Reference · Glossary

Private Equity Glossary

The terms that actually come up on a middle-market deal, defined by someone who has run the model. 48 core private equity and LBO terms, grouped by category. The worked examples all use one house deal: a $150M distribution business with $25M of EBITDA bought at 6.0x. Expand a core term for its formula, a worked example, and an exhibit; the highest-intent terms link to a full page with the math.

Returns & Performance

How a deal or a fund is scored.

# Internal Rate of Return (IRR) Core

The annualized, time-weighted return that sets a deal's net present value to zero. It is the headline return metric for deals and funds, and the figure most LBO tests ask you to solve for. Because it is time-sensitive, returning capital faster raises it.

Show formula, worked example & exhibit

Formula Annualized rate where the NPV of all cash flows = 0

In the model Returns block / equity waterfall

Worked example

A 3.0x MOIC over 5 years is about a 25% IRR; the same 3.0x over 7 years is about 17%.

Common mistake

Reading IRR without its MOIC. A fast, small win can post a high IRR while returning few dollars.

Calculator

MOIC (x)Hold (years)

Implied IRR24.6%

Assumes a single entry and exit, with no interim cash flows.

Full definition → Related: MOIC, Holding Period, Value Creation Bridge

# MOIC (Multiple on Invested Capital) Core

Total value returned divided by capital invested, the cash-on-cash multiple. It answers how many times the money came back, with no regard to time. Read it alongside IRR, which adds the speed.

Show formula, worked example & exhibit

Formula Total value returned / capital invested

In the model Returns block / equity waterfall

Worked example

Put in $60M of equity, return $180M at exit, and the MOIC is 3.0x.

Common mistake

Comparing MOICs across different hold periods without checking the IRR.

Calculator

MOIC (x)Hold (years)

Implied IRR24.6%

Assumes a single entry and exit, with no interim cash flows.

Full definition → Related: IRR, DPI, TVPI & RVPI, Value Creation Bridge

# DPI, TVPI & RVPI

The three fund-level multiples LPs track, all net of fees and stated against paid-in capital. DPI is realized cash returned per dollar in; RVPI is the unrealized NAV still in the ground; TVPI is the two combined. DPI is the number that cannot be marked.

Show formula, worked example & exhibit

Formula DPI = cash returned / paid-in. TVPI = DPI + RVPI.

Worked example

A fund can show a strong TVPI built on marks while DPI, the cash actually returned, lags.

Related: Private Equity DPI guide, MOIC

# Multiple Expansion Core

Selling a business at a higher EV / EBITDA multiple than was paid, so value comes from the re-rating itself rather than from operating gains. It is the third return lever, and the one least within a sponsor's control because it depends on the exit market.

Show formula, worked example & exhibit

Formula (Exit multiple - Entry multiple) x Exit EBITDA

In the model Exit assumptions / returns bridge

Worked example

Exit at 7.0x what was bought at 6.0x on $38M of exit EBITDA adds about $38M of value from the multiple alone.

Common mistake

Underwriting multiple expansion to make a marginal deal clear its return hurdle.

Full definition → Related: Value Creation Levers, Purchase Price Multiple, Value Creation Bridge

# Holding Period

The time a fund owns a portfolio company, from close to exit, commonly three to seven years. Hold period is a direct lever on IRR: the same MOIC earned faster produces a higher IRR.

Show worked example & exhibit

In the model Returns timeline (entry to exit dates)

Worked example

The same 3.0x MOIC earned in 5 years instead of 7 lifts IRR from about 17% to about 25%.

Related: IRR, Secondary Buyout

# Hurdle Rate (Preferred Return)

The minimum annual return, most commonly 8%, that LPs must receive before the GP earns carried interest. Below the hurdle, all profit goes to LPs; above it, the carry split applies, often after a GP catch-up.

Valuation & Pricing

What the business is worth and how the price is set.

# Enterprise Value (TEV) Core

The total value of the operating business, independent of how it is financed: Equity Value plus Net Debt. It is the basis for the entry and exit multiple (EV / EBITDA) and the starting point of the bridge to the sponsor's equity check.

Show formula, worked example & exhibit

Formula Equity Value + Net Debt (+ preferred + minorities - associates)

In the model Entry assumptions / purchase price

Worked example

At 6.0x on $25M EBITDA, EV is $150M; with $75M of net debt, equity value is $75M.

Common mistake

Mixing EV and equity inputs, for example dividing equity value by EBITDA.

