What is PE Returns Analysis?
Returns analysis is the quantitative backbone of every PE investment decision. It answers the fundamental question: “If we buy this company at this price, with this capital structure, grow it according to our plan, and sell it at a certain multiple, what return do we earn on our equity?”
PE returns differ from public market returns because PE firms use leverage (borrowed money) to amplify equity returns, hold investments for defined periods (typically 3-7 years), and actively manage the companies they own. This creates three distinct return drivers: (1) EBITDA growth — the company’s earnings increase, (2) multiple expansion — the company is sold at a higher multiple than it was purchased at, and (3) debt paydown — the company’s cash flow pays down acquisition debt, increasing the equity value.
Understanding how these three drivers interact is essential. A deal with 2.5x MOIC driven primarily by EBITDA growth is fundamentally different (and generally safer) than one driven by multiple expansion or aggressive leverage.
Why It Matters
Returns analysis drives every aspect of the deal. It determines the maximum price the firm should pay (the price at which returns fall below the minimum hurdle). It informs financing decisions (how much leverage is prudent). It stress-tests the investment thesis (what happens if growth disappoints or exit multiples compress). And it provides the basis for IC approval — the committee needs to see attractive returns under realistic assumptions.
At most PE firms, the minimum return thresholds are approximately 20%+ gross IRR and 2.5x+ gross MOIC for a control buyout. Growth equity and minority investments may have different thresholds. Net returns (after management fees and carried interest) are typically 3-5 percentage points lower than gross.
Key Concepts
| Term | Definition |
|---|
| IRR (Internal Rate of Return) | The annualized return that makes the net present value of all cash flows equal to zero; accounts for timing of investments and distributions |
| MOIC (Multiple on Invested Capital) | Exit equity value divided by equity invested; a simple measure of total return regardless of timing |
| Entry Multiple | The EV/EBITDA multiple paid to acquire the company (e.g., buying at 8x EBITDA) |
| Exit Multiple | The EV/EBITDA multiple at which the company is sold (e.g., selling at 10x EBITDA) |
| Leverage | The amount of debt used to finance the acquisition, expressed as a multiple of EBITDA (e.g., 4x leverage means total debt = 4x EBITDA) |
| Multiple Expansion | Selling at a higher multiple than you paid; a key return driver but not something a PE firm can fully control |
| Returns Attribution | Breaking down total returns into the portion from EBITDA growth, multiple expansion/contraction, and debt paydown |
| Sensitivity Table | A matrix showing how returns change as two variables move simultaneously (e.g., entry multiple vs. exit multiple) |
| Hurdle Rate | The minimum return threshold a deal must exceed to be approved; typically 20% gross IRR for buyouts |
| Gross vs. Net Returns | Gross returns are before fees and carry; net returns are what LPs actually receive |
How It Works
Gather Deal Inputs
Entry: Entry EBITDA (LTM or NTM), entry multiple, enterprise value, net debt at close, equity check size, transaction fees.
Financing: Senior debt (multiple, rate, amortization), subordinated debt, total leverage, equity contribution.
Operations: Revenue growth rate, EBITDA margin trajectory, capex as % of revenue, working capital changes, debt paydown schedule.
Exit: Hold period, exit multiple, exit EBITDA (calculated from growth assumptions).
Calculate Base Case Returns
Compute entry EV, equity invested, exit EBITDA, exit EV, net debt at exit, exit equity value, MOIC, IRR, and cash-on-cash. Show the returns waterfall: EBITDA growth contribution, multiple expansion/contraction, debt paydown, and fee/expense drag.
Build Sensitivity Tables
Create 2-way sensitivity matrices: Entry Multiple vs. Exit Multiple, EBITDA Growth vs. Exit Multiple, Leverage vs. Exit Multiple, and Hold Period vs. Exit Multiple. Each cell shows IRR / MOIC.
