Private Equity Basics

We spent the last 3 months researching how PE firms create value 🌱 The result: “The Private Equity Value Creation Report” — one of the most in-depth studies on the topic, based on the data from over 10,000 PE entries and exits globally. 𝟳 𝗸𝗲𝘆 𝘁𝗮𝗸𝗲𝗮𝘄𝗮𝘆𝘀: 1️⃣ Revenue growth is the largest driver of PE value creation On average, it contributes to 54% of value creation. Recently, revenue growth has become an even more critical driver of success (as multiples have come down), contributing to ~65-70% of value creation in the last 2 years. 2️⃣ Margin expansion plays a smaller role at 15% Margin expansion is most impactful when PE firms target operationally challenged businesses rather than already-efficient businesses. 78% of deals with negative EBITDA margins achieved margin expansion (median +1250bps), while businesses with high EBITDA margins (>30%) typically saw margin contraction. 3️⃣ Multiple expansion contributes significantly at 32% For the top quartile deals, its contribution is even higher at 40%.  By sector, TMT, Science & Health, and Services see the largest multiple expansion. Consumer and Industrials see the least. By size, multiple expansion is the highest for smaller deals under $100M EV. 4️⃣ Growth amplifies all other PE value creation drivers Growing companies benefit from operating leverage and are more likely to achieve margin expansion. 58% of growing firms expand margins compared to 44% of those with negative growth. Higher-growth companies also typically command 30–50% higher multiples at exit. 5️⃣ Top and bottom-performing deals are held the longest Investors hold onto the best-performing assets for greater upside but also hold the worst, trying to fix the business. Assets held in the 3-6 year range tend to cluster around more predictable, moderate returns. 6️⃣ Buy-and-build is central to PE value creation When done right, buy-and-build bolsters all three value creation drivers: revenue growth, margin expansion, and multiple expansion. Buy-and-build works at any size, but the uplift is strongest in small platforms. The multiple arbitrage strategy still works with add-ons trading at a 20% discount to platforms. 7️⃣ Larger deals drive more margin expansion Large businesses ($1bn+ EV) and public-to-private deals, on average, deliver more margin expansion. Smaller businesses, on the other hand, rely more on growth and multiple expansion to drive returns. Given the smaller size, returns on average, are also higher for family-to-sponsor deals. _______ 𝗙𝘂𝗹𝗹 𝗥𝗲𝗽𝗼𝗿𝘁 Don’t miss out on insights: 💡 By Sector 💡 By Deal Type and Size 💡 MOICs and Loss rates + 5 case studies and 43 charts. Get it here ➡️ https://lnkd.in/d9Z3kubU (E-mail required) #ValueCreation #Growth #PrivateEquity

The Carried Interest Multiple I encourage all LPs to assess and look at this metric - the amount of carried interest compensation relative to management fees. More LP capital is flowing into funds with misaligned GP incentives. Victor Echevarria shows this through the brilliant example below: "The left column depicts a firm that has raised a single $100M fund, which will collect $20M in management fees over its life. In order for the GP to make 10x that amount, or $200M in carried interest, its portfolio will collectively need to exit for $11B, a difficult but achievable target." "For a $10B series of funds, the firm will pull in $2B worth of management fees. To merely double their compensation, they would need $220B of collective exit value." "There has never been a US VC-backed company that has IPO’d or been acquired for over $100B. If a $10B exit is considered a “grand slam,” this firm would need an astonishing ability to repeatedly select winners and negotiate sufficient ownership." "In other words, to make $2B, this general partnership just needs to show up for work. To make another $2B in carried interest, it would have to accomplish a feat that no one has ever come close to achieving." As Michael Jackson said: "after a certain size you’re not a venture firm anymore. You might do some venture type deals, but most of the money you’re allocating isn’t going into actual venture." #VC #venturecapital

