Private Equity

Most of the businesses you will ever interact with — the local manufacturer, the family-owned distributor, the regional services firm — will never trade on a public exchange. Private equity is the discipline of investing in those companies on purpose. Done well, it is a symbiotic arrangement: businesses that otherwise lack capital or strategic firepower get both, and investors get returns that consistently outperform public markets through a combination of operational change and financial leverage.

This session walks through the four things every PMC member should be able to explain about private equity: what it is, how funds work, how deals get valued, and the mechanics of a leveraged buyout. We close with a worked case — GreenCo Ltd. — that is representative of the kind of question you will get in a PE interview.

What is private equity?

At its most basic, private equity is the act of investing capital in companies that are not public, either directly or via a fund, with the explicit intent to improve the business and sell it later for more money. The names that dominate the industry — Blackstone, KKR, Carlyle, TPG — built their franchises doing exactly this at scale.

Three actors anchor every PE structure, and the language is worth getting right early.

Why does the asset class exist? Because private companies often need something they cannot get from public markets or commercial banks. A PE firm helps foster growth, supplies capital and expertise for expansion, drives operational efficiency, and resolves succession issues for owners ready to step away.

Private equity sits at the intersection of strategy and capital — and the value created sits in the overlap. Strategic operational changes alone produce a better business. Leverage alone produces returns from any business that holds together. Together, they produce above-average returns from businesses that have been made structurally better.

The fund structure and life cycle

A private equity fund is not a permanent company — it is a vehicle with a defined start, a defined investment period, and a defined wind-down. Most funds run seven to ten years end-to-end, and the rhythm of that decade is what shapes how GPs behave.

The structure is simple. LPs commit capital to the fund. The GP draws that capital down through capital calls as investments are identified. The fund acquires portfolio companies, holds them for three-to-seven years, drives change, and exits — at which point proceeds flow back through the fund to the LPs, with the GP keeping their carried interest above a hurdle.

The life cycle has three phases that overlap in practice but are useful to think about separately:

1. Capital calls. During the early years, the GP "calls" capital from LPs as deals come together. LPs do not write a single big cheque on day one; they commit to write cheques on demand for the life of the fund.
2. Investment period. Roughly the first half of the fund's life — the GP is putting capital to work, doing due diligence, executing acquisitions, and integrating portfolio companies.
3. Harvest period. The second half — the GP is improving the businesses already owned, then selling them. Cash flows back to LPs. If the fund has worked, returns are realised; if not, the GP has harder conversations about the next fundraise.

Types of private equity funds

The label "private equity" covers a much broader landscape than most introductions admit. The four buckets below capture the standard taxonomy you will see in any institutional allocation framework.

The differences are not just numerical — they reflect fundamentally different theories of value creation.

Buyout funds acquire control of mature businesses with strong, predictable cash flow, employ significant leverage, and rely on the company's own free cash flow to repay debt over the holding period. Strong cash generation is at the core of every buyout success story; without it, the leverage that should be the engine of returns becomes a liability instead. The buyout is the genesis of the LBO, which we unpack below.

Growth funds invest in proven business models seeking capital to expand operations, enter new markets, or finance acquisitions — without a change of control. The business already works; the growth fund supplies the capital and often the strategic guidance to scale it.

Venture capital invests in early-stage, often pre-revenue companies. Roughly 75% of VC-backed companies never return cash to investors, so VC funds rely on portfolio diversification and a small number of outsized winners to deliver fund-level returns north of 100% on the successful positions.

The catch-all "Other" category covers private debt, special situations, distressed debt, angel investing, and a long tail of strategies. The point of the taxonomy is not to memorise it — it is to recognise that "private equity" in casual usage usually means buyout, but the asset class is much wider.

The life cycle of a deal

Inside any fund, every individual investment moves through the same five-stage cycle. The cycle repeats deal after deal, fund after fund, and is what allows PE firms to industrialise their value-creation playbook.

A typical PE firm holds an investment for three to seven years. Shorter than that and the operational thesis has not had time to compound; longer and the fund's life cycle starts to bite, and LPs notice that they are not seeing exits.

Valuation in private equity

The valuation question in PE is almost always asked the same way: at what EV/EBITDA multiple is the target reasonably priced? The multiple depends on the industry, the quality of cash generation, and the strategic importance of the deal.

Source: PitchBook, Q2 2025 Global M&A Report (North America and Europe).

The procedure for reaching a fair value is methodical, four steps:

1. Calculate a normalised EBITDA. This may be the actual last-twelve-months figure, the forward year, or a recurring number that adjusts for one-offs. The choice matters and is often the most contentious diligence item.
2. Estimate a multiple on EBITDA. Pull a relevant set of public trading comps and precedent transaction comps, compute their implied EV/EBITDA, and take a defensible range.
3. Adjust for company-specific levers. Size premium or discount. Customer concentration. Geographic risk. Quality of management. The starting multiple from step 2 moves up or down based on these factors.
4. Propose an equity value. The enterprise value comes from multiple × EBITDA. Subtract the equity bridge — net debt, minority interest, pension underfunding, preferreds — to get equity value, which is what the seller actually receives.

