Private Equity
Model debt paydown and exit equity
Two sponsors buy and sell at the same enterprise values. Why can their equity returns differ?
A cash sweep uses available cash to repay debt before exit. Less debt at sale means a larger residual for shareholders, holding operating value and other claims fixed.
Ending debt = max(opening debt − cash swept, 0); exit equity = max(exit EV − ending debt, 0)
Repay up to $10m in each of three years. The $60m balance falls to $30m. Exit equity is $120m − $30m = $90m, before any fees.
Buy at $100m EV with $60m debt and $40m sponsor equity. Sweep $10m annually for three years. Exit debt falls to $30m. At $120m exit EV, equity receives $90m, equal to 2.25× invested capital.
Repay up to $10m in each of three years. The $60m balance falls to $30m. Exit equity is $120m − $30m = $90m, before any fees.
The business sweeps only $5m per year and exits at the same $120m EV. What are sponsor proceeds?