If I were building a PE firm from scratch with $0 in assets, I wouldn’t start with capital, I’d start with capability. Here’s how we’d do it: Start with the team, but not the typical PE team. No ex-bankers, no junior deal staff. Instead, a core group of operators: a performance marketer, a RevOps architect, a data engineer, and a systems integrator. These aren’t advisors—they’re embedded. They don’t build pitch decks, they build pipelines, pricing models, and growth engines. Then build the stack. Shared CRM. Centralized media buying. A cross-portfolio data warehouse. Real-time dashboards tracking CAC, LTV, close rates, churn, and revenue velocity. Every tool selected to compress time-to-value, drive execution, and scale repeatably across assets. The thesis? Go after unloved B2C and prosumer businesses—home services, niche ecommerce, legacy consumer brands—that have strong unit economics but weak digital execution. These are companies with real cash flow that simply haven’t been modernized. Digital becomes the value creation lever. And the sourcing model? Skip auctions. Build a brand instead. Use outbound, content, and partnerships to attract founders who want your model. Don’t pitch capital—show up with case studies, playbooks, and a clear path to 2x EBITDA in three years. That’s not deal flow. That’s demand gen. You don’t need a fund to start a firm. You need a platform that proves it can create value. Capital follows capability. What would your playbook look like if you had to build a PE firm from zero, with no assets, no legacy, and no excuses?

How do 5 partners collectively invest a $500M fund across 3-4 years? The answer is nuanced but quite simple to explain: Even before the money is raised from its investors (LPs) — a document called the PPM specifies portfolio construction i.e. how many companies to invest into, sectors to invest in & approx. cheque size at stages. Firstly, a $500M fund is NOT a single block of capital — it is often earmarked in two ways: (1) Sector wise e.g. what I have drawn in the image (2) Stage wise e.g. Early (Seed) v/s Venture (Series A-B) v/s Growth (Series C+) 🧠And, this is often why you have multiple partners: (a) In a sector specific construct, each partner might be tagged to one or more sectors (b) In a stage specific construct, some partners might specialize in a given stage (e.g. Venture) (c) In all constructs, some partners are ‘shared resources’ e.g. a partner who focuses on fundraising / LP relations / banker relations 🏦How does the money get invested? There is the concept of the IC (Investment Committee) — consisting of the partners & maybe external attendees. The IC makes a final call on a decision. IC construct can change with the sector / stage of the investment being considered. This is where having multiple partners helps: Each one is a sector/stage specialist + brings a different POV. 💸How do the incentives work? Many VC funds have ‘performance carry’ i.e. you earn even more based on how well your investments perform. e.g. in the sector-wise fund structure, if the Partner responsible for Financial Services is able to deliver a x7 return on the $80M earmarked for FS — THEN, she would make more money than the Partner responsible for Software (assuming it returned x2 on their pool) 👍And, the math adds up: To return x3 to x5 on $500M (before fees) 1 pool x 7 return + 3 pools x 4 return + 1 pool x 1 return = ~$1520M i.e. a x3.2 return ➡️ Like everything in Finance, there are a number of nuances specific to a each Venture Capital firm. But, broadly speaking, this is one mental model to think of how large VC funds operate. #startups #india #venturecapital

How does a PE / VC fund work? The ONLY post you need to read! Save this post for future reference Share this with your friends for their benefit. ▶️ First up – Why PE/VC funds are needed? Ultra rich investors, having already invested in listed Equities and Debt markets, are looking for diversification and higher return potential. So they turn to early stage investing ▶️ How does the fund work? A PE/VC fund manager raises money, to invest in unlisted ventures (usually). They could define themes, like consumer funds, or tech funds, or could be sector agnostic ▶️ Who are General Partners / Limited Partners? In simple terms, the Fund Manager is the General Partner (GP), and the investors are Limited Partners (LP) ▶️ Committed Capital? The amount committed by the investor (Paid-in Capital) ▶️ DPI and TVPI As the exits from some of the unlisted investments happen, the GP distributes the money to LPs. Terms like DPI (Distributions to Paid in Capital) and TVPI (Total Value to Paid in Capital) become key metrics. Say the investor puts in INR 100 million. This is invested in 10 companies (INR 10 mn each). If the first company is exited at INR 60 million (and this is distributed), and the value of the other 9 investments is INR 120 mn (these are yet to be exited) DPI here would be 60/100 = 0.6 And TVPI would be (120+60)/100 = 1.8 ▶️ What is the fee structure like? Usually most funds operate on a 2-20 structure, with a Hurdle rate. So the management fee is 2%. Then there is a carry (profit sharing) of 20%, above a certain hurdle return – say 8% If the fund return > 8%, then 20% is shared with the Fund Manager (FM). ▶️ But what is Catch Up? 20% above 8% is the profit sharing, but what about upto 8%. This is what Catch up defines. If a fund has Full Catchup – it means that if the return crosses 8%, then the FM gets 20% on the entire return. For example, if the fund generates 15%, then in full catch-up, the carried interest would be 20% of the entire 15%. But in a No Catchup scenario, it would be 20% of the return above the hurdle (15%-8%) So this is how typically a PE/VC fund works. ----- If you are looking to build a career in PE/VC, here is a video that outlines the core skills needed in the PE/VC space https://lnkd.in/dPbTRU-Q ----- Peeyush Chitlangia, CFA I help you build a career in finance