Numbers matter — they are what gets presented to the C-suite of the target — but they are not the whole story. You are dealing with someone who built a business, often over decades, and is now selling it. The deal closes (or doesn't) on managing people as much as on managing spreadsheets.

The leveraged buyout model

A leveraged buyout, in its simplest form, is buying a company using a lot of debt and a small amount of equity. The mechanic that makes the strategy work is straightforward: as the company generates cash, that cash is used to repay debt. The equity portion of the capital structure grows as the debt portion shrinks. At exit, what was once a small slice of equity is now a much larger slice — and at a multiple of the entry EBITDA, that translates into a return profile that no all-equity transaction can match.

The arithmetic of an LBO has four core mechanics.

Sources and uses

The sponsor puts in equity and raises several tranches of debt to acquire the company. Senior debt, mezzanine, sometimes a unitranche. Together with the sponsor equity, these "sources" must equal the "uses" — purchase price for the equity, refinancing of any old debt, plus transaction and financing fees.

Operate

The portfolio company is run as a normal business. Revenue, EBITDA, cash flow after interest, taxes, capex, and working capital. The interest expense on the LBO debt is large, which makes the cash flow profile noticeably different from the same business pre-buyout.

Sweep

Free cash flow is used to amortise debt. Some structures are more aggressive ("100% cash sweep above a minimum cash balance"), some less.

Exit

The business is sold at a multiple of EBITDA. Remaining debt is repaid out of the proceeds. Whatever is left is equity value — and the sponsor's IRR is calculated on the path of equity in versus equity out.

Building an LBO from scratch

The standard ten-step build is more checklist than art. Every junior analyst learns it in roughly the same sequence:

1. Drivers and scenarios. All deal assumptions: entry multiple, exit multiple, starting EBITDA, hold period, base/bull/bear cases.
2. Sources and uses. Uses are equity purchase price, refinanced old debt, fees. Sources are the new debt tranches plus the sponsor equity "plug" that balances the table.
3. Debt schedules. Opening balance from sources, interest expense computed off applicable rates, principal amortisation per the term sheet, closing balance.
4. Operating forecast. Revenue growth → EBITDA via margin → less D&A → less interest → less taxes → equals net income.
5. Free cash flow. EBITDA, less cash taxes, less CapEx, less change in NWC, equals FCF — the cash available to service and repay debt.
6. Cash and debt sweep. Maintain a minimum cash balance. Any FCF above that minimum, after interest and working-capital needs are met, goes to debt paydown.
7. Exit calculation. Exit EV equals exit EBITDA times the assumed exit multiple. Exit equity value equals exit EV minus the net debt remaining at exit.
8. Returns. MOIC equals exit equity proceeds divided by initial sponsor equity. IRR comes from the series of equity cash flows — Excel's IRR function does the rest.
9. Sensitivities. Most importantly: exit multiple versus revenue growth (or entry multiple), and entry leverage versus IRR. These two tables tell you which assumptions actually drive your return.
10. Checks. Sources equals uses. Cash balance never breaches the minimum. Interest coverage stays above 1.0×. Circular references resolve cleanly.

Case study: GreenCo Ltd.

The structured way to test all of this together is with a small case study. The version below is representative of the level of difficulty in early-round PE interviews.

The situation. It is January 1st, 2023. GreenCo Ltd. is a Portugal-based company that installs wind turbines (produced by large OEMs) and performs maintenance on windfarms (with its own equipment and crew). All projects are on foreign ground. The owner wants to sell 100% of the business for €20M. You are a PE analyst tasked with assessing whether the price is fair.

The data you have:

Step 1 — build the P&L

The historical operating numbers tell a story. Project work is volatile (it tracks the rhythm of wind-farm construction), maintenance is steady (it follows the installed base), and personnel costs grow linearly as the company hires.

GreenCo P&L 2018–2022 (€ millions). Maintenance is computed as 5 farms × €0.2M per farm.

EBITDA collapsed in 2020 (a COVID effect — projects deferred or cancelled outright) and has been recovering since. The 2022 figure of €3.5M is the latest available data point and the natural starting point for valuation.

Step 2 — estimate the multiple

The two reference multiples you have are 7.0x (closest public peer) and 8.0x (latest comparable transaction). Both cluster in the same neighbourhood. For a small Portuguese business with the geographic concentration risk GreenCo carries — all projects on foreign ground, all crew based in one country — an honest analyst would apply a discount for size and country, landing somewhere around 7.5x as a defensible multiple.

Step 3 — reach equity value

Step 4 — think critically

The owner is asking €20M. The fair-value calculation lands at €17–18M. The gap is real — about 14% above the analyst's mark.

The mechanical answer is: walk away or negotiate down. The honest answer is more nuanced. GreenCo's 2022 EBITDA of €3.5M is a recovery number, not a cyclical peak. The business is in a structurally growing industry — wind installations are a multi-decade tailwind, not a fad. And the proposed multiple — 8.0x — is in line with the latest comparable transaction.

The analyst's job is not to pick a side reflexively. It is to lay out the trade-off and then move to the next question — which in this case is the LBO model. Can the deal carry the leverage required to make the returns work at €18M? At €20M? The answer to that question, not the spreadsheet alone, is what tells you whether the price is fair.