When did LBO become a valuation technique?

Yeah wouldn't really consider it a valuation technique. That being said you can back into a PE valuation - what a sponsor would be willing to pay in order to achieve a 15/20/25% IRR - using an lbo model. Common exercise for bankers running a sell side

You're not alone. I was prepping for interviews recently and described the four main valuation methods as you did (used liquidation and/or sum of the parts for the fourth method). Even though I am technically in PE (as an intern), I see LBO as more of a tool for determining the debt structure and other relevant details of the deal, but a couple bankers I spoke with told me to recognize an LBO as the fourth most common method. Definitely worth brushing up your LBO skills (mine are honestly pretty subpar) for banking interviews, as even my other IBD intern friends have had some relatively challenging questions related to LBOs.

Depends on how you're defining "acceptable valuation technique." The AICPA and the Appraisal Foundation do not regard LBO modeling as a distinct valuation technique. In fact, they lump public company comps and precedent transactions into a single method (i.e., the market approach). It sounds like this is not what your interviewer was referring to when asking about the "4 valuation techniques." Your interviewer basically invented his/her own categorization of "acceptable valuation techniques" that isn't grounded in objective reality (i.e., cannot be found in any authoritative valuation literature).

You should have asked your interviewer if option-based valuation techniques can be considered "acceptable" according to his/her arbitrary understanding of the term.

If you're interviewing at a MM shop they are going to be doing a lot of deals with private equity funds so an LBO will be very important to everything they do. In practice, even if you aren't working with a sponsor, an LBO will be on a football field for any asset that a Sponsor could conceivably buy (even if illustrative). Typically when doing so you'd make assumptions in terms of leverage and entry/exit multiple and sensitize these to develop your range.

OP, the LBO is technically not a valuation technique, but given then PEGs frequently participate in the M&A process, an LBO is generally run alongside the DCF and comps, which is probably why your interviewer lumped it in here. Even in corp dev, we will run LBOs just to see how we are bidding vs. what a PEG might bid. You answered the question fine in my book, but unfortunately, most ib interviews are a game of elimination, and you gave the interviewer an easy out, so to speak.

An IB interviewer told me that there are three main ways to value a company: DCF, Comparable Comps/precedent transactions, and Sum of the Parts. Every other time that I've been asked this question, the correct answer is DCF, Comparable Companies Analysis, and Precedent Transactions Analysis.

In the way the question was phrased, I think the interviewer was hinting at how important the LBO valuation is to him. Everyone who understands the basics of Ib well enough, knows there are only three main valuation techniques. For the interviewer to ask for 4, your answer probably should've went to the LBO, or at least by some time after the first three and then insert LBO in there after probing the guy.

The LBO is actually a DCF run with certain assumptions and presented in a slightly different way. If you load your DCF with the same assumptions as in the LBO, you should actually get answer. In a typical DCF you solve for a price assuming a certain discount rate, while in LBO what you typically solve for a discount rate (the IRR) at a certain price.