medium · Private Equity pe-core
A sponsor acquires a company for a $1,000 enterprise value at 10.0x EBITDA, funding it with $600 of debt and $400 of equity. Over a 5-year hold, EBITDA grows from $100 to $150, all free cash flow is swept to repay $250 of debt, and the company is exited at the same 10.0x multiple.
Of the total equity value created at exit, what fraction is attributable to deleveraging (debt paydown) versus EBITDA growth, holding the multiple constant?
- EBITDA growth contributes $500 and deleveraging contributes $250, so growth accounts for two-thirds of the $750 value created
- EBITDA growth contributes $250 and deleveraging contributes $500, so deleveraging accounts for two-thirds of the value created
- Both contribute equally because the $250 of debt repaid offsets the $250 of incremental EBITDA at the 10.0x multiple
- Deleveraging contributes the full $750 because exit equity of $1,150 less entry equity of $400 equals the debt repaid plus retained cash
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