination ($500K per add-on). Key risk is retaining acquired management teams and customer relationships during integration.”

Red flags: Generic “synergy” claims without supporting analysis, underestimating integration complexity and timeline, overestimating revenue synergies.

Ops & governance engineering: Implementing pricing optimization, salesforce effectiveness programs, procurement savings (including renegotiating supplier contracts), and KPI monitoring cadence across portfolio companies.

Firm-Specific & Market Knowledge

Why our firm — demonstrating research & strategic alignment

What they’re testing: Depth of preparation, understanding of firm’s differentiation, and genuine interest beyond generic private equity appeal.

Researching the firm and its recent portfolio companies is crucial for excelling in private equity interviews. Candidates should be prepared to discuss a recent deal by the firm and articulate their opinion on its merits during interviews.

Framework:

1. Strategy mandate: Sector focus, deal size, geographic coverage

2. Portfolio relevance: Recent investments that align with your background

3. Value-creation model: Operational approach, platform building, add-on strategy

4. Cultural fit: Team structure, decision-making process, partner backgrounds

5. Firm type differentiation: How the firm’s approach compares to other private equity strategies, such as growth equity firms versus traditional buyout firms

Example: “Your focus on founder-owned business services companies matches my experience helping entrepreneurs scale operations. The recent acquisition of [Portfolio Company] demonstrates your operational value-creation approach—implementing pricing analytics and add-on acquisition programs rather than pure financial engineering. I also appreciate how your strategy differs from growth equity firms, as you emphasize control investments and operational transformation, whereas growth equity firms typically focus on minority stakes and supporting organic growth. Your sector expertise in healthcare IT aligns with my background modeling SaaS businesses with recurring revenue models.”

Red flags: Generic compliments about “smart people” or “great returns,” citing wrong fund vintage or strategy, no specific partner names or deal references.

Research checklist:

• Last 18 months’ deals and sectors

• Fund size, vintage, and current deployment

• Recent exits and value creation case studies

• Partner backgrounds and specializations

Market & Macro (current environment)

Rates, credit, and valuations — tying macro to deal economics

What they’re testing: Ability to connect macroeconomic trends to private equity deal dynamics and investment returns.

Framework: Cost of debt ↑ → coverage ↓ & FCF ↓ → entry/exit multiples shift → volume/mix of financing changes

Higher rates increase borrowing costs, reduce debt capacity, and compress valuation multiples. This affects deal volume, financing structures, and return expectations for private equity funds. Most PE firms, especially the large megafunds with high leverage, adjust their investment strategies and deal structures in response to changing interest rates and market conditions, often leading the market in timing and approach. In contrast, smaller PE firms may follow with different, sometimes faster and less structured processes, and may be more flexible in their investment criteria or timing.

Example: “Rising rates from 2022-2024 reduced LBO deal volume ~40% as financing costs increased 300-400bps. Unitranche pricing moved from L+500-600 to L+700-900. Many deals shifted to majority equity financing or required PIK toggle features. Exit multiples compressed 15-20% in growth sectors, requiring operational improvements to hit return targets. PE firms responded by reassessing exit options, such as M&A or IPOs, and adjusting their negotiation strategies to maintain returns.”

Red flags: Absolute claims (“+100bps = -300bps IRR”) without context, ignoring sector-specific impacts, not considering refinancing risks for existing portfolio.

Heuristic: +100bps typically reduces levered IRR by low-hundreds of basis points, depending on leverage level, hold period, and cash sweep mechanics.

Multiple compression thinking: Public-private arbitrage affects entry/exit valuations. Sector dispersion creates opportunities in less affected industries.

Paper LBO & Mental Math

Quick IRR calculations — pressure-tested numeracy

What they’re testing: Mental math skills under pressure, understanding of LBO return mechanics, and ability to make quick investment decisions.

Framework: Purchase calc → Debt paydown via FCF → Exit value → Equity → MOIC/IRR

1. Calculate total purchase price including fees

2. Model annual debt paydown from free cash flow

3. Estimate exit enterprise value and subtract remaining debt

4. Calculate equity returns and approximate IRR

Example (illustrative): “$100M EBITDA company at 5× entry = $500M EV plus $25M fees = $525M. 60% debt = $315M, 40% equity = $210M. Annual FCF of $60M pays down debt. Year 5: $125M EBITDA at 6× = $750M EV. Remaining debt ~$15M = $735M equity value. Returns: 3.5× MOIC, ~29% IRR.”

