PE Fund Mechanics
PE · Returns
LPs and GPs, fees and carry, the distribution waterfall, returns metrics, and diligence.
LPs, GPs, fees and carry
Who is in a fund
A private equity fund is usually a limited partnership. Limited partners (LPs) — pension funds, endowments, sovereign wealth funds, insurers, family offices — commit capital. The general partner (GP), the PE firm, makes and manages the investments and usually commits 1–5% itself.
Drawing diagram…
Returns attribution for a deal bought at 10.0x EBITDA of 100 (enterprise value 1,000, net debt 600, equity 400) and sold at 11.0x EBITDA of 150 (enterprise value 1,650, net debt 300, equity 1,350). The equity gain of 950, about a 3.4x MOIC, splits into EBITDA growth of 500 (50 of new EBITDA at the entry multiple), multiple expansion of 150 (1.0x on exit EBITDA of 150) and deleveraging of 300 (net debt falling from 600 to 300).
Common pitfall
Define every term before you calculate. Most wrong answers here start with a fuzzy definition, not bad arithmetic.
Learn these first
Study module
- PE Fund Mechanics45 min