Private equity means investing in

  • Private companies
  • Public companies that will be bought off the stock market to become private, e.g., Dell

Private equity can be classified in

  • Buyout: invest in large, mature companies using a significant amount of debt
  • Venture Capital: invest in small, young companies using little or no debt

A buyout example – how leverage can increase return

Buying a company with $5M EBITDA for $40M

Without leverage

  • Equity purchase price: $40M
  • Annual return: $5M/$40M = 12.5%

With leverage

Borrow loan: 4x EBITDA = $20M, 5% interest rate = annual interest payment of $1M

  • Equity purchase price: $40M – $20M debt = $20M
  • Annual return: $5M – $1M interest = $4M, $4M/$20M = 20%!

Free Resource

Private Equity Due Diligence Checklist: 10 Questions Family Offices Should Ask

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