Run Scenario Analysis
Build Bull / Base / Bear scenarios with varying revenue CAGR, exit EBITDA margin, exit multiple, and compute MOIC and IRR for each.
Output
Excel workbook with assumptions tab, returns calculation, sensitivity tables with conditional coloring, and scenario summary. One-page returns summary suitable for IC deck.
Worked Example: Full Returns Calculation
| Parameter | Value |
|---|
| Company | IndustrialTech Corp |
| Entry EBITDA (LTM) | $10.0M |
| Entry Multiple | 8.0x |
| Enterprise Value | $80.0M |
| Transaction Fees | $2.4M (3% of EV) |
| Total Uses | $82.4M |
| Senior Debt (4.0x EBITDA) | $40.0M |
| Equity Check | $42.4M |
| Debt Rate | SOFR (5.0%) + 400bp = 9.0% |
| Debt Amortization | 2% annual ($800K/year) |
| Revenue CAGR | 8% |
| Entry Revenue | $50.0M |
| EBITDA Margin | 20% (stable) |
| Capex (% of Revenue) | 3% |
| Hold Period | 5 years |
| Exit Multiple | 8.0x (flat — no expansion) |
Step-by-Step Calculation
Year-by-Year Projections:
| Metric | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|
| Revenue | $50.0M | $54.0M | $58.3M | $63.0M | $68.0M | $73.5M |
| EBITDA (20%) | $10.0M | $10.8M | $11.7M | $12.6M | $13.6M | $14.7M |
| Capex (3%) | — | $1.6M | $1.7M | $1.9M | $2.0M | $2.2M |
| Free Cash Flow | — | $5.6M | $6.3M | $7.0M | $7.8M | $8.7M |
| Interest (9%) | — | $3.6M | $3.5M | $3.4M | $3.4M | $3.3M |
| Debt Amortization | — | $0.8M | $0.8M | $0.8M | $0.8M | $0.8M |
| Cash for Debt Paydown | — | $1.2M | $2.0M | $2.8M | $3.6M | $4.6M |
| Cumulative Extra Paydown | — | $1.2M | $3.2M | $6.0M | $9.6M | $14.2M |
| Total Debt Outstanding | $40.0M | $38.0M | $35.2M | $31.6M | $27.2M | $21.8M |
| Metric | Value |
|---|
| Exit EBITDA (Year 5) | $14.7M |
| Exit Multiple | 8.0x |
| Exit EV | $117.6M |
| Net Debt at Exit | $21.8M |
| Exit Equity Value | $95.8M |
| Equity Invested | $42.4M |
| MOIC | 2.3x |
| Gross IRR | 17.7% |
| Driver | Contribution to Equity Value | MOIC Contribution |
|---|
| EBITDA Growth | (14.7M−10.0M) x 8.0x = $37.6M | 0.89x |
| Multiple Expansion | (8.0x−8.0x) x 10.0M=0 | 0.00x |
| Debt Paydown | 40.0M−21.8M = $18.2M | 0.43x |
| Total Value Created | $55.8M | 1.32x |
| Fees/Expenses Drag | -$2.4M | -0.06x |
| Net MOIC | | 2.26x |
What If We Improve Growth?
