Private Equity Deal Structures: From Enterprise to Equity Value
A private-equity deal structure allocates funding, control and claims on exit proceeds. Bridge enterprise value to equity value using net debt, then allocate that equity under the actual ownership and preference terms.
The key decisions, at a glance
| Concept | What to do | Watch for |
|---|---|---|
| Enterprise value | Value the operating business before allocating debt and equity claims. | Do not compare enterprise proceeds directly with initial equity. |
| Net debt | Subtract debt and add excess cash under the case convention. | Debt repayment can increase equity value without operating growth. |
| Ownership and preferences | Apply dilution, preferred claims and participation terms. | A headline ownership percentage may not equal the proceeds share. |
| Equity multiple | Divide equity proceeds by invested equity on a consistent basis. | A multiple does not state how long the investment was held. |
1. Enterprise value
Value the operating business before allocating debt and equity claims.
Watch for: Do not compare enterprise proceeds directly with initial equity.
2. Net debt
Subtract debt and add excess cash under the case convention.
Watch for: Debt repayment can increase equity value without operating growth.
3. Ownership and preferences
Apply dilution, preferred claims and participation terms.
Watch for: A headline ownership percentage may not equal the proceeds share.
4. Equity multiple
Divide equity proceeds by invested equity on a consistent basis.
Watch for: A multiple does not state how long the investment was held.
Original worked case
Separate business growth from debt paydown
Given: A sponsor buys a company for enterprise value $100m, funded by $60m debt and $40m equity. Exit enterprise value is $120m and remaining debt is $45m. No excess cash, fees, dilution or interim distributions.
01 Entry equity
$100m - $60m = $40m.
02 Exit equity
$120m - $45m = $75m.
03 Equity multiple
$75m / $40m = 1.875x.
Answer and interpretation
Equity gains $35m: $20m from enterprise-value growth plus $15m from debt reduction under these assumptions.
Change one assumption
If exit enterprise value is $80m with $45m debt, equity is $35m and the multiple falls to 0.875x.
Independent teaching example with the stated assumptions. Not an official exam question, marking key or observed market trend.
Understand the method
Part 1
Balance sources and uses at acquisition
Uses describe where transaction funding goes: purchase consideration, refinancing of existing debt, fees and required opening cash. Sources describe where funding comes from: new debt, sponsor equity, rollover equity and other stated financing. The totals must balance. Do not equate the headline enterprise purchase price with the sponsor’s equity cheque without accounting for the other items.
Keep the case convention clear about cash-free, debt-free pricing and any debt assumed rather than repaid. If enterprise value is $100m, transaction fees are $3m and the only financing is $60m new debt, sponsor equity must be $43m under a simplified no-cash, no-other-use structure. Omitting fees overstates the subsequent equity multiple.
Part 2
Bridge enterprise value to the proceeds available to equity
For a simple capital structure, enterprise value plus excess cash minus debt gives equity value. Other senior claims, preferred securities, minority interests and transaction costs may need explicit adjustments. Do not subtract debt twice when an exit figure is already an equity value. Start by labelling every input as enterprise value, asset value or equity proceeds.
At exit, calculate enterprise value from the stated operating metric and multiple, then deduct remaining debt and exit costs. Compare sponsor proceeds with all sponsor contributions, including later injections. A single entry-to-exit multiple ignores timing; an IRR requires dates and all intervening distributions. Keep fund-level carry separate from the deal-level ownership calculation unless the problem explicitly includes it.
Part 3
Attribute the gain to operations, pricing and financing
Suppose EBITDA rises from $10m to $12m while the enterprise multiple stays at 10x. Enterprise value grows from $100m to $120m through earnings growth. If debt falls from $60m to $45m, equity value rises from $40m to $75m before costs. Of the $35m equity gain, $20m comes from enterprise-value growth and $15m from debt reduction under this simple bridge.
