Case 002Returns attribution and value creationCore

Two portfolio exits both returned 2.5x. One was re-rated with flat earnings; the other doubled its earnings at a constant multiple. Show each value bridge and judge which return is repeatable.

The situation

A fund sold two companies after five years, each at 2.5x the equity it put in, Rs 320 crore into each.

Neeraksha Foods, a packaged snacks maker, was bought at 8x EBITDA of Rs 100 crore, Rs 800 crore, with Rs 480 crore of debt. EBITDA was still Rs 100 crore at exit, but the market had warmed to branded food and the buyer paid 11x. Debt had fallen to Rs 300 crore.

Parvat Pharma Packaging, which makes blister packs for drug makers, was bought at 8x EBITDA of Rs 60 crore, Rs 480 crore, with Rs 160 crore of debt. The team added two lines and a new customer; EBITDA doubled to Rs 120 crore and it sold at 8x again. All spare cash went into capacity, so debt was still Rs 160 crore.

Your task

Break each 2.5x into EBITDA growth, multiple change and debt paydown. Which return would you expect the team to repeat, and why?

Quick check

Before building anything: what share of Neeraksha's gain came from the multiple?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Neeraksha's 2.5x is 62% re-rating and 38% debt paydown; Parvat's is entirely EBITDA growth. Both turn Rs 320 crore into Rs 800 crore, an IRR of about 20%. Parvat's return came from work the team did and can underwrite again. Neeraksha's came mostly from a market mood the team did not control; at its entry multiple it would have returned 1.56x.

Step 1How do you split a buyout gain into its sources?

Three engines, applied in order. EBITDA growth valued at the entry multiple, then the change in multiple applied to exit EBITDA, then the fall in net debt. The three always add to the change in equity, which is your check. Picture a flat you bought and let out: rent rises because you renovated, prices in the area rise because a metro station opened, and the home loan shrinks as you pay EMIs. All three raise your equity; only the first is your doing.

The relationship
ΔEquity=(E1−E0) m0+(m1−m0) E1+(D0−D1)\Delta\text{Equity} = (E_1 - E_0)\,m_0 + (m_1 - m_0)\,E_1 + (D_0 - D_1)
E_0, E_1EBITDA at entry and at exit
m_0, m_1EV/EBITDA multiple at entry and at exit
D_0, D_1net debt at entry and at exit
What it says in wordsThe gain in equity is growth valued at the price you paid, plus the re-rating applied to what you sell, plus the debt you paid off.

Neeraksha: (100 less 100) times 8 is zero; (11 less 8) times 100 is Rs 300 crore; 480 less 300 is Rs 180 crore. Total Rs 480 crore, which matches 800 less 320. Parvat: (120 less 60) times 8 is Rs 480 crore; no multiple change; no paydown. Also Rs 480 crore.

Same 2.5x, two different bridges, Rs crore of equityNeeraksha Foods320Entryequity+0EBITDAgrowth+300Multiplechange+180Debtpaid down800ExitequityMultiple change: 62.5% of the gainParvat Pharma Packaging320Entryequity+480EBITDAgrowth+0Multiplechange+0Debtpaid down800ExitequityMultiple change: 0.0% of the gain
Both bridges run from Rs 320 crore to Rs 800 crore of equity, but Neeraksha's gain is Rs 300 crore of re-rating plus Rs 180 crore of debt paydown with no EBITDA growth, while Parvat's is Rs 480 crore of EBITDA growth with nothing from the multiple or the debt.
Step 2Which one would you back the team to repeat?

Parvat. A return built on EBITDA growth at a constant multiple is a return the team made, so it is evidence of a skill that transfers to the next deal. Neeraksha's team did pay down debt, but leverage plus a warm market for food brands did most of the work. Ask whether anything they did earned the re-rating: a shift to higher-margin products or a cleaner customer base can justify a higher multiple. With EBITDA flat, that case is hard to make.

Exit multipleNeeraksha MOICNeeraksha IRRParvat MOICParvat IRR
7x1.25x4.6%2.12x16.3%
8x (entry)1.56x9.3%2.50x20.1%
9x1.88x13.4%2.88x23.5%
As realised2.50x20.1%2.50x20.1%
If both companies had sold at their 8x entry multiple, Parvat would still have returned 2.50x while Neeraksha would have returned only 1.56x, an IRR of 9.3%; the re-rating is what lifted Neeraksha to 2.5x.
Step 3What is the limit of this attribution?

The order matters at the edges. Valuing growth at the entry multiple and the re-rating on exit EBITDA is a convention; flip it and the split moves when both change at once. Here only one moves in each deal, so the answer is clean. The more useful test is the one in the table: hold the multiple at entry and see what is left. Parvat keeps 2.5x; Neeraksha drops to 1.56x, a 9.3% IRR that would not have cleared most funds' hurdle.

Where candidates lose it

Candidates see two identical 2.5x results and call the deals equally good. The interviewer gave you the same headline on purpose; the case is about what sits under it.

The second miss is calling debt paydown pure skill. Repaying debt from flat earnings is mostly leverage at work, and it carries risk that a growth bridge does not.

What the interviewer asks next

  • Neeraksha's margin rose two points during the hold but revenue fell. How would that change the bridge?
  • An LP shows you the fund's bridge: 60% of all gains came from multiple expansion. What do you ask?
  • How would you split a deal where EBITDA and the multiple both rose?

Company names and figures are illustrative.