Red flags: Slow arithmetic, mixing EV/equity values, ignoring transaction fees or working capital impacts.

Memorize:

• 2×/3y ≈ 26.0%

• 3×/5y ≈ 24-25%

• 2×/5y ≈ 14.9%

Tip: Round numbers for speed (e.g., $500M EV vs $487M).

5-Line Paper LBO

1. Entry: TEV $500M, EBITDA $100M, 5.0× multiple, $25M fees (assume “CapEx ≈ D&A”)

2. Financing: $300M debt (60%), $225M equity; 8% cash interest, cash sweep of excess FCF

3. Year-5 EBITDA: $125M (5% CAGR); FCF-to-Debt schedule:

   • Year 1: $300M → $24M interest → $36M sweep → $264M

   • Year 5: Remaining debt ~$150M

4. Exit: 6.0× multiple, $750M EV, $150M net debt, $600M equity value

5. Returns: 2.7× MOIC, ~22% IRR; 2-variable sensitivity: Exit multiple ±1× × Entry leverage 4×/5×/6×

Assumption note: CapEx ≈ D&A simplifies cash flow calculation. Otherwise specify CapEx as % of revenue.

Exit Strategy & Timing

Strategic vs financial buyer dynamics: Strategic buyers often pay 15-25% premiums when synergies are credible and achievable. Financial buyers focus on standalone value and leverage capacity. A firm’s success is often measured by the performance of its portfolio companies after exit, highlighting the importance of strategic investment decisions.

Timing considerations: Market cycles affect exit valuations and buyer availability. IPO windows require meaningful scale and high growth for successful offerings. Some professionals transition to venture capital or growth equity roles after exits, leveraging their experience in private equity to focus on high-growth sectors or early-stage investments.

Sponsor-to-sponsor transactions: Now represent roughly half of exits as funds recycle capital. Requires clear value creation story and growth runway for next owner.

Red flags: Ignoring buyer universe constraints, no perspective on market readiness or scale requirements, unrealistic premium assumptions.

Next Steps after the Interview

Once the private equity interview process wraps up, you can expect feedback pretty quickly from the firm if it went well. Whether it’s an offer or a rejection, if you get an offer, don’t just say yes immediately like you’re accepting a free drink at a networking event. Take time to actually review the terms—salary, bonus, benefits, those juicy long-term incentives—while also getting a feel for the firm’s culture, investment strategy, and whether you’ll actually have a shot at advancing. And don’t be afraid to negotiate aspects of your offer; these PE firms absolutely expect you to know your worth and advocate for yourself like the sharp professional you are.

If you didn’t make the cut this time, definitely ask for feedback (found occasional success with this); it can be like getting free consulting on your interview game and can be absolute gold for the next go around. PE firms often keep strong candidates on their radar for future roles (yes, even if they said no this time), so maintaining that positive relationship isn’t just nice-to-have politeness, it’s strategic career planning. Bottom line, regardless of how this particular interview plays out, use the entire experience to level up your understanding of the PE world and sharpen those communication and negotiation skills that’ll make you unstoppable in this industry long-term.

Common Mistakes in Private Equity Interviews

• Candidates often fail to demonstrate sufficient knowledge about the private equity firm they are interviewing with (and honestly, showing up without knowing if they’re growth equity or distressed is like going to a wedding without knowing the couple – awkward and obvious).

• Many candidates do not adequately prepare for the ‘Why our private equity firm?’ question, leading to generic responses that sound like they were copy-pasted from the firm’s website (spoiler alert: the interviewers wrote that website and can smell BS from a mile away).

• Candidates frequently overlook the importance of understanding industry trends relevant to the firm’s focus area.

• Insufficient preparation for discussing past deal experiences can be detrimental, as interviewers often ask about relevant transactions.

• Interviewers appreciate responses framed in a structured manner, but many candidates deliver disorganized answers (structure your thoughts like you structure an LBO model – with purpose and clarity).

• Common mistakes in communication include failing to clearly outline the rationale behind investment decisions or financial metrics

• Many candidates misjudge the weight of technical knowledge versus cultural fit during interviews, failing to balance both aspects

FAQ

The middle market is hands down your best shot at actually learning the ropes if you’re serious about breaking in, so use this guide to prep like your career depends on it, practice until you’re sick of modeling, and finally land that role that’ll actually launch your PE career.