EBITDA growth vs Multiple expansion
In PE, why would firms prefer returns to come from EBITDA growth as opposed to multiple expansion? Is it just cause cash flow is important in repaying debt principal and interest?
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EBITDA growth is more of a “sure thing” in that the EBITDA of a company cannot be argued (ignoring crazy run-rate / pro forma adjustments for the concept here) whereas the multiple applied to EBITDA for valuation is ultimately subject to the whims of the market and therefore is harder to forecast / rely on, especially in an LBO where your model is looking at an exit 5+ years out
Really helpful and makes sense - thank you!
Agree with the above. EBITDA growth is perceived to be more due to the "skill of the investor" rather than multiple expansion which can be impacted by different macro factors, etc.
If you dig up the most recent Bain PE returns report (can't remember the exact name of it), you can see the returns attribution work they did and basically the entire PE industry has experienced massive multiple expansion over the past decade. Is that really due to the "skill" of the PE industry or was that a result of lower interest rates, the general melt-up in markets everywhere, etc.
EBITDA growth is what a given PE fund has the most direct control/influence on.
EBITDA growth is a standardized metric that everyone uses for the most part.
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