In the past 10 months at EY SaT, I have worked on numerous deals and dealt with around 3 Private Equity Firms. Across all the deals, one thing became clear - PE investors look at businesses through a very specific lens. In this post, let’s discuss the key factors they analyze, with real-world examples: 1] Sustainable & Scalable Business Model PE funds are not just looking for revenue growth - they want businesses with a model that can scale efficiently. Example: A D2C brand with ₹500 Cr revenue may seem attractive, but if its customer acquisition cost is high and repeat purchases are low, investors will think twice. Compare this to a SaaS company with predictable recurring revenue—investors would lean towards the latter. 2] Unit Economics & Profitability Cash burn is fine, but only if backed by strong unit economics. Example: A food delivery startup with ₹100 per order revenue but ₹150 cost per order (even after discounts) is a red flag. On the other hand, a logistics company with a clear path to breakeven per delivery is much more attractive. 3] Industry Tailwinds & Competitive Advantage PE investors assess whether the industry itself has strong growth potential and if the company has a sustainable edge over competitors. Example: Fintech lending is booming, but does the company have a unique underwriting model, regulatory approvals, or a sticky customer base? Without these, it’s just another player in a crowded space. 4] Governance & Compliance Risks A company with strong growth but weak compliance is a ticking time bomb for investors. Example: Many startups in the past have faced issues due to financial misreporting or governance lapses, leading to massive devaluations (WeWork being a classic case). A PE fund will conduct rigorous due diligence to avoid such risks. 5] Exit Potential & Value Creation PE investors don’t just invest—they need a clear plan for exiting with strong returns. Example: If a company has a strong IPO pipeline, potential M&A interest, or clear secondary sale opportunities, it becomes a far more attractive bet. CRUX At its core, PE investing is about value creation—identifying businesses that are fundamentally strong and helping them scale further. If you were a PE investor, what factors would matter the most to you? Let’s discuss in the comments!

Founders start with 100% equity in their company. A seed round takes 20%. A Series A takes another 20%. Series B takes 15%. Each round also replenishes the ESOP pool, which is carved out of the founders' shares. Add an anti-dilution adjustment (a clause that protects investors from losing value when the company raises a future round at a lower valuation), and the two co-founders often end up owning 15–18% of the company at some point in time. That's not it. The crazy part is the liquidation preference (a clause that gives investors the right to get their money back first when the company is sold or liquidated before founders and employees see any proceeds). Most Indian VC term sheets today use a 1x standard. Meaning investors get all their money back first. For example, if a company raises ₹200 crore across its life and exits for the same amount, investors walk away with everything. Terrible outcome, btw, for everyone. VC was looking for a larger outcome, but the entrepreneur sees no outcome after years of effort. This is something we should all think of. And investors themselves, when they propose solutions to these tricky situations, also have a moat and can stand apart from the rest. Like I keep saying, capital being commoditised today, everything else around that capital is what will really get the best founders keen to partner. One option is to give founders equity as a gift linked to business performance. But investors must constantly think of these options. Even founders should be careful throughout with liquidation preference (always try to keep it at 1x). Also consider secondary sales to help them access some liquidity. To ease the financial pressure and ensure some outcome through the journey of building the company. We should view the Indian VC market as a space where both founders and investors win, where employees with ESOPs in lieu of salary actually make money, and where exit headline numbers translate into real outcomes across the cap table. Unfortunately, that can't happen automatically. It happens when investors and founders deliberately keep the ownership and incentive structures aligned throughout the company's life.

