Is this ROI good or not for an average PE firm?

Hello,

Just to give a ballpark figure, typical Buyout-focused PE firms target +20% IRR over a period of 5 years, implying a Multiple on Invested Capital (MoIC) of at least 3.0x. Notice that the profitability of the underlying asset is not so important; it's more of an input to achieve that.

On the case you presented:

• ROI of 25%, thus MoIC of 1.25x is way too small
• A key driver of profitability is the exit value, which you are not considering.. and what is the entry price? or is it a greenfield investment? (usually a PE firm acquires an established company)
• Difficult to imagine a situation of annual cash flows of $2M and profits of $0.4M
• Aren't you mixing CapEx and annual costs? Or is it a coincidence they are the same? And CapEx of 4x revenues is huge

In a nutshell, I would not invest in this deal and I believe you are making too simplistic assumptions.

Best,

Francisco