Returns bridge

A returns bridge decomposes the change in equity value into its three sources: earnings growth, movement in the exit multiple, and deleveraging. It answers where the money actually came from.

The convention is to measure EBITDA growth at the entry multiple, so it is isolated from any multiple change; multiple expansion at exit EBITDA; and deleveraging as the reduction in net debt over the hold.

It is what a fund shows its investors, and what an interviewer is probing when they ask what drove the return. A bridge dominated by multiple expansion says the fund was lucky; one dominated by EBITDA growth says it did something.

It also disciplines underwriting. Building the bridge before committing forces an explicit statement of how much of the target return depends on things outside the sponsor's control.