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.
How to handle and investment with more than one equity infusion, distribution, add-on acquisition, divestment, refinancing, or dividend recapitalization.
Adjust exit metrics for the divestment of operating entities that make incremental changes to the company’s effective balance sheet and P&L.
Adjust entry metrics for the acquisition of operating entities that make incremental changes to the company’s effective balance sheet and P&L.
How private equity GPs tend to shift value creation from categories like Revenue Growth and EBITDA Growth into Multiple 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.
How much of a private equity return is driven by changes in EBITDA (assuming an EBITDA-based valuation).