What does an 'exit bridge' from enterprise value to net proceeds for the sponsor contain?
An exit bridge is the structured calculation from enterprise value at exit down to the net cash the sponsor actually receives after tax. Junior analysts typically underestimate the erosion between EV and after-tax cash — it is often 50%+.
EV minus net debt minus sub-debt tranches (mezzanine incl. PIK, Holdco PIK) minus other debt-like items (pension liability, IFRS 16 lease, earn-out reserves) = total equity value. From that, minus management equity and rollover equity = sponsor equity value. Minus M&A costs minus tax = after-tax sponsor cash.
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| Line | $m |
|---|---|
| Enterprise Value at Exit | $600 |
| − Net Senior Debt | ($80) |
| − Mezzanine incl. PIK | ($50) |
| − Holdco PIK Notes | ($45) |
| − Vendor Loan / Earn-Out Reserve | ($15) |
| − Pension liability (debt-like) | ($8) |
| − IFRS 16 lease liability | ($12) |
| = Total Equity Value | $390 |
| − Management Equity (10%) | ($39) |
| − Rollover Equity (8%) | ($31) |
| = Sponsor Equity Value | $320 |
| − M&A costs (2%) | ($8) |
| − Earn-out trigger reserves | ($12) |
| = Sponsor Net Proceeds | $300 |
| − Tax (28% capital gain) | ($84) |
| = After-tax cash | $216 |
A 50%+ erosion between EV and after-tax cash. The bridge is mandatory in the IC memo.
Forgetting mezzanine PIK accretion, not accounting for earn-out reserves, tax at the sponsor level (holding-company structuring can reduce it).
Question: "Where is the biggest erosion in the bridge?"
Answer: "In the middle market: PIK accretion on sub-debt (10–15% of the EV reduction) and tax (15–20% of the equity value depending on structuring). On middle-market targets, often also a pension liability above 5% of EV"