If value creation initiatives increase the revenue CAGR from 8% to 12%:
| Metric | 8% Growth (Base) | 12% Growth (Improved) |
|---|
| Year 5 Revenue | $73.5M | $88.1M |
| Year 5 EBITDA | $14.7M | $17.6M |
| Exit EV (8.0x) | $117.6M | $140.8M |
| Exit Equity | $95.8M | $119.0M |
| MOIC | 2.3x | 2.8x |
| IRR | 17.7% | 22.9% |
Sensitivity Table: Entry Multiple vs. Exit Multiple (MOIC)
| Exit 6x | Exit 7x | Exit 8x | Exit 9x | Exit 10x |
|---|
| Entry 7x | 1.6x | 2.0x | 2.5x | 2.9x | 3.3x |
| Entry 8x | 1.3x | 1.7x | 2.1x | 2.5x | 2.9x |
| Entry 9x | 1.1x | 1.5x | 1.8x | 2.2x | 2.5x |
| Entry 10x | 0.9x | 1.3x | 1.6x | 1.9x | 2.2x |
Sensitivity Table: Revenue CAGR vs. Exit Multiple (IRR)
| Exit 7x | Exit 8x | Exit 9x | Exit 10x |
|---|
| 5% Growth | 9.5% | 13.0% | 16.2% | 19.1% |
| 8% Growth | 13.2% | 17.7% | 21.0% | 24.0% |
| 10% Growth | 15.5% | 19.6% | 23.3% | 26.7% |
| 12% Growth | 17.6% | 22.9% | 26.4% | 29.7% |
| 15% Growth | 20.9% | 25.7% | 30.1% | 34.2% |
Scenario Analysis
| Scenario | Revenue CAGR | Exit Margin | Exit Multiple | Exit EBITDA | MOIC | IRR |
|---|
| Bull | 15% | 22% | 9.0x | $22.1M | 4.0x | 32% |
| Base | 8% | 20% | 8.0x | $14.7M | 2.3x | 18% |
| Downside | 3% | 18% | 7.0x | $10.4M | 1.3x | 5% |
| Stress | 0% | 16% | 6.0x | $8.0M | 0.7x | -7% |
- MOIC = Exit Equity Value / Equity Invested
- IRR = solve for r: Equity Invested x (1 + r)^n = Exit Equity Value (adjusted for interim cash flows)
- Returns Attribution:
- Growth: (Exit EBITDA - Entry EBITDA) x Exit Multiple / Equity
- Multiple: (Exit Multiple - Entry Multiple) x Entry EBITDA / Equity
- Leverage: Debt paydown over hold period / Equity
Daily Workflow for Returns Analysis
During Screening (15 min): Run a quick back-of-the-envelope returns calculation. Entry EBITDA x entry multiple = EV. Assume 4x leverage. Assume 10% EBITDA growth and flat exit multiple. Does the MOIC exceed 2.5x? If not, the deal is likely too expensive.
During Diligence (1-2 hours): Build the full returns model in Excel. Incorporate QoE-adjusted EBITDA, actual financing terms from the lender, and specific value creation assumptions. Run all four sensitivity tables.
Pre-IC (30 min): Update the returns model with final deal terms, negotiate financing, and completed diligence findings. Stress-test the downside case: what happens if the deal team’s growth assumptions are wrong by 50%?
IC Presentation (part of IC deck): Present the returns page: base case returns, sensitivity tables with hurdle-rate highlighting, scenario analysis (bull/base/bear), and returns attribution. The IC will focus on: (1) what drives the returns, (2) what breaks the deal, and (3) how much margin of safety exists.
Practice Exercise
You are evaluating the following deal. Build a complete returns analysis.
Deal Inputs:
- Entry EBITDA: $15M
- Entry Multiple: 9.0x
- Enterprise Value: $135M
- Transaction Fees: 3% of EV ($4.05M)
- Senior Debt: 4.5x EBITDA ($67.5M)
- Equity Check: $71.55M
- Debt Rate: SOFR (5%) + 450bp = 9.5%
- Debt Amortization: 1% annual
- Revenue: $75M, growing at 10% CAGR
- EBITDA Margin: 20%, expanding to 23% over 5 years
- Hold Period: 5 years
- Exit Multiple: 9.0x (flat)
Tasks:
- Calculate the year-by-year revenue, EBITDA, free cash flow, and debt balance projections.
- Calculate exit EV, exit equity, MOIC, and IRR.
- Build the returns attribution (EBITDA growth, multiple expansion, debt paydown).
- Create a 2-way sensitivity table: Entry Multiple (8x, 9x, 10x, 11x) vs. Exit Multiple (7x, 8x, 9x, 10x, 11x). Show MOIC in each cell.
