The investment banking interview question we’re going to go over today is “What are the exit strategies in an LBO?” Here’s what you should say.
“There are two main exit strategies in an LBO: Sale, IPO and Dividend Recapitalization.
In a sale, another buyer acquires the entire company from the private equity firm. So the private equity firm sells all of its ownership in the company to that buyer. This is oftentimes the most preferred exit strategy.
Alternatively, the private equity firm can choose to take the company public and exit via an IPO. It’ll still hold some equity ownership after the IPO, but since the company is now publicly traded, the PE firm can slowly sell down its shares in the stock market.
In a Dividend Recap, the company takes on more debt and use the proceeds from the debt to pay dividends to the PE firm.
These are the three exit strategies in an LBO.”
That’s all you have to say for this question. Now to be honest, we don’t really consider Dividend Recap to be a real exit strategy. That’s because the PE firm’s ownership percentage in the portfolio company doesn’t really reduce after the Dividend Recap. The PE firm will still need to pursue a Sale or an IPO after the Dividend Recap in order to fully exit the investment. However, for interview purposes, you should mention it in your answer.