Debt & Equity = Balance (true for the public market & true in the private market) WSJ reported that Private Equity funds face mounting/prolonged exits. In contrast, private credit offers a more deterministic return profile given contractual coupon payments, with amortization, and defined maturity dates, which delivers relatively consistent DPI (Distributions to Paid-In), IRR and MOIC calculations. Top-quartile PE managers will distinguish themselves from the crowd as they will deliver strong returns that is truly value-added. Those who are not performing as well will seek extensions, multi-asset continuation vehicles, and fee drag until the “frozen M&A environment” re-opens. The WSJ article highlights $668B stuck in aging PE funds (some now lasting 15 years), whereas direct lenders can pay dividends, recycle capital, or return the capital to their investors as loans mature or prepay. The efficiency and more predictable cash flows of Private Credit is crucial for LPs managing duration and liquidity. PE investors (including pensions and insurance companies) are re-allocating a portion of their alternative investment portfolio towards private credit due this predictable cash flows, lower volatility, and shorter duration. The critical point to realize is that Private Equity and Private Credit work together, it is the perfect balance to optimize your diversified portfolio: Private Equity provides upside through capital appreciation and operational value creation, while Private Credit delivers steady income, downside protection, and predictable cash flows. Together, they complement each other—equity drives growth, credit provides stability—creating a resilient, all-weather private markets allocation for institutional investors. Manager selection is critical in private markets, as top-quartile managers consistently drive most of the value creation. In both private equity and credit, dispersion is wide—making access to proven managers the key determinant of returns.

𝐕𝐄𝐍𝐓𝐔𝐑𝐄 𝐂𝐀𝐑𝐄𝐄𝐑𝐒 𝐃𝐄𝐌𝐘𝐒𝐓𝐈𝐅𝐈𝐄𝐃 4: 𝐓𝐇𝐄 𝐎𝐏𝐄𝐑𝐀𝐓𝐎𝐑 𝐕𝐂 Continuing on routes into Investment Teams in Venture (https://lnkd.in/gvWW28eF), last time we talked about Career VCs (https://lnkd.in/gRXHh4CQ), this time: 𝘵𝘩𝘦 𝘖𝘱𝘦𝘳𝘢𝘵𝘰𝘳 𝘝𝘊. 𝐖𝐡𝐚𝐭 𝐢𝐬 𝐚𝐧 𝐎𝐩𝐞𝐫𝐚𝐭𝐨𝐫? “Operator” refers to professionals in engineering, product, sales, marketing, corporate development, etc within tech companies from startups to Big Tech. 𝐏𝐫𝐨𝐬 & 𝐂𝐨𝐧𝐬 𝐨𝐟 𝐁𝐞𝐢𝐧𝐠 𝐚𝐧 𝐎𝐩𝐞𝐫𝐚𝐭𝐨𝐫 𝐕𝐂 ✅Experience: Early-stage companies need specialist knowledge in their sector and experience in ‘company building’. Operator VCs have this from their background and so can help more than equivalent Career VCs. ✅Credibility: The experience an Operator VC brings helps them connect with founders and teams who face similar challenges. This credibility builds strong bonds before and after an investment. ✅Network: Operator VCs already have a network of teams, founders and experts they can lean on for sourcing and diligence. ❌Financial skills: At non-Partner levels, a large part of VC involves financial and company/market analysis. Career VCs develop these skills through banking or consulting, whereas operators can lack this expertise. ❌Compensation: Non-partner roles at VCs can have a lower base comp than senior operator roles in tech. 𝐂𝐡𝐚𝐥𝐥𝐞𝐧𝐠𝐞𝐬 𝐟𝐨𝐫 𝐎𝐩𝐞𝐫𝐚𝐭𝐨𝐫𝐬 𝐢𝐧 𝐕𝐂 Despite their unique experience, Operators don’t always have an easy path into VC. Unless senior enough to join as a Partner, the lack of analytical and financial skills means some find it hard to get in and, once they are, can struggle with these aspects of the job. To counteract this, I have two suggestions:  1️⃣ Get the training – plug financial/analytical gaps with a fully-fledged MBA or focused education;  2️⃣ Play to your strengths – Use expertise (eg tech if from an engineering background) to supplement rather than compete with Career VCs. 𝐒𝐡𝐢𝐟𝐭𝐢𝐧𝐠 𝐟𝐫𝐨𝐦 𝐨𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐭𝐨 𝐢𝐧𝐯𝐞𝐬𝐭𝐢𝐧𝐠  The nature and style of work in VC is very different to a tech company:   1️⃣ Fragmented, short duration teams working towards a transaction, rather than a long-term macro goal 2️⃣ Partnership vs CEO organisational structure 3️⃣ Transactional work where, unlike sales, ‘more’ is not necessarily better. As a result, skills that made operators successful in tech don’t always translate well to VC. Some adapt, while others find it difficult and ultimately leave the industry. 𝐓𝐢𝐩𝐬 𝐟𝐨𝐫 𝐠𝐞𝐭𝐭𝐢𝐧𝐠 𝐢𝐧𝐭𝐨 𝐕𝐂 𝐯𝐢𝐚 𝐭𝐡𝐢𝐬 𝐫𝐨𝐮𝐭𝐞 1️⃣ Showcase experience: What is your operational superpower and how can you highlight it? 2️⃣ Up-skill: learn the basics of financial modelling and corporate analysis so you are at less of a disadvantage. 3️⃣ Investment Interest: Engage with startups and invest time or money. Build a ‘portfolio’, and explain how your operational skills add value to the companies you help.

