And here's another time I was completely stumped in private equity...

We're all standing around the conference table and the partner says,

"we can probably get 3-4 turns on this thing."

"𝘵𝘶𝘳𝘯𝘴" ?

I wasn't sure what he meant.

Were we going to own this company a 3-4 times?

After confidently nodding my head, I rushed back to my computer and consulted my friend Google:

"what are turns in private equity?"

Here's what I found:

"A turn of leverage or a turn of debt describes an organization's debt to EBITDA leverage ratio. For example, two turns of debt means that the company's leverage ratio is 2x."

(𝘴𝘰𝘶𝘳𝘤𝘦: 𝘥𝘪𝘷𝘦𝘴𝘵𝘰𝘱𝘦𝘥𝘪𝘢 -- at least today, no idea what I found back then)

Ohhhhhh okay I see now I think...

So, if the company has EBITDA of $2mm, then turns would be this:

1 turn = $2mm of debt

2 turns = $4mm of debt

3 turns = $6mm of debt

4 turns = $8mm of debt

**********

So now let's see what the partner is 𝘳𝘦𝘢𝘭𝘭𝘺 thinking about.

Let's take the same company with $2mm of EBITDA.

Let's also say it's "trading for" 6x in the market.

So, it's "purchase price" or "fair market value" is $12mm ($2mm x 6).

If we can get "3-4 turns on this thing" that means we can raise $6 - $8mm of debt:

($2mm x 3 = $6mm)

($2mm x 4 = $8mm)

Which means...

(𝙖𝙣𝙙 𝙝𝙚𝙧𝙚'𝙨 𝙩𝙝𝙚 𝙠𝙚𝙮)

The PE firm will need to raise $𝟰𝗺𝗺 - $𝟲𝗺𝗺 𝗶𝗻 𝗲𝗾𝘂𝗶𝘁𝘆 to close the deal & buy the company.

($12mm price - $8mm debt @ 4 turns = $4mm equity left)

($12mm price - $6mm debt @ 3 turns = $6mm equity left)

**********

Why is this "equity figure" so important to the partner?

Well one is just to start setting investor expectations & ballpark things.

But really, it's because:

**The less equity the PE firm can bring to the deal, the better the (POTENTIAL) return can be.**

(↑ 𝘵𝘩𝘪𝘯𝘬𝘪𝘯𝘨 𝘰𝘶𝘵 𝘭𝘰𝘶𝘥, 𝘵𝘩𝘪𝘴 𝘪𝘴 𝘢 𝘨𝘳𝘦𝘢𝘵 𝘱𝘰𝘴𝘵 𝘧𝘰𝘳 𝘢𝘯𝘰𝘵𝘩𝘦𝘳 𝘵𝘪𝘮𝘦)

and generating strong returns is what keeps the PE firm in business and allows them to raise another fund.

—Chris

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