How do you decompose LBO equity returns into operating improvements, multiple expansion, and debt paydown?

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IBPrep · Accepted Answer

Returns Attribution Analysis splits total equity value creation into three buckets: (1) Operating Improvements = (Exit EBITDA − Entry EBITDA) × Entry Multiple, the value created from EBITDA growth at the original purchase multiple; (2) Multiple Expansion = (Exit Multiple − Entry Multiple) × Exit EBITDA, value created from selling at a higher multiple than purchased; (3) Debt Paydown = Total Equity Proceeds − Operating Improvements − Multiple Expansion, the remainder, attributable to reducing debt with FCF over the hold.

How do you decompose LBO equity returns into operating improvements, multiple expansion, and debt paydown?

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