Home / Summaries / finance / equity-company-management

Overview of the private equity industry

4 important questions on Overview of the private equity industry

What is the overall return realised by the investors in an LBO?

By the exit cash flow of the company (approx. EBIT or EBITDA), the exit multiple (of EBIT or EBITDA), and the amount of debt that has been paid off over the time horizon of the investment.

What are the two most important ratios in private equity?

EV/EBITDA - indicates the valuation of a business. Indicates how many years it takes at a minimum for a business to pay back all financiers.
Net debt/EBITDA - indicates how many years it takes at a minimum to pay down debt.

What are the five advantages of private vs. Public equity financing?

Alignment of interest of shareholders and management.
More direct influence on the strategy and the management of a company.
Possibility to take a long-term view instead of managing a company for good quarterly results.
Tight instead of comfortable balance sheet structure, which incentivises management to focus on growing the business.
Usually run by a consistent, value-oriented management.

What are five disadvantages of private vs. Public equity financing?

Debt burden can lead to financial distress, specifically in challenging times.
Private equity competition drives up purchasing prices, which is good for the initial seller, but challenging for the company.
Private equity fees and various compensation structures may represent unnecessary costs for a company.
Asset disposal and exit-driven decision making may limit optimal long-term potential.
Management team incentives often border on corruption (entry-exit compensation).