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DiMeo Schneider & Associates

Investment Manager Research | Private Markets

Private Markets: Creating Value

January 6, 2020

  • Private equity firms’ ability to control companies enables them to enact change and create value during their
    hold period
  • Sophisticated operating resources can create the ability to grow earnings by institutionalizing processes, innovating, expanding products as well as geographically and rationalizing costs
  • Increasing the quality of a company by diversifying and stabilizing sources of revenue can lead to multiple expansion
  • Thoughtful structuring with regards to leverage de-risks the investment and allows for increased flexibility

Private equity firms are uniquely positioned to create value within their portfolio companies due to their controlling interests in the businesses.

The specific strategy for increasing value varies with each investment, however, the strategies can be categorized into one of three areas: earnings growth, multiple expansion or structuring. Investments have the highest probability of outsized returns when all three of these components work in tandem.

Before diving into each, it is important to understand the building blocks of valuation within private equity. The most common methodology is the multiple approach. When private equity firms buy and sell their portfolio companies they pay a multiple of that company’s earnings, or Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The market multiple is based on comparable companies in the industry and validated through an auction process conducted by an intermediary. The EBITDA and the valuation multiple equate to an enterprise value; a combination of equity and debt, as shown in the graphic below.

Click here to read more of the white paper Private Markets: Creating Value


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