How is value created in private Equity? Okay, so value in private Equity is created in three main ways.

The first is through deleveraging.

Through the process of deleveraging the value of the equity owned by the private Equity Firm grows over time as more debt principle is paid down using the cash flows generated by the acquired company.

So the second way value is created is through operational or ebitdog growth.

Growth in evit dark can be achieved by making operational improvements to the business's margin profile these include things like cost cutting raising prices.

Implementing New Growth strategies to increase revenue and making a creative add-on acquisitions.

The Third Way value is created is through multiple expansion. Ideally a financial sponsor hopes to acquire the company at a low entry multiple getting it cheap and then exit at a higher multiple.

The exit multiple can increase from improved investor sentiment in the relevant industry better economic conditions and favorable transaction Dynamics. For example, a competitive sale process led by strategic buyers.

However, most lbo models conservatively assume the firmal exit at the same EV to ebitdar multiple as it was purchased out.

The reason is that the deal environment in the future is unpredictable and having to rely on multiple expansions to meet the return threshold is considered to be risky with this question private Equity firms are testing to see whether you understand what levers can be used in private Equity to generate returns. This question is asked to make sure that any candidate joining the private Equity Firm can demonstrate how value is created through Investments three areas where investment professionals spend a lot of time doing analysis the candidates showed that they understood each pillar of value creation and didn't stop there but gave examples within each category. This is a technical question and the answer cannot vary too much. The candidate does a good job of keeping the answer to the point and goes an extra step to show they understand what assumptions to make about multiple expansion in models.