Most first-time PE CFOs misunderstand their package and it costs them money. I see a lot of first-time PE CFOs fixate on “total comp” and miss what actually drives outcomes over a full investment cycle. In PE-backed businesses, your package is split into three buckets. Base. Fixed cash. Market-competitive for the size and sector. This pays the bills and should not depend on exit timing or market conditions. Bonus. Annual cash tied to sponsor priorities: EBITDA, cash, leverage, delivery of milestones. Often a meaningful percentage of the base. Equity (the deal). Your alignment with the sponsor. Shares, Options or sweet equity. For first-time PE CFOs, total comp and equity participation are often higher than in non-PE roles. The sponsor is buying intensity & alignment. How the equity works in practice: The sponsor owns the majority of the company and sets up a management pool (often 5–15% fully diluted). That pool is split across the leadership team. You are not participating in the whole company. You are sharing in a percentage of the value created between entry and exit. If investors double or triple their money, your equity can be worth a multiple of annual cash comp. If performance is weak or the asset is underwater, it can be worth very little or nothing. Two things that catch people out: Vesting. Equity is almost never fully yours on day one. Expect 3–5 year time-based vesting, often with additional performance hurdles tied to EBITDA, leverage, or MOIC. Liquidity. You usually only see cash at an exit or recap. Until then, it’s illiquid and theoretical. At exit, the waterfall is simple in concept if not in detail: Debt and costs are paid. The fund gets its capital back (and any preferred return). Only then is the remaining value shared between the fund and the management pool. Your payout equals the equity value flowing to management × your vested percentage at that point. How to think about this as a first-time PE CFO: Treat base plus a conservative bonus as what you rely on to run your household. Treat equity as higher-risk, higher-reward upside. When evaluating an offer, be clear on three things: – your percentage of the fully diluted equity and management pool – the vesting mechanics (time and performance) – illustrative exit scenarios so you can see realistic payoff ranges Equity in PE is a long-term partnership with the sponsor, where you trade some short-term certainty for direct exposure to the value you help create over the life of the investment. #privateequity #cfo #finance #compensation