Calculator

Enterprise value ($M)Debt ($M)Cash ($M)Other claims ($M)

Equity value$75.0M

Equity Value = EV - (debt - cash) - other senior claims.

Full definition → Related: Equity Value, EV vs Equity Value guide

# Equity Value

The value attributable to shareholders, equal to Enterprise Value minus Net Debt and other claims senior to common equity. It is the figure that maps to the actual cash equity changing hands.

Show formula, worked example & exhibit

Formula Enterprise Value - Net Debt - other senior claims

In the model EV-to-equity bridge

Worked example

At a $150M EV with $75M of net debt, the implied equity value is $75M.

Related: Enterprise Value, Net Debt

# EBITDA Core

Earnings Before Interest, Taxes, Depreciation, and Amortization, a proxy for operating cash earnings before capital structure and taxes. Middle-market deals are priced as a multiple of EBITDA and leverage is sized in turns of it, which makes it the single most important number in the entry valuation.

Show formula & worked example

Formula Operating income + Depreciation + Amortization

In the model Income statement / entry multiple

Worked example

$25M of EBITDA at a 6.0x multiple supports a $150M enterprise value.

Common mistake

Treating EBITDA as cash flow; it ignores capex, working capital, cash interest, and cash taxes.

Full definition → Related: Adjusted EBITDA, Free Cash Flow

# Adjusted EBITDA Core

Reported EBITDA plus normalizing add-backs that a buyer believes reflect true run-rate earnings: one-time costs, above-market owner pay, and the pro forma effect of acquisitions. Because price is a multiple of this number, every defensible add-back is worth a multiple of itself.

Show formula, worked example & exhibit

Formula Reported EBITDA + defensible add-backs

In the model Quality of Earnings / entry EBITDA build

Worked example

$22M reported plus $2M one-time ERP and $1M above-market owner pay is $25M; at 6.0x that $3M is $18M of value.

Common mistake

Taking the seller's add-backs as settled; aggressive ones rarely survive a QoE.

Full definition → Related: EBITDA, Quality of Earnings

# Purchase Price Multiple (Entry / Exit)

The valuation paid or received, expressed as a multiple of a metric, most often EV / EBITDA. The entry multiple sets the price; the exit multiple drives multiple expansion or contraction. The case study uses 6.0x at both entry and exit.

Show formula & worked example

Formula Enterprise Value / EBITDA

Worked example

The case study holds 6.0x at both entry and exit, so returns come from operations and deleveraging.

# Discounted Cash Flow (DCF)

A valuation method that projects future cash flows and discounts them to the present at a required rate of return, usually the WACC. DCF anchors intrinsic value, but in an LBO the binding constraint is usually what leverage and a target return will support.

Show formula

Formula Sum of future cash flows discounted at the WACC

Related: WACC, Free Cash Flow

# WACC (Weighted Average Cost of Capital)

The blended required return on a company's debt and equity, weighted by each in the capital structure, and the standard discount rate in a DCF. It is the hurdle a project's returns must beat to create value.

Show formula

Formula Weighted after-tax cost of debt and cost of equity

Related: Discounted Cash Flow

# Middle Market

The segment of mid-sized companies between small business and large-cap, the core hunting ground for most PE firms. Commonly framed as roughly $10M to $1B in revenue, with the core middle market often pegged around $25M to $50M of EBITDA.

Related: Middle Market Definition guide

Deal Structure & Financing

How the deal is built and paid for.

# Leveraged Buyout (LBO) Core

The acquisition of a company using a significant amount of borrowed money, with the target's own assets and cash flows supporting the debt. The structure lets a sponsor buy a business far larger than its equity check alone would allow. Returns come from debt paydown, EBITDA growth, and multiple expansion.

Show formula, worked example & exhibit

Formula Returns = debt paydown + EBITDA growth + multiple expansion

In the model The whole model (S&U, debt schedule, returns)

Worked example

Buy at $150M (6.0x), fund with $80M of debt and $80M of equity, grow EBITDA and delever, then exit.

Common mistake

Assuming leverage alone makes a deal work, without real operating improvement.

Full definition → Related: How to Build an LBO Model, Leverage

# Leverage (Turns of Leverage) Core

The amount of debt used to fund an acquisition, usually expressed in turns of EBITDA (Net Debt / EBITDA). Debt amplifies equity returns and risk in equal measure: $80M of gross debt on the $150M case study is 3.2x leverage (3.0x net of $5M cash) and funds about half of enterprise value.

Show formula, worked example & exhibit

Formula Net Debt / EBITDA (turns)

In the model Sources & Uses / debt schedule

Worked example

$80M of gross debt on $25M of EBITDA is 3.2x leverage, 3.0x net of $5M cash.

