Traditional private equity models often depend on exits to realize returns, with investors waiting through a holding period before capital is returned. This paper explores an alternative framework used in lower middle market private equity, where return generation may begin during ownership rather than at disposition.
The report outlines how acquiring businesses at lower entry multiples can create higher initial earnings yields, which may support ongoing investor distributions from operating income. It also examines how organic EBITDA growth can expand borrowing capacity while maintaining stable leverage ratios, creating additional distribution potential through recapitalizations under certain assumptions.
Using illustrative portfolio scenarios, the paper compares this approach with traditional lower middle market private equity structures that typically involve capital calls, J-curves, and greater dependence on future exits. The analysis suggests that for portfolios focused on operating income and disciplined acquisition pricing, a portion of private equity returns may be generated before a sale event occurs.
The report also discusses how exits can remain important by capturing accumulated EBITDA growth and potential valuation changes over time, while positioning distributions generated during ownership as a separate component of total return. Illustrations and targets in the paper are hypothetical and not guaranteed.