Project Cardinal — Paper LBO with a Cash Sweep
A 30-minute Paper LBO case study with a complete model answer
Modeled After
TPG
A sponsor training deck on private equity returns — its IRR decomposition, the 'Trifecta' of EBITDA growth, multiple arbitrage and debt paydown through free cash flow, each worked to a 20% IRR from a single driver; its standard that a successful investment usually needs at least two of the three; and its 'be realistic — should we underwrite 2x multiple expansion?' discipline on exit multiples.
The returns framework, the two-driver standard and the 20% reference hurdle are modeled after TPG. Those materials state no time limit and contain no paper LBO — the thirty-minute pen-and-paper format is a general market convention rather than any one firm's — and the company, the capital structure and every figure in this case are entirely our own.
The Situation
Cardinal Fitness Group
- Sector
- Consumer / health and fitness — leased mid-market fitness clubs on recurring monthly membership dues
- Size
- Geography
- United States; Texas, Oklahoma and the lower Midwest
- Ownership
- Situation
The Prompt
You are a candidate in a second-round private equity interview. Ten minutes in, the interviewer reads a page of assumptions out loud, slides it across the desk, and starts a thirty-minute timer.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 30 minutes.
PART 1
Entry and Funding — 20 cells
PART 2
Operating Model — 51 cells
PART 3
Debt Schedule — 91 cells
PART 4
Exit and Returns — 20 cells
PART 5
Returns Attribution — 24 cells
EXTENSION A
Sweep Check — 31 cells
EXTENSION B
Sensitivities — 124 cells
EXTENSION C
Simplification Costs — 89 cells
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished Excel model is in the solution set below.
- 01
Read the financing sentence twice before you read anything else
- 02
Run the checklist and ask for what is missing
- 03
Take the entry in three steps and say the leverage out loud
- 04
Build above the interest line first, then the schedule
- 05
Convert the hurdle into a dollar target before you finish
- 06
Attribute the return, then answer the question that was asked
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Debt sized in turns, not as a percentage of price
A lender underwrites cash flow, not price. Quoting the loan as 4.5x EBITDA rather than as a share of the purchase price makes that explicit and changes what the sponsor's equity is: a residual rather than an input. If the price rises a turn, the loan does not move, so the whole extra turn is equity — which is why the ability-to-pay question in a case like this has a closed-form answer rather than needing trial and error.
The no-paydown convention, and why it exists
Every paper LBO tier below this one assumes no principal is repaid during the hold. Cash accumulates at no interest and is netted against the debt at exit, so the balance never moves, the interest never moves, and there is no circular relationship between a debt schedule and an income statement. That is what makes the format possible in pencil. It is a simplification of the exercise, not a description of a term sheet, and knowing the difference is what a case with a real sweep is testing.
Interest on the beginning-of-period balance
The deliberate simplification that keeps a real cash sweep tractable. Compute interest on the balance at the start of the year and the schedule is sequential: this year's interest is known before this year's cash flow, and this year's cash flow sets next year's opening balance. Compute it on an average or a closing balance and the model becomes circular, which is the deepening that separates a full modeling test from this tier. Nothing in this case needs iterative calculation, and turning it on would be a symptom rather than a fix.
What a cash sweep is actually worth
Cash and debt net against each other pound for pound, so sweeping a loan and hoarding the cash produce the same net debt out of the same cash flow — the repayment itself creates nothing. What sweeping buys is a lower interest charge in every subsequent year, and what reaches the equity is that saving after tax. Which also tells you when a sweep is worth having: it depends on how early the cash arrives, because a dollar swept in the last year has almost no time left to save anything.
Capex above depreciation, and the coverage ratio that notices
Interest coverage — EBITDA over cash interest — ignores the cash a business has to spend to stay in business. Where capital expenditure runs well above depreciation, as it does for a club estate on a refit cycle, the ratio a credit committee actually sizes on is fixed-charge coverage: EBITDA less capex less cash taxes, over cash interest. The general rule is worth carrying past this case: when a company's headline fact is X, no credit statistic that ignores X may stand on its own.
Working capital as a source of cash
Subscription and membership businesses collect before they deliver, so the deferred revenue balance grows with the customer base and working capital releases cash as the business grows. The reflex — that growth absorbs working capital — is right for a distributor and wrong here. It is usually a small number, and it is worth asking about anyway, because a sign error is invisible to every magnitude check you might run on your own arithmetic afterwards.
Returns attribution and the three drivers
The gain above invested equity splits into earnings growth capitalized at the entry multiple, multiple expansion applied to exit-year earnings, debt paydown out of free cash flow, and whatever leaks to a management incentive plan. The teaching standard on the buyside is that a successful investment usually needs at least two of the first three, and that underwriting multiple expansion is an assumption dressed as an explanation. Print the buckets that come out at zero rather than dropping them: zero by construction and zero by omission look identical on the page and mean opposite things.