Full definition → Related: Leveraged Buyout, Free Cash Flow

# Sources & Uses Core

The table that shows how a deal is funded (sources) and where the money goes (uses). The two sides must balance, and sponsor equity is usually the plug that makes them tie. It sets the opening capital structure and the equity check the whole model exists to measure.

Show formula, worked example & exhibit

Formula Total Sources = Total Uses (sponsor equity is the plug)

In the model Transaction tab (the first build)

Worked example

Uses: $150M EV, $5M fees, $5M min cash = $160M. Sources: $75M term loan, $5M revolver, $80M sponsor equity.

Common mistake

Forgetting uses beyond price: fees, a minimum cash balance, and refinanced debt.

Calculator

Purchase EV ($M)Fees ($M)Min cash ($M)Debt ($M)Rollover ($M)

Sponsor equity (plug)$80.0M

Total uses$160.0M

Sponsor equity is the plug: (EV + fees + min cash) - debt - rollover. Add a rollover to lower the sponsor check.

Full definition → Related: Transaction Fees, Management Rollover

# Net Debt Core

Total interest-bearing debt minus cash and cash equivalents, and the bridge item between Enterprise Value and Equity Value. Net Debt / EBITDA is the standard measure of leverage.

Show formula, worked example & exhibit

Formula Total interest-bearing debt - cash & equivalents

In the model Net debt schedule / EV-to-equity bridge

Worked example

$80M of debt and $5M of cash is $75M of net debt; at a $150M EV, implied equity value is $75M.

Common mistake

Forgetting to net cash, or omitting debt-like items such as leases, pensions, and earnouts.

Full definition → Related: Enterprise Value, Leverage, Value Creation Bridge

# Senior Secured Debt / Term Loans (TLA, TLB)

The top of the capital structure: debt secured by the company's assets, repaid first and carrying the lowest cost. Often split into an amortizing bank tranche (Term Loan A) and a longer, lightly amortizing institutional tranche (Term Loan B), usually alongside a revolver.

Show worked example & exhibit

Worked example

In the $150M case study, the senior term loan is $75M (3.0x), repaid first and priced cheapest.

Related: Mezzanine Debt, Covenants

# Mezzanine Debt

Subordinated debt that sits between senior debt and equity, often carrying warrants or a PIK component. It is more expensive than senior debt and fills the gap when senior lenders will not fund the full check.

Show exhibit

Related: Senior Secured Debt, PIK

# PIK (Payment-in-Kind)

A feature on junior debt or preferred equity where interest accrues and is added to principal instead of being paid in cash. PIK preserves cash early in a deal but compounds the obligation over time. A PIK toggle lets the borrower choose cash or PIK each period.

Related: Mezzanine Debt

# Covenants (Maintenance vs. Incurrence)

Contractual conditions in a loan agreement. Maintenance covenants are tested every quarter regardless of activity; incurrence covenants are only tested when the borrower acts, such as raising more debt. Covenant-lite loans carry incurrence covenants only.

Related: Senior Secured Debt

# Cash Sweep

A provision requiring excess free cash flow to pay down debt ahead of schedule. The sweep accelerates deleveraging, which builds equity value, and is a standard feature in LBO debt schedules.

Related: Debt Paydown, Free Cash Flow

# Asset-Based Loan (ABL)

A revolving credit facility secured by specific assets, usually receivables and inventory, with the limit set by an advance rate on those assets. Working-capital-heavy businesses like distribution lean on ABLs to fund inventory and receivables.

Related: Net Working Capital

# Dividend Recapitalization

Raising new debt at a portfolio company to fund a dividend to the sponsor before exit. A recap returns capital early, which boosts DPI and IRR by pulling cash forward, but it re-levers the business and raises risk.

Related: IRR, Leverage

# Transaction Fees

The advisory, legal, financing, and accounting costs of getting a deal done, typically a few percent of enterprise value (the case study uses 3%). They are a use of funds the sponsor's equity has to cover, so they directly raise the equity check.

Show worked example & exhibit

Worked example

On the $150M case study, about $5M of fees is a use of funds the sponsor's equity covers.

Related: Sources & Uses

Cash Flow & Working Capital

The cash that services debt and the capital tied up to run the business.

# Free Cash Flow (FCF) Core

The cash a business generates after funding operations and reinvestment, and the cash available to service and repay debt. A working LBO definition is EBITDA less cash interest, less cash taxes, less capex, less the increase in net working capital. FCF, not EBITDA, is what pays down acquisition debt.