Debt reduction is not free value creation: the business must generate cash after reinvestment, taxes and financing costs, or someone must contribute new capital. A complete attribution identifies that source. If the sponsor injects $15m to repay debt, ignoring the injection would exaggerate the equity return. Market multiple expansion should also be separated from operating improvement.
Part 4
Model downside and preferences before celebrating leverage
With fixed debt, the equity claim absorbs a disproportionate share of enterprise-value changes. An asset worth $100m with $60m debt has $40m equity. If value falls to $80m and debt is unchanged, equity falls to $20m, a 50% loss from a 20% enterprise-value decline. This arithmetic ignores bankruptcy costs and other claims, which can make the outcome worse.
Preferred equity introduces another allocation layer. In a simplified non-participating preference, a holder may choose its preference entitlement or conversion proceeds under the stated terms. Participating preferences, caps and accrued returns require different waterfalls. Write each right explicitly and distribute available proceeds in order; a company’s total equity value is not automatically split according to headline ownership percentages.
An acquisition funding table that balances
Enterprise purchase price
- Amount
- 100
- Sources ($m)
- New debt
- Amount
- 60
Transaction fees
- Amount
- 3
- Sources ($m)
- Sponsor equity
- Amount
- 43
Total uses
- Amount
- 103
- Sources ($m)
- Total sources
- Amount
- 103
Illustrative debt-free acquisition with no excess cash, rollover or other claims. Real sources-and-uses schedules require the actual transaction terms.
More worked practice
Original teaching cases. Use the stated assumptions; these are not official exam questions or marking keys.
Fees and exit costs reduce the headline equity multiple
Given: Use the $43m sponsor equity above. Exit enterprise value is $120m, debt is $45m and exit costs are $2m. There are no intervening flows.
- 1Gross exit equity value is 120 - 45 = $75m.
- 2Net sponsor proceeds are 75 - 2 = $73m.
- 3Equity multiple is 73 / 43 = 1.70x, rounded.
Interpretation: The frictionless $75m / $40m calculation gives 1.875x, but it excludes both entry and exit costs. Match the numerator and denominator to the investor’s actual cash flows.
Check your understanding
Answer first, then open the explanation. These checks are original practice and do not generate an exam score.
1. What happens if sources exceed uses?
The schedule is incomplete or inconsistent unless the excess is an explicitly stated use such as balance-sheet cash. Reconcile it before calculating returns.
2. Does repayment funded by a new sponsor contribution count as operating value creation?
No. Record the additional contribution in invested capital and distinguish it from cash generated by the business.
3. A $10m non-participating 1x preference also owns 20% on conversion. At $30m equity proceeds, which amount is larger?
$10m preference versus $6m conversion value. Under the simplified terms, the holder selects the $10m preference; other contractual terms could change the answer.
Common questions
Does a 20% increase in enterprise value imply a 20% equity return?
No. Debt changes and the size of initial equity can amplify or reduce the percentage equity result.
Can I infer IRR from 1.875x?
Only if cash-flow timing is specified. For a single investment and exit after T years, the annual return is 1.875^(1/T) - 1, before omitted costs.
Sources and scope
The sources below establish their stated framework or subject context. Calculations and cases are our own teaching material; these sources do not endorse them or establish complete exam coverage.
- CAIA curriculum and study tools
Official curriculum, companions and required readings for the exam year. The current page now links to 2027 materials.
- CFA Institute: Investments in Private Capital (2026)
Private capital structures and company lifecycle context. Supporting concept reference, not a CAIA curriculum crosswalk.
- ILPA: Principles and best practices
Alignment, governance and transparency in private fund relationships. Our fee and transaction cases use independently stated terms.
- CAIA 2027 curriculum overview
Published topic categories and Emerging Topics reading titles for 2027. The overview is not the complete learning-objective list.
By MiloPrep editorial team. Updated 10 October 2026. Independent study notes, not affiliated with or endorsed by CAIA Association. How we prepare our content.
Notes
- * Study scope: Selected study concepts, not complete curriculum coverage. Match your sitting to the official exam-year materials; CAIA’s current resource page now links to 2027. ↩ Return to content