Investors want to know where a buyout's gain came from, because only some of it repeats. Equity value is EV less net debt, so the gain splits three ways:
- EBITDA growth, valued at the entry multiple: (exit EBITDA - entry EBITDA) x entry multiple.
- Change in multiple, applied to exit EBITDA: (exit multiple - entry multiple) x exit EBITDA.
- Debt paydown: entry net debt - exit net debt.
Valued this way, the three pieces add up to the gain exactly. Mix the bases, such as the multiple change on entry EBITDA, and a cross term goes missing, so the bridge doesn't close. A check cell catches it.
A fall in the multiple shows as a negative piece: growth and paydown had to make up for paying more than the exit price justified. Funds prefer gains from growth and paydown, which they control, to gains from the multiple, which the market sets.