The PE Fund and the Eye Hospital Chain
Five-year hold, 3× target. Underwrite the deal like an investor.
The Prompt
Your client is a mid-market PE fund evaluating a majority stake in an eye-care hospital chain: 18 centres, ₹240 crore revenue, ₹48 crore EBITDA, growing ~15% a year. The fund targets 3× money over a five-year hold. The deal team asks you to assess whether this asset can deliver, and what the value-creation plan must contain.
Opening exchange
PE cases run on the returns equation: entry multiple, EBITDA growth, exit multiple, leverage. So first — what entry valuation is being discussed, and how much debt would the structure carry?
Entry at 14× EBITDA — ₹672 crore enterprise value — with 40% debt funding. Assume exit at the same 14× unless you argue otherwise.
With entry = exit multiple and known leverage, the whole 3× question collapses into one number: how big must exit EBITDA be?
Then I can reverse-engineer the requirement before judging the asset. Equity in: 60% × 672 ≈ ₹403 crore. For 3×, equity out ≈ ₹1,210 crore. I'll work out what exit EBITDA that implies, then test whether this chain can plausibly get there — organic growth, new centres, margin work — and what could break it.
Structure & Hypothesis
Analysis & Data
Does it add up?
Same-centre growth of 8–10% plus 12 new centres contributing ₹25–30 crore by year 5 plus margin gains lands around ₹95–105 crore exit EBITDA — straddling the ₹98 crore requirement. So the base case just works, which is exactly the problem: a plan that needs everything to go right isn't underwriteable. The deal needs either a price negotiation — every 1× off entry is roughly ₹48 crore less equity needed — or a credible fourth lever, like an optical-retail attach strategy or M&A of single-centre operators at 7–8× that arbitrages straight to our 14×.
The verdict "it barely works, therefore negotiate or add levers" is more valuable than a yes/no.
The partner asks: what's the single biggest risk you'd DD?
Surgeon economics and lock-ins. In eye care the cash flows follow 25–30 senior surgeons, not the brand. I'd DD attrition history, compensation versus market, equity participation, and whether the top 5 surgeons' patient volumes survive a change of ownership. Second: payor mix drift — government-scheme cataract reimbursements are price-capped, and a mix shift toward schemes silently compresses realization.
Recommendation
Recommend to the deal team
- Proceed only with a sharper entry: target 12–12.5× (≈ ₹600 cr EV) — at 14× the plan has zero margin of safety against a 3× underwrite.
- Add a buy-and-build lever: acquire 3–4 single-centre operators at 7–8× during the hold; the multiple arbitrage alone adds ~0.4× to fund returns.
- Make surgeon retention the deal's central DD item and the first 100-day action: lock-ins, phantom equity, and succession depth per centre.
- Stress-test exit at 12× — if returns fall below 2.2× there, the deal is a pass at any entry above 12.5×.
Key Takeaway
What this case teaches
PE cases reward reverse-engineering the requirement before evaluating the asset: equity in → target multiple → required exit EBITDA → required CAGR. Then judge the value-creation plan against that bar — and treat "base case barely clears" as a negotiation instruction, not an approval.