Private Equity
What to know
Private equity analysis starts with the cash flow profile (J-curve: capital calls early, distributions later) and performance metrics: IRR, TVPI (DPI + RVPI), and public market equivalents such as the Kaplan–Schaar PME, which discounts contributions, distributions, and NAV at the index return; PME above 1.0 means the fund beat the index. Value creation decomposes into EBITDA growth, multiple expansion, and leverage. Fund terms matter: 2/20 economics, an 8% preferred return, European versus American waterfalls, GP catch-up, clawback, management fee on committed versus invested capital, key-person clauses, LPAC oversight, subscription lines, continuation funds, and GP-led versus LP-led secondaries.
Traps
- IRR embeds a reinvestment assumption and is inflated by subscription lines that delay capital calls.
- TVPI ignores timing; DPI captures realized cash only and says nothing about unrealized NAV quality.
- American (deal-by-deal) waterfalls favor the GP relative to European whole-fund structures.
- A strong IRR on a small early distribution can mask a weak total outcome.
Worked example - European waterfall
LP commits 100; exit proceeds are 150 at the end of year 3. Preferred return at 8% compounded: 100 × 1.08³ = 125.97 returned to the LP. GP catch-up = preferred × 0.25 = 6.49 (this is the amount that brings the GP to 20% of profit). Remaining 150 − 125.97 − 6.49 = 17.54 splits 80/20: GP 3.51, LP 14.03. GP total = 10.00, exactly 20% of the 50 profit. Memorize the catch-up multiple 0.25 - questions test it.