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Sensitivity Analysis Deep Dive

How to read, build, and talk through IRR sensitivity tables in an interview. Entry multiple vs. exit multiple, IRR vs. leverage, and the MOIC/equity check matrix.

Why Sensitivity Tables Exist

No LBO model is a single-point forecast. The value of the model is understanding how returns change under different scenarios. Every PE associate is expected to know which variables move the needle — and by how much.

In an interview, you won't build the tables from scratch. But you'll be handed one and asked to interpret it. This guide walks through the three most common tables you'll see.

Table 1: IRR vs. Entry Multiple × Exit Multiple

The most fundamental sensitivity. Entry multiple on the X-axis (rows), exit multiple on Y-axis (columns). Shows the IRR at every combination. Base case: entry 9.0x, exit 9.0x.

Assumptions: $500M EBITDA, 5-year hold, EBITDA grows to $690M (5%/yr), 5.5x total debt at entry, all FCF sweeps to debt.

How to Read This in an Interview

The interviewer will put this in front of you and say "what do you see?" Here's the right framework:

1. Find the base case — Locate where entry = exit = your base multiple. In this table, 9.0x/9.0x = 37% IRR.
2. Identify the "buy zone" — Minimum IRR threshold for institutional PE is typically 20–25%. Everything above the red zone is investable.
3. Describe the asymmetry — Moving one row down (buying cheaper) has more IRR impact than moving one column right (exiting at a higher multiple). Why? Because entry valuation affects the equity check directly.
4. Talk about downside protection — Even if we exit at 7.0x versus 9.0x, at an 8.0x entry, we still clear 36% IRR. That's the margin of safety story.

Table 2: IRR vs. Entry Multiple × Leverage Level

This table fixes the exit multiple and hold period, then varies leverage (total debt / EBITDA) and entry multiple. Shows the amplification effect of debt.

The Leverage Amplification Story

Notice: at 9.0x entry, going from 3.0x to 6.0x leverage increases IRR by ~19 percentage points (26% → 45%). That's leverage working as an amplifier. But the same amplifier works in reverse in a downside scenario — which is why lenders demand coverage tests.

Table 3: MOIC vs. Revenue Growth × EBITDA Margin

This table holds the capital structure and entry/exit multiple constant, and stresses the operating performance. Most relevant for growth equity and operational value creation theses.

How to Build a Sensitivity Table (Interview Context)

In Excel, use a Data Table (What-If Analysis). In an interview model or paper LBO, approximate it by solving the IRR formula at 2–3 different scenarios and noting the directional change.

Where n = hold period in years. For MOIC, it's even simpler:

Building Sensitivity Tables Quickly

1. Fix all variables except the two you want to stress
2. Pick 5–7 values for each variable spanning ± 2 standard deviations from your base case
3. Calculate the output (IRR or MOIC) at each combination
4. Color-code: green = exceeds hurdle, yellow = borderline, red = below hurdle
5. Identify the "safe zone" — the rectangle of combinations that still works

What Interviewers Are Testing

• Do you understand that entry multiple has an outsized impact vs. exit multiple?
• Can you identify the variables that are most controllable vs. most uncertain?
• Can you articulate when a deal "doesn't work" — i.e., where is the boundary condition?
• Do you know what the typical PE return thresholds are? (20%+ IRR, 2.5x+ MOIC minimum; 25%+ IRR, 3.0x+ MOIC target)