Private equity value creation models used by GPs and LPs, and even academic and industry researchers, usually fail to capture how debt amplifies equity gains and losses. Fortunately, a broken value bridge can be fixed quite easily…
If you plan to use private equity value creation models to understand the sources of Fund or GP returns, you should always include a value driver that accounts for equity dilution and concentration.
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.
Quantify the impact of cashflow and growth capital’s dampening of equity gains (and losses) in growth or expansion investments.
Quantify the impact of cashflow and debt’s amplification of equity gains (and losses) in levered investments.