What is the first step in calculating the levered free cash flow yield for private equity investments?

The first step in calculating the levered free cash flow yield for private equity investments involves determining the levered free cash flow. This metric represents the cash that a company generates after accounting for its debt obligations, including interest payments. It is essential because it provides insight into the actual cash available to equity holders, as it reflects the amount of cash that can be distributed to investors after fulfilling all financing obligations.

Understanding levered free cash flow is critical for private equity investors because they often use leverage to finance a portion of their investments. By starting with this calculation, investors can evaluate how well the business is generating cash relative