Walk me through a paper LBO.

I'll use round numbers. Target has $100 million of EBITDA, we buy at 8x, so EV is $800 million. We fund it 60% debt / 40% equity — $480M debt, $320M equity — and we hold for 5 years.

Sources and uses: $800M total uses (purchase price, ignore fees for simplicity). Sources are $480M of debt and $320M of sponsor equity.

Debt schedule: assume the debt is at 6% interest. Year 1 interest expense is $480M times 6% equals $28.8M. EBITDA grows 5% per year, so Year 1 is $105M, Year 5 is roughly $128M. Assume D&A is $10M, CapEx is $10M (they offset for FCF purposes), and a 25% tax rate. Year 1 EBIT is $95M, EBT is $66.2M, taxes are $16.6M, net income is $49.6M. Add back $10M D&A, subtract $10M CapEx — Year 1 FCF available for debt paydown is $49.6M.

I'd round and assume cumulative debt paydown over the 5 years is roughly $250M — call it $50M per year on average, ramping with EBITDA growth. So Year 5 ending debt is $480M minus $250M equals $230M.

Exit: assume we exit at the same 8x multiple on Year 5 EBITDA of $128M, so exit EV is $1.024B. Subtract Year 5 debt of $230M — exit equity value is $794M.

Returns: $794M divided by $320M initial equity equals 2.5x MOIC. IRR over 5 years for a 2.5x is roughly 20% — the rule-of-thumb shortcut: 2x in 5 years is ~15% IRR, 2.5x is ~20%, 3x is ~25%.

Value creation bridge: about 50% from EBITDA growth, 30% from debt paydown, 20% from multiple — except in this case the multiple is flat, so 60/40 split EBITDA growth and debt paydown.