Pragmatic Solutions to 40 Private Equity Problems
Dive right into the module that best fits your situation or watch them all sequentially to thoroughly master the private equity value bridge.
01. Net MOIC and Net IRR
Calculate Net Returns from the Gross MOIC and Gross IRR and estimates for Management Fee, Fund Expense, and Carried Interest.
02. Equity Dilution and Equity Concentration
Measure how GP equity returns are influenced by capital raising, management option pools, and stock types (e.g., participating preferred).
03. Unlevered Return and the Leverage Effect
The right way to quantify how debt and growth capital influence private equity returns.
04. EBITDA Growth and EBITDA Multiple Expansion
How much of a private equity return is driven by changes in EBITDA (assuming an EBITDA-based valuation).
05. Revenue Growth and Revenue Multiple Expansion
How much of a private equity return is driven by changes in revenue (assuming a revenue-based valuation).
06. Dependent and Independent Variables
The right way to set up Excel spreadsheets for the value creation models in this series.
07. Five ways to Measure Private Equity Returns
Measure private equity value driver as absolute ($) value creation, relative (%) value creation, times money value creation, equity return multipliers, and value creation IRRs.
08. Gearing and Cashflow in an LBO
Quantify the impact of cashflow and debt’s amplification of equity gains (and losses) in levered investments.
09. Gearing and Cashflow in a Growth Investment
Quantify the impact of cashflow and growth capital’s dampening of equity gains (and losses) in growth or expansion investments.
10. Interest Costs and Debt Tax Shield
Estimate the impact of interest payments on a levered private equity investment.
11. Revenue Growth and EBITDA Margin Expansion
Given an EBITDA-based valuation, how much value is driven by changes in top-line revenue and EBITDA margin on the company’s P&L.
12. Gross Margin Expansion and Operating Margin Reduction
Given an EBITDA-based valuation, how much value is driven by changes in COGS and SG&A on the company’s P&L.
13. Market-driven Multiple Expansion
Separate the market and manager-driven factors behind valuation to calculate Market Multiple Expansion and Intrinsic Multiple Expansion.
14. Market Multiple Data Sources
Suggestions for building effective market valuation multiple datasets.
15. Market-driven Revenue Growth
Separate the market and manager-driven factors behind revenue to calculate Addressable Market Growth and Market Share Growth.
16. Addressable Market Data Sources
Suggestions for building effective addressable market value datasets.
17. Sector-appropriate Gearing
Measure how much of the return was driven by a private equity deal having more (or less) leverage than the typical public or family-held peer.
18. Other Market Drivers
Measurements of market influence on company EBITDA margin, COGS, and SG&A can be interesting, but are generally less reliable.
19. Market versus Manager-driven Returns
Simple market and manager-driven return measurements that can be more meaningful and easier to calculate than PME.
20. The Market Return Matrix
The fastest way to benchmark private equity deals by industry or sector and estimate GP value-add.
21. Foreign Exchange Rates
Measuring value drivers when the portfolio company’s native currency is different from the GP or LP.
22. Five Mistakes that GPs Make
How private equity GPs tend to shift value creation from categories like Revenue Growth and EBITDA Growth into Multiple Expansion.
23. Acquisition Adjustments (I)
The right way to set up entry metrics, given transaction fees, expenses, working capital, and cash.
24. Acquisition Adjustments (II)
More on entry adjustments, including rollover equity, seller notes, and acquired liabilities.
25. Exit Adjustments (I)
The right way set up exit metrics, given the various fund flows among buyers, sellers, lenders, bankers, and other parties.
26. Exit Adjustments (II)
More on exit adjustments and the impact of cash holdbacks and escrows.
27. Holding Period Inflows and Outflows
The right way to address transactional events that occur during a private equity investment's holding period.
28. Follow-on Equity Investments
Adjust entry metrics for follow-on equity investments used to fund operations or acquire assets.
29. Equity Distributions
Adjust exit metrics for prior distributions generated from operating cash flows or the sale of assets.
30. Add-on Acquisitions
Adjust entry metrics for the acquisition of operating entities that make incremental changes to the company’s effective balance sheet and P&L.
31. Divestments
Adjust exit metrics for the divestment of operating entities that make incremental changes to the company’s effective balance sheet and P&L.
32. Debt Financing
Adjust entry and exit metrics for transaction-driven changes in debt levels during a holding period.
33. Dividend Recapitalizations
Adjust entry and exit metrics for equity distributions generated from changes in a company debt levels.
34. Contingent Earn-Outs
The right way to handle a contingent earn out at either entry or exit.
35. Multiple Holding Period Inflows and Outflows
How to handle and investment with more than one equity infusion, distribution, add-on acquisition, divestment, refinancing, or dividend recapitalization.
36. The Effective IRR
Estimate Internal Rates of Return without burdensome cash flow spreadsheets.
37. Value Creation over Time
Monitor value driver changes quarter-to-quarter to identify inflection points.
38. Value Creation across Valuation Domains
Calculate performance and valuation-driven equity changes despite evolving valuation metrics (i.e., going from pre-revenue to a revenue multiple to an EBITDA multiple).
39. Aggregate Value Creation across Portfolios
How to measure aggregate drivers of equity value creation for across portfolios, Funds, and investment programs.
40. Net Return-based Value Drivers
Measure value drivers like EBITDA Growth and Multiple Expansion in the Net Return domain, after the impact of GP Management Fees, Fund Expenses, and Carried Interest.
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