Please forgive my naivety; but going through some interview prep on LBO's I'm curious if there's any reason for GP's at buyout funds to see their portfolio companies "succeed". Just from experience in DCM, bond performance isn't always necessarily directly proportional to company performance.
Although unlikely, if FCF's are strong enough to pay down debt (assuming management is aggressive about deleveraging) the EV (ceteris paribus) will have to increase. Therefore the PE fund wouldn't have to create any value whatsoever.
If you really wanted to get down into the weeds (probably inaccurate given the data set) you could possibly run some sort of Maximum Likelihood Estimator or Method of Moments to determine the most efficient FCF/Debt for realized returns and "manipulate" the companies structure and operations to fit the model.
So basically, and again please correct me if I'm way off base, it would seem the most efficient way to make money would to simply fit the company's performance to the model. Obviously an increase in the value of the equity would make more money, but it seems like you could just contort a portfolio company until it gives you what you want.
Sorry if I'm not wording this question correctly.
While paying down debt certainly does increase equity value, nothing juices returns quite like EBITDA growth and sale multiple expansion.
...and nothing solidifies commitments to your next fund like juiced returns!
Regards
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