The 30% Return Your Equity Partner Already Picked

The Number, In the Investor's Own Words

One active gap-equity fund put its target plainly: "net returns to investors around 30% IRR."

The phrase that carries the weight is "net to investors."

• Gross to the deal is what the underlying business generates.

• Net to investors is what actually lands in an LP's account after the economics that sit between deal-level cash flow and investor distributions.

Those are different numbers, and a deal can post a strong gross return while still falling short of an investor's bar once that gap is accounted for. Sponsors who model to the gross figure and stop there are answering a question this investor is not asking. When this investor names a target, they are naming the number after that gap. That is the number your entry price has to clear.

What 30 Percent Over Five Years Actually Is

This investor also told us they typically aim for a five-year hold period, all the standard stuff, in their words. Put the two together and you get one clean calculation, a straight conversion from a rate to a multiple, using this investor's own stated numbers:

1.30 to the fifth power is approximately 3.7.

A 30 percent net IRR held for five years works out to roughly 3.7 times the money, assuming a single investment in and a single payment out with nothing distributed in between. On a $5 million check, that is about $18.6 million back at the end of the hold.

Worth being precise about what that is. It is a rate-to-multiple conversion built from this one investor's stated preferences. There is no exit multiple, leverage assumption, or specific deal baked into it. Whatever your actual deal returns depends on your entry price, your operating plan, the pace of distributions, and the exit.

Why That Lands on Your Entry Price

Here's what I see play out regularly: sponsors treat entry price as the whole negotiation and leave the return math for later. This investor's stated preference for sub five multiples explains why that ordering costs sponsors leverage.

A 3.7x outcome comes from three of the levers:

1. Entry multiple, what you pay going in.

2. Exit multiple, what the business sells for coming out.

3. Hold period, how long the capital is deployed.

The exit multiple sits years out, driven by market conditions and buyer appetite you cannot set today. The hold period is a planning assumption this investor builds around five years, not something a sponsor compresses on request. The entry multiple is the one lever a sponsor negotiates directly, at the table, before a dollar is committed.

Why this matters for your deal: when two of those three are largely fixed by the market and the calendar, the third carries a lot of the weight. That is the arithmetic behind this investor telling us they would love to see sub five multiples. A sponsor who walks into a raise already knowing this will spend more of the negotiation on price and less of it explaining the model after the fact.

Working Backward From 3.7x

The conversion tells you what the equity has to return. Running it backward tells you what you can afford to pay.

Take a business doing $3 million of EBITDA with a lender willing to put up $9 million of debt against it. Five-year hold, debt paid down to $4 million, and the business sells at 5.0x either way, so the only thing changing is what you paid going in. These figures track deal-level equity, before fund economics and disregarding deal costs.

Buy at 5.0x:

• You pay $15 million for the business: $9 million of it borrowed, $6 million of it equity

• For that $6 million of equity to return 3.7x, it has to come back as $22.3 million on the day you sell

• The sale also has to clear the $4 million of debt still outstanding after 5 years, so the business has to sell for $26.3 million

• A $26.3 million sale at a 5.0x multiple means the business is earning $5.3 million of EBITDA in year five, up from $3 million today

Buy at 4.0x:

• You pay $12 million: the same $9 million borrowed, but only $3 million of equity

• For that $3 million of equity to return the same 3.7x, it has to come back as $11.1 million

• Clearing the same $4 million of remaining debt after 5 years, the business has to sell for $15.1 million

• A $15.1 million sale at the same 5.0x multiple means the business is earning $3.0 million of EBITDA in year five, approximately what it earns today

One turn of entry multiple is the difference between needing to grow EBITDA 75% and barely needing to grow it at all.

The reason the gap runs that wide is the debt. A lender caps it off the business, not off what you agreed to pay, so it sits at $9 million in both scenarios. Every dollar of price above that lands on the equity check, and the equity check is the piece carrying the 3.7x hurdle.

The Bottom Line

If your equity partner needs 3.7x over a five-year hold for their 30% return, a high entry multiple massively raises the operating performance required to get there.

Before you price your next deal, ask a prospective gap-equity partner three questions:

1. What net IRR are you underwriting to?

2. What hold period are you assuming?

3. What entry multiple range makes that arithmetic work for a business like this one?

Price to clear that calculation rather than to win the negotiation, and the conversation with your equity partner gets a lot shorter. Know the return the check has to produce, and craft your entire deal accordingly.

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