Show formula, worked example & exhibit

Formula EBITDA - cash interest - cash taxes - capex - increase in NWC

In the model Cash available for debt paydown line

Worked example

$25M EBITDA, less $6M interest, $3M taxes, $4M capex, and $2M of working-capital build, is $10M of FCF.

Common mistake

Ignoring working capital; growth ties up cash in receivables and inventory and starves FCF.

Full definition → Related: EBITDA, Debt Paydown

# Net Working Capital (NWC)

Operating current assets (mainly receivables and inventory) minus operating current liabilities (mainly payables), excluding cash and debt. Growth in NWC consumes cash and reduces free cash flow, which is why it matters so much in working-capital-heavy deals.

Show formula, worked example & exhibit

Formula Operating current assets - operating current liabilities (ex cash & debt)

In the model Working capital schedule

Worked example

As a distributor grows, receivables and inventory build faster than payables, absorbing cash.

# Working Capital Peg Core

The normalized level of net working capital that buyer and seller agree the business needs to operate, set at close and used to true up the purchase price. It stops a seller from stripping cash out of the balance sheet before closing.

Show formula, worked example & exhibit

Formula Price adjustment = Actual NWC at close - Peg

In the model Closing mechanics / purchase-price true-up

Worked example

Peg $20M: close at $22M and the price rises $2M; close at $18M and the price falls $2M.

Common mistake

Confusing the one-time peg true-up with the ongoing WC investment that drains FCF each year.

Calculator

Peg ($M)Actual NWC at close ($M)

Price adjustment+$2.0M

Directionprice up, to the seller

Actual NWC above the peg raises the price (a payment to the seller); below the peg lowers it.

Full definition → Related: Net Working Capital

# Debt Paydown (Deleveraging)

Using the company's free cash flow to repay acquisition debt over the hold. Each dollar repaid converts directly into a dollar of equity value, all else equal, and is one of the three core LBO return drivers.

Show worked example & exhibit

In the model Debt schedule

Worked example

Each dollar of free cash flow used to repay debt converts into a dollar of equity value.

Diligence & Alignment

Testing the numbers and aligning the people.

# Quality of Earnings (QoE) Core

A focused diligence study, usually by an accounting firm, that tests whether reported earnings are real, sustainable, and correctly stated. It normalizes EBITDA, scrutinizes add-backs, and probes revenue recognition and customer concentration. It is where the number the whole deal is priced on gets validated or cut.

Show worked example & exhibit

In the model Diligence / entry EBITDA validation

Worked example

Disallow $2M of add-backs on $25M presented and, at 6.0x, the price falls $12M.

Common mistake

Underwriting a price to add-backs that diligence will not support.

Full definition → Related: Adjusted EBITDA, EBITDA

# Management Rollover Core

The portion of sale proceeds that a target's existing management team reinvests into the equity of the new deal rather than cashing out. Rollover aligns managers who helped underwrite the plan and reduces the sponsor's required equity check.

Show formula & worked example

Formula Rolled equity = roll % x management proceeds (a source of funds)

In the model Sources & Uses (sources side)

Worked example

On the $80M equity check, a 10% rollover is $8M, so the sponsor funds $72M.

Common mistake

Omitting rollover from Sources & Uses, or treating it as free equity.

Full definition → Related: Sources & Uses

Fund Structure & Economics

How the fund itself is built, paid, and governed.

# General Partner (GP)

The firm that raises and manages the fund: it sources deals, makes investment decisions, manages portfolio companies, and earns a management fee plus carried interest. The counterpart to the Limited Partners who provide most of the capital.

# Limited Partner (LP)

An investor that commits capital to a fund but does not run it: pensions, endowments, sovereign wealth funds, insurers, funds of funds, and family offices. LPs supply the large majority of fund capital and receive returns net of fees and carry.

Related: General Partner, Capital Call

# Carried Interest (Carry) Core

The GP's share of fund profits, the larger half of the classic 2 and 20 economics and almost always 20% of profits. It pays out only after capital is returned and the hurdle is cleared, so it rewards realized gains, not paper marks.

Show formula, worked example & exhibit

Formula 20% of fund profits (the '20' in 2 and 20)

In the model Fund-level returns / LP-GP split

Worked example

On $100M of profit above the return of capital, the carry is 20%: $20M to the GP, $80M to LPs.

Full definition → Related: Hurdle Rate, Distribution Waterfall

# Management Fee

The annual fee a GP charges to operate the fund, the 2 in 2 and 20, typically around 2% of committed capital and often lower for larger funds. It funds the firm's operations and is separate from carried interest.

