How PE Creates Value
Private equity returns come from a few sources: growing profits, paying down debt, buying other companies and selling at a higher valuation. Here is how each lever works and which ones reflect real improvement.
Three return levers
| Lever | How it works | Example |
|---|---|---|
| Profit growth | Raise sales, cut costs, improve pricing | Earnings rise from $100M to $140M |
| Debt paydown | Cash flow repays loans, so more value belongs to equity | Debt falls from $600M to $400M |
| Multiple expansion | Sell at a higher price per dollar of earnings | Buy at 10 times, sell at 12 times |
Hypothetical examples.
Unlock all of Investing School
The rest of this lesson, its chart examples and quiz are part of Investing School. Start free with Stock Market Fundamentals and the first lesson in every category.