The five-year MoM-to-IRR grid
Roughly: 1.5x is 8%, 2.0x is 15%, 2.5x is 20%, 3.0x is 25%, 3.5x is 28%, 4.0x is 32%, 5.0x is 38%. Memorize it and interpolate between the two nearest rows. It is accurate to well inside a percentage point, far tighter than the precision of a paper LBO's inputs, and it turns the last step of the exercise from a fifth root into a lookup. It also runs backwards, which is more useful: a hurdle is a multiple of money, and a multiple of money is a dollar target you can check against as you go.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: Excel model, built the way a banker would actually build it. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Debt sized in turns of EBITDA
- —A cash sweep on beginning-of-period balances
- —Free cash flow with capex above depreciation
- —Fixed-charge coverage
- —Returns attribution across all four buckets
- —MoM and IRR without a calculator
Memo
The written recommendation and how it was reached
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and Memo (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Cardinal — Paper LBO with a Cash Sweep
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is a paper LBO with a cash sweep?
A standard pen-and-paper LBO screen with one variation: the debt is actually repaid during the hold instead of sitting untouched until exit. Every dollar of free cash flow is applied against the loan at each year end, so the balance amortizes and the interest charge falls with it. That turns a single flat interest number into a five-row schedule. It is still tractable on paper because interest is struck on the beginning-of-period balance, which makes the schedule sequential rather than circular — the deliberate simplification that keeps the arithmetic doable without iteration.
Why does the interest have to be computed on the opening balance?
Because otherwise the model eats its own tail. Interest depends on the debt balance; the balance depends on how much cash was swept; the cash swept depends on how much was left after interest. Strike the interest on the balance at the start of the year and that loop is broken: the interest is a known number before any of the year's cash flow exists. Full modeling tests deepen the circularity by moving to average balances, which is one of the clearest markers of the tier above this one.
Is a cash sweep worth much?
Less than most candidates expect. Sweeping does not repay more debt than hoarding the cash does — cash and debt net against each other, so identical cash flow gives identical net debt either way. What sweeping buys is a lower interest charge in the years that follow, and what reaches the equity is that saving net of tax. So the value depends on how early the cash arrives: in a business whose free cash flow is back-loaded, most of the cash has almost no time left to save anything. Being able to say that mechanism out loud is worth more than the figure.
Which inputs are missing from the prompt, and what should I do about it?
Two, and neither is derivable from the rest. One is a cash flow component whose direction is the point rather than its size, and the reflex for a growing business gets it backwards for this sector. The other concerns what the term loan does with the cash the business generates, and it is invisible unless you have registered that the format's usual answer is a convention rather than a term. Ask for both early — the interviewer will answer any factual question about a withheld input, though not a question about method. If you do not spot them in time, say out loud what you are assuming and why, then keep moving.
Is the workbook the thing I complete in thirty minutes?
No. The thirty minutes is a pen-and-paper exercise with no computer and no calculator, and it fills in zero cells of any spreadsheet. The deliverable is spoken: a multiple of money, an approximate IRR, an attribution and a recommendation. The completed model and its blank twin exist as the answer key and as a self-check to key in once you have finished on paper — roughly forty-five minutes for the exercise tabs and another fifty-five for the three extension tabs. Do the paper version first, then open the template and find out where your rounding went and whether your debt schedule rolled correctly.
How should I quote leverage and coverage here?
Leverage on both bases, and say which is which. Debt over adjusted EBITDA is the sponsor's number and debt over reported EBITDA is the GAAP floor, and how far apart they sit tells you how much work the add-backs are doing. Say that a covenant is struck on neither of them. A leveraged credit agreement tests leverage on Consolidated EBITDA as the document defines it — reported earnings plus a negotiated list of add-backs, with the run-rate and synergy basket inside the customary twenty-five percent cap — which is a third number you cannot compute from the materials here. Quoting the two you can compute and naming the one that actually binds is the complete answer. On coverage, do not stop at EBITDA over interest. This business spends heavily on its estate, so the honest ratio is fixed-charge coverage — EBITDA less capital expenditure less cash taxes, over cash interest — and it is materially tighter. Quoting only the flattering ratio on a capex-heavy business is the kind of thing a credit-minded interviewer notices immediately.
What separates a strong answer from a merely correct one here?
Correct arithmetic is the floor. What distinguishes a strong candidate is asking what the loan does with the cash before starting, building the schedule on opening balances and saying why, decomposing the return into its buckets rather than stopping at the number, quoting the coverage ratio that includes the capex, and closing with a recommendation that says whether the deal clears, and whether it clears by enough to survive the items the exercise drops. The interviewer is grading whether you can explain how you built your base case and what you would flex — not whether you landed on their exact figure.
About This Paper LBO Case Study
Paper LBO case study for private equity interviews. 30-minute format covering debt sized in turns of ebitda, a cash sweep on beginning-of-period balances, free cash flow with capex above depreciation. Includes the full prompt, a tied-out Excel model and an audio walkthrough.
This case study sits in Private Equity, under Paper LBOs. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
30-Minute Format
The time limit a real assessment would give you
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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