Related: Carried Interest

# Capital Call (Drawdown)

The mechanism by which a fund draws committed capital from its LPs as deals are funded, rather than collecting it all up front. The cumulative amount drawn is the paid-in capital in the denominator of DPI and TVPI.

# Distribution Waterfall Core

The order in which fund cash flows are split between LPs and the GP: typically return of capital, then the preferred return, then a GP catch-up, then the 80/20 split. The two main types are European (whole-fund) and American (deal-by-deal).

Show formula, worked example & exhibit

Formula Return of capital -> preferred return -> GP catch-up -> 80/20 split

In the model Fund-level returns / LP-GP split

Worked example

On $250M of proceeds over $100M paid-in, a full catch-up gives the GP $30M (20% of the $150M profit) and LPs $220M.

Common mistake

Dropping the preferred return or the catch-up; both change who gets paid and when.

Calculator

Paid-in capital ($M)Exit proceeds ($M)Hold (years)Pref / hurdle (%)Carry (%)

GP carry$30.0M

LP proceeds$220.0M

GP share of profit20.0%

European (whole-fund) waterfall with a full GP catch-up: return of capital, then the preferred return, then the catch-up, then the carry split. American deals split deal-by-deal.

Full definition → Related: Carried Interest, Hurdle Rate

# Co-Investment

An LP's direct investment alongside a fund into a specific deal, usually with reduced or no fees and carry. Co-investments let large LPs put more money to work on deals they like and lower their blended cost.

Related: Limited Partner

# Dry Powder

Committed capital a fund has raised but not yet invested. Industry-wide dry powder is a rough gauge of how much buying pressure, and competition on price, is in the market.

Related: Capital Call

# Growth Equity

Minority investments in established, growing companies that need capital to expand, typically with little or no leverage. It sits between venture capital and buyouts on the risk and control spectrum.

Related: Leveraged Buyout

# Secondary Buyout

A deal in which one PE firm sells a portfolio company to another PE firm. It has become a major exit route as the industry has grown, alongside strategic sales and IPOs.

Related: Holding Period

# Write-Off

The full impairment of an investment when a portfolio company fails and its equity value goes to zero. Write-offs are part of the return distribution in any portfolio; the model is to have winners that more than cover them.

Related: MOIC

Value Creation & Strategy

How sponsors actually make the business worth more.

# Value Creation Levers

The ways a PE firm increases the value of a business over the hold, grouped into three forms of engineering: financial (capital structure and leverage), governance (active boards and incentives), and operational (revenue, margin, and working-capital gains). The firms that compound do so on operational and governance gains, not leverage alone.

# Value Creation Bridge (Returns Attribution) Core

The waterfall that attributes a deal's equity gain to its three sources: EBITDA growth, multiple expansion, and debt paydown. Entry equity plus the three levers equals exit equity. It is how a deal team stays honest about what actually drove the IRR and MOIC.

Show formula, worked example & exhibit

Formula Entry equity + EBITDA growth + multiple expansion + debt paydown = exit equity

In the model Returns attribution (entry to exit)

Worked example

House case: $75M entry + $78M EBITDA growth + $0 multiple + $95M debt paydown = $248M exit equity (flat 6.0x).

# Add-On Acquisition (Bolt-On) Core

A smaller company bought by an existing portfolio company (the platform) rather than by the fund directly. Add-ons are the engine of a buy-and-build: they grow the platform, often at a lower multiple, which blends down the average entry price and can drive multiple arbitrage at exit.

Show worked example & exhibit

In the model Buy-and-build / consolidation model

Worked example

Buy the platform at 6.0x and add-ons near 4.5x to blend down entry, then exit the larger business higher.

Common mistake

Letting integration risk or overpaying for the next deal erase the multiple arbitrage.

Full definition → Related: Platform Company, Multiple Expansion

# Platform Company

The initial, usually larger acquisition that becomes the base for a buy-and-build, onto which add-ons are bolted. The platform supplies the management team, systems, and infrastructure that smaller acquisitions plug into.

Show worked example & exhibit

Worked example

Buy a $25M platform at 6.0x, bolt on $5M and $4M of add-ons near 4.5x, and the combined $34M business can exit higher.

Related: Add-On Acquisition

# Operating Partner

A senior professional inside a PE firm focused on improving portfolio companies rather than sourcing deals, often a former operator or executive. Operating partners execute the operational-engineering half of value creation.

Related: Value Creation Levers