- Run 3 scenarios (bull, base, bear) and show the MOIC and IRR for each.
- Determine the maximum entry price (entry multiple) at which the deal still meets the 20% IRR / 2.5x MOIC hurdle (assuming flat exit multiple and base case growth).
- If you could add 2 percentage points of annual revenue growth through a specific value creation initiative, how much additional MOIC would that generate? Is it worth $500K of annual investment?
Common Mistakes
Do not forget transaction costs (typically 2-4% of EV) — they reduce Day 1 equity value. Management rollover and co-invest change the equity check — ask if relevant.
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Forgetting transaction costs. A 3% transaction fee on a 100Mdealis3M — straight off the top of equity value. Always include legal, accounting, advisory, and financing fees in the Sources & Uses.
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Assuming multiple expansion in the base case. The most conservative (and most credible) base case assumes flat multiples. If your deal requires selling at 10x when you bought at 8x just to meet hurdle rates, the deal is too expensive. Let multiple expansion be upside.
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Ignoring working capital requirements. A growing company typically needs incremental working capital. If revenue grows 10% and working capital is 15% of revenue, that is $750K per year of cash consumed — reducing the cash available for debt paydown.
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Not showing returns net of fees. Gross returns look better than net, but LPs earn net returns. Show both. For typical 2% management fee and 20% carry, net IRR is typically 3-5% below gross.
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Treating leverage as a value creation lever. Leverage amplifies returns but also amplifies losses. Higher leverage improves MOIC in good scenarios but increases the risk of covenant breach or equity loss in downside scenarios. Show the returns at multiple leverage levels.
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Confusing MOIC and IRR. A 3.0x MOIC over 3 years is a 44% IRR. The same 3.0x over 7 years is a 17% IRR. MOIC does not account for time; IRR does. Always present both.
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Not stress-testing the downside. The IC will ask: “What if growth is zero and multiples compress 2 turns?” If you have not run that scenario, you are not prepared.
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Ignoring dividend recaps and interim distributions. A dividend recap in Year 2 (refinancing to return equity early) dramatically improves IRR because you get money back sooner. If planned, include it. If not, note it as potential upside.
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Double-counting returns. Ensure that EBITDA growth contribution + multiple expansion contribution + debt paydown contribution = total value created. If the attribution does not add up to the total MOIC minus 1.0x, there is an error.
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Using the wrong EBITDA for exit valuation. Exit EV should be based on the exit year’s EBITDA, not the run-rate or pro forma EBITDA. If you project EBITDA growth to Year 5, use the Year 5 EBITDA for the exit calculation.
How to Add to Your Local Context
claude plugin install private-equity@financial-services-plugins
## Default Assumptions
- Transaction fees: 3% of EV
- Management rollover: [specify if standard for your firm]
- Minimum IRR threshold: 20% gross
- Minimum MOIC threshold: 2.5x gross
- Default hold period: 5 years
- Default exit multiple: entry multiple (no expansion assumed)
- Working capital as % of revenue: [sector-specific]
- Capex as % of revenue: [sector-specific]
Best Practices
- Always show returns both gross and net of fees/carry where applicable
- The most conservative assumption is no multiple expansion — base case should work at flat multiples
- Dividend recaps or interim distributions affect IRR significantly — include if planned
- Tax considerations (asset vs. stock deal, 338(h)(10) election) can materially affect after-tax returns
- Sensitivity tables should highlight the cells where returns fall below hurdle rates — this tells the IC where the deal breaks
- Always include a “downside” scenario that stress-tests the deal — what does the return look like if growth is flat and multiples compress?
- Returns attribution is the most important chart in the IC deck — it shows whether returns come from controllable sources (EBITDA growth) or uncontrollable sources (multiple expansion)
- For highly leveraged deals, always calculate the leverage ratio at Year 2-3 to ensure the company can service its debt through a mild downturn
- Run the model both with and without add-on acquisitions to show the organic-only return profile
