hard · Investment Banking ma-lbo

Ignoring any change in the interest rate, default risk, or cash sweep, why is the associate RIGHT that IRR rises -- yet the multiple-of-money (MoM) gain is smaller than a novice would guess?

1. The extra turn shrinks the entry equity check, magnifying the percentage return on a fixed dollar of value creation, but because exit equity is reduced by the same extra turn of debt still outstanding, the absolute equity gain barely changes -- so MoM is amplified far less than the IRR percentage suggests
2. The extra turn raises exit equity roughly one-for-one because the higher leverage forces a materially larger mandatory cash sweep in every single projection year, so both IRR and MoM should rise proportionally and the associate has merely understated the true MoM benefit to the fund's limited partners
3. The extra turn lowers the effective entry multiple paid for the target business, reducing recorded goodwill and the associated purchase-accounting writedown drag realized at exit, which is what actually lifts the reported IRR while leaving the sponsor's initial equity check completely unchanged throughout the hold
4. The extra turn increases annual cash interest expense, which lowers taxable income and raises the debt-related tax shield enough that the cumulative after-tax equity gain more than doubles over the full five-year holding period, making MoM rise even faster than the headline IRR figure suggests to the deal committee

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