Financial Glossary
Private equity
Private equity (PE) refers to ownership stakes in companies that are not listed on public exchanges, typically acquired through direct investment, leveraged buyouts (LBOs), growth equity rounds, or venture capital. PE firms raise committed capital from limited partners (LPs) -- pension funds, endowments, family offices -- into a fund with a defined investment period (usually five years) and a harvest period for exits (another five years). Returns are driven by a combination of operational improvement, multiple expansion (buying at a lower EBITDA multiple than selling), and leverage paydown. Management fees (typically 2% of committed capital) and carried interest (typically 20% of profits above a hurdle rate) are the standard compensation structure.
Problem & Application
A PE firm acquires a chain of 10 campgrounds for $15 million (5x EBITDA on $3M annual EBITDA), financing $10 million with bank debt. Over four years, management upgrades booking software, adds glamping inventory, and raises average daily rates, growing EBITDA to $5 million. The firm sells at 6x EBITDA for $30 million, repays the remaining $8 million in debt, and distributes $22 million to equity holders -- roughly a 3.5x return on the $5 million equity invested. Fractional CFO services are common in PE-backed portcos because the fund requires monthly EBITDA packages, covenant compliance certificates, and board-ready financial reporting that small operator management teams rarely have in-house.
In Short
Private equity is a valuable source of capital for private companies, but it requires strong management and alignment between investors and company leaders to achieve success.