Schedule mock interviews on the Meeting Board, join the latest community discussions in our Consulting Q&A and find like-minded Interview Partners to connect and practice with!
Back to overview

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

Hi PrepLounge community,

I was not sure about a case answer regarding the evaluation of an investment for a PE firm

Simplified Scenario:

  • Up-front cost: -8M (beginning of year1) - CAPEX lasting 5 years
  • Cash Flow: +2M every year for five years
  • ROI over 5 years: (2M * 5 - 8M)/8M = 2M/8M = 25%
  • Profitability: - Annual Revenue: 2M - Annual Cost: 8M/5 = 1.6M --> Profit Margin = 0.4M / 2M = 20%
  • Time-value is not considered 
  • No synergies / extra-revenues / extra-costs

Doubts

Is ROI 25% over 5 years enough? I don't understand if I can say that annual ROI is roughly 5%, nor if this is a good benchmark.

More in detail:

1. What should a PE fund do with this investment? (Of course, generally speaking)
2. What should an industrial company do? The annual profit margin is solid (20%)

Thank you so much

Anonymous

3
2.2k
18
Be the first to answer!
Nobody has responded to this question yet.
Top answer
Deleted user
on Apr 23, 2020

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

5
Emily
Coach
on Apr 30, 2020
9 years in MBB Southeast Asia & China| 8 years as MBB interviewer | Free intro call

Hi,

Agree with Francisco that the 25% ROI over 5 years would be way to low for PE investment. It doesn't sound like a good investment. 

As for the company itself, 20% might sound solid, but you really need to compare with other players in the industry to test whether 20% is good or bad. 

Best,

Emily

on May 01, 2020
#1 Coach for Sessions (4.500+) | 1.500+ 5-Star Reviews | Proven Success: ➡ interviewoffers.com | Ex BCG | 10Y+ Coaching

Hi there,

the answer depends on the goal of the company which you should clarify at the beginning, but a 25% return in 5 years seems low for a PE.

Not sure what you mean with What should an industrial company do?, as from what I understood the client is a PE firm and not an industrial company.

Best,

Francesco

Similar Questions
Consulting
Resources for Private Equity Cases?
on Feb 28, 2025
Global
3
900+
Top answer by
Pedro
Coach
Bain | EY-Parthenon | Former Principal | 1.5h session | 30% discount 1st session
30
3 Answers
900+ Views
Consulting
CDD/Private Equity Interviews
on Jul 13, 2024
Global
2
9.9k
Top answer by
Pedro
Coach
Bain | EY-Parthenon | Former Principal | 1.5h session | 30% discount 1st session
473
2 Answers
9.9k Views
Consulting
Big 4 or MBB to IB
on Apr 14, 2024
Global
4
1.7k
Top answer by
Udayan
Coach
Top rated Case & PEI coach/Multiple real offers/McKinsey EM in New York /12 years recruiting experience
50
4 Answers
1.7k Views
+1
How likely are you to recommend us to a friend or fellow student?
0 = Not likely
10 = Very likely
Thanks for your feedback! Your opinion helps us make PrepLounge even better.