The 10 errors that tank otherwise-prepared candidates in PE interviews. Most aren't about knowledge — they're about precision, clarity, and thinking under pressure.
Strong candidates who fail LBO interviews usually make one of two types of mistakes: (1) mechanical errors that show they haven't actually built a real model, or (2) conceptual gaps that show they've memorized steps without understanding why. Both are fixable. This guide covers the most common versions of each.
IRR is an annualized compounding return. Dividing MOIC by years gives you a simple return rate — which overstates IRR dramatically because it ignores compounding. A 3.0x in 5 years is a 24.6% IRR, not 60%.
Memorize the key reference points: 2.5x/5yr = 20%, 3.0x/5yr = 25%, 4.0x/5yr = 32%.
EBITDA ≠ cash flow. On $500M of EBITDA with 5.0x leverage at 9% all-in rate, you're paying ~$225M in interest. Add taxes and capex and your actual FCF is $150–$200M, not $500M. Using EBITDA as FCF will produce IRRs that are 15–20 percentage points too high and will expose you in any follow-up question.
Interest expense is tax-deductible. The entire point of debt financing is partially the tax shield. Computing taxes on EBIT ignores the interest deduction and overstates your tax bill — which reduces FCF and understates IRR. This is a basic mechanics error that signals you haven't actually built the model.
Leverage at entry is calculated on LTM EBITDA at the time of the deal — not on projected future EBITDA. Lenders underwrite against what is known, not what you're projecting. Using forward EBITDA to justify leverage is an error that any lender will immediately flag.
Multiple expansion is the least controllable return driver. It depends on market conditions, sector sentiment, and business transformation — none of which you can guarantee. Assuming expansion in the base case is the mark of an unsophisticated model. Sophisticated analysts model it in the upside case with explicit justification (sector re-rating, EBITDA quality improvement, growth acceleration).
Transaction fees (M&A advisory, legal, debt financing fees) typically run 1.5–2.5% of deal value. At a $4.5B deal, that's $68–$112M. These come out of the equity check or are financed separately — either way, they increase total sources needed and reduce equity returns.
Any interviewer who asks for an IRR will follow up with "where does that come from?" If you can't decompose the return into EBITDA growth, debt paydown, and multiple change, you haven't finished the analysis. Return attribution is the insight — the IRR number is just the output.
Leverage is always constrained by what lenders will actually provide. Before you model 6.0x, 7.0x, or 8.0x leverage, check the coverage ratios. EBITDA / Interest should exceed 1.5x at minimum for most lenders, 2.0x for conservative structures. Violating this means the deal can't be financed as modeled.
Enterprise value includes debt — it represents the total value of the business to ALL capital providers. Equity value is what's left for shareholders after paying off debt. The sponsor only owns the equity. Conflating EV with equity value will cause a massive overstatement of returns and will signal to any interviewer that you don't understand the capital structure.
In PE interviews, you will be asked things you don't know. The test isn't whether you know everything — it's whether you can think clearly under uncertainty. Show your reasoning. Acknowledge the gap, make a directional estimate, and offer to discuss. Candidates who reason through unknowns are more valuable than candidates who only answer questions they've prepared for.