Shore Capital Partners *PE 101*
Private Equity (PE) 101
Value Levers in PE
Measuring Value in PE
Value at the Exit
STATS:
Out of the 26,000 public companies, just 4% are behind most of the wealth created in the stock market. And within that 4%, only 30% of the top dogs are actually pulling the weight.
(Shore Capital Partners, page 27).
Summary:
Private equity is all about spotting the right opportunities, unlocking synergies, and, yes, a bit of financial engineering thrown in.
We’re not here to slash talent and stack debt on debt. Sure, some people in the game do that, but there’s always that one guy in the friend group who ruins it for everyone else.
1. Value Levers:
Pay Down Debt
Less debt = more value for all parties.
Less debt = more investment into people, equipment, and customers.
Increase EBITDA
Top and bottom margin growth.
More revenue doesn’t equal more equity value. And your margin? Doesn’t matter if you’re underpaying your team, losing money on jobs, and putting your business at risk for the sake of top-line growth.
Want a recap of finance? Check out this video by Bill Ackman.
Multiple Expansion
Create a clear strategy for premium value.
“We’re talking strategic M&A — the kind that lets MEP firms grab the latest tech like energy-efficient systems, automation, or smart building solutions.”
J.P. Morgan M&A Market Outlook post.
(Shore Capital Partners, page 14).
2. Measuring Value in Private Equity
Multiple on Invested Capital (MOIC)
Finance bros, like anyone else, love tossing around jargon to sound clever. But it all comes down to one simple thing: putting the money back in the investors' pocket.
Don’t confuse it with cash-on-cash returns, which is the annual pre-tax cash flow relative to the invested capital.
(Shore Capital Partners, page 14)
Not all returns are created equal. A higher MOIC isn’t always the most ideal measure. In private equity, the ultimate goal is to return as much capital as possible to investors.
1x MOIC = return of capital. This is good because you’ve returned investors’ money, but it doesn’t reflect yield or profits on top of the initial investment.
1x MOIC can serve as a good hurdle rate. This means that once we’ve returned the initial capital to investors, we can begin sharing the profits. The typical profit-sharing split is around 15-20% after investors have received their full capital back.
Funds also charge an annual management fee of 1.5% to 2% of total assets under management (AUM), but it can vary based on the fund size, stage (early-stage vs. later-stage), and the specific deal.
3. Value at the Exit
The stereotype is always to slash the $100k person for the $60k one and load up the business with debt. But real value at exit comes down to one thing: the depth and strength of the management team.
Shore Capital Partners, page 20
The only reason management isn't at the far right of the equation is because it’s the proxy for a repeatable acquisition and same-store growth strategy.
Long-term value is built on people and partnerships.
Look at Chick-fil-A and Truett Cathy. They nailed it with the store-owner model.
People | Replication | Same Store Growth.
After the Cathy family takes 15% of the top line, 50% of the profits are shared.
And yet, hundreds of top MBA grads are lining up to manage a store.
👇 Check out Chick-fil-A’s doing more than 2X revenue per store compared to McDonalds.
Chick-fil-A: Bird of a Different Feather, Darden Business Publishing, Page 13
Citations:
Chick-fil-A: Bird of a Different Feather, Darden Business Publishing, Page 13
