PE Legend

Glossary

Every term the game uses, defined the way a good mentor would define it — two sentences and a number you can hold onto.

EBITDA

A company's yearly profit engine before financing games — earnings before interest, taxes, depreciation and amortization. Buyers use it because it strips out how the business was paid for and shows what the operations actually earn.

A pizza chain doing $10M revenue with $2M EBITDA keeps $2 of every $10 as operating profit — a 20% margin.

Multiple

The price of a business expressed as a number of times its EBITDA. It is the market's shorthand for quality, growth and risk: safer, faster-growing businesses trade at higher multiples.

Buying $20M of EBITDA at 8.0x means paying $160M for the whole company.

Leverage

Borrowed money used to buy the company. Leverage shrinks the cash you personally have to put in, so every dollar of profit later lands on a much smaller equity base — and it magnifies losses the same way.

A $160M purchase with $100M of debt means you only write a $60M equity check.

Equity

The cash your fund actually puts into the deal — the purchase price minus the debt. Equity is what gets returned (or wiped out) at exit, and it is what your MOIC is measured against.

$160M price − $100M debt = $60M equity check from the fund.

Debt

Money loaned by banks and credit funds to help buy the company. It charges interest every year and must be repaid before equity holders see a dollar at exit.

$100M of debt at 9% costs $9M of interest in year one.

Covenant

A promise written into the loan — usually a cap on debt relative to EBITDA. Break it and the lender takes control of the outcome, often forcing a quick sale at a bad price.

A 7.0x covenant on $100M of debt breaks the moment EBITDA falls below $14.3M.

MOIC

Multiple on invested capital: dollars out divided by dollars in. It ignores time — it just asks how many times you multiplied your investors' money.

$45M in, $139M out = 3.1x MOIC. Roughly 2.0x is what keeps investors happy.

IRR

Internal rate of return — the annualized speed of your gain. Two deals can both return 2.0x, but the one that got there in three years has a much higher IRR.

2.0x over 5 years is about 15% IRR; 2.0x over 3 years is about 26%.

Exit

Selling the company — to another fund, a strategic buyer, or the public markets. The exit price is set by the exit multiple times whatever EBITDA you've built.

Exiting $28M of EBITDA at 9.0x = $252M enterprise value.

Dead money

Capital that sits in a deal for years and comes back roughly the way it went in. No disaster, no win — but the clock ran, so the IRR is dreadful.

$50M in, $55M out after five years: 1.1x MOIC, about 2% a year.

Free cash flow

The cash the business actually generates after paying for equipment, taxes and interest. In an LBO this cash is swept straight into paying down the loan.

$20M EBITDA − 25% for capex and taxes = $15M, minus $9M interest = $6M of debt paydown.

Bolt-on

Buying smaller competitors and folding them into your company. Small companies sell for low multiples, big ones for high multiples — so the same profits get repriced upward.

Buy $3M of EBITDA at 5.0x ($15M) inside a platform valued at 9.0x — instantly worth $27M.

Multiple arbitrage

Earning a return purely from the gap between what you paid and what buyers pay for a bigger business. Scale itself is the product.

Bought the platform at 8.0x, sold it at 9.5x — 1.5 turns of pure repricing.

Dry powder

Committed investor money you haven't spent yet. It earns nothing while it waits, so an unspent dollar quietly drags your fund return toward 1.0x.

$100M of a $500M fund left unspent returns 1.0x on that slice, no matter how good the rest is.

LP

Limited partner — the pensions, endowments and family offices whose money you invest. They take almost all the profit and judge you on MOIC and IRR.

A state pension commits $50M to your $500M fund and expects roughly 2.0x back.

Carry

Carried interest: the fund manager's share of the profits, classically 20% above an 8% annual hurdle. It is the entire reason anyone works these hours.

$200M of profit above the hurdle means $40M of carry split across the team.

Enterprise value

The value of the whole business — what you'd pay for it debt-free. Entry EV is the multiple times EBITDA; equity value is EV minus the debt outstanding.

9.0x × $20M EBITDA = $180M EV; with $80M of debt left, equity is worth $100M.

Cyclicality

How hard a business gets hit when the economy turns. Trucking and building products swing violently; software subscriptions barely notice.

A 12% downturn hits a highly cyclical firm by ~18% and a stable one by ~4%.

Fire sale

A forced, fast sale — usually because a lender lost patience. The buyer knows you have no choice, so the price reflects it.

Bought at 9.0x, sold under duress at 7.4x, with the debt paid first.