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.
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.
The right way to quantify how debt and growth capital influence private equity returns.