Private equity evaluation is not primarily a pricing exercise but a transformation framework. It focuses on the gap between current performance and achievable performance under controlled ownership within a defined time horizon.
The process begins with reconstructing earnings quality. Reported EBITDA is treated as a starting input, adjusted for non-recurring items, owner-specific costs, and accounting distortions. The objective is to identify sustainable cash flow capacity rather than historical performance.
Structural defensibility is then assessed. Key variables include revenue recurrence, customer concentration, pricing power, and switching costs. These determine whether performance is systemically embedded or contingent on external conditions.
Management is treated as an adjustable input within the system. Incentive alignment and governance redesign are central levers for value creation, rather than assumptions about inherent capability alone.
Exit logic constrains the entire model. Entry valuation is derived from expected exit outcomes under conservative assumptions regarding multiples, leverage, and growth. Investments are only valid if transformation survives these constraints.
Overall, private equity functions as a disciplined system for converting operational inefficiency into measurable value within a bounded time horizon.