How to answer this Technical interview question about LBO Risks for Mid-Level Investment Banking?

What are the key risks in a leveraged buyout (LBO) transaction, and how would you mitigate them?

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Investment Banking

Technical

Asked at

Lazard

Difficulty :

Hard

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Explanation

This question tests your understanding of LBO structures, particularly the risks involved and how to manage them. Recruiters are looking for your ability to identify financial, operational, and market risks and propose practical mitigation strategies. Common pitfalls include providing superficial answers or ignoring key factors like debt servicing. A strong response demonstrates a deep understanding of LBO mechanics and risk management techniques. Preparation involves studying LBO models and analyzing real-world examples.

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Answer Example

The key risks in an LBO include high leverage leading to debt servicing challenges, operational underperformance, and market volatility affecting exit valuations. To mitigate these risks, I would structure the debt with manageable covenants, focus on operational improvements to drive cash flow, and consider hedging strategies to manage market risks. For example, in a case study, I proposed reducing leverage to 4x EBITDA and implementing cost-saving measures, which improved debt coverage ratios and ensured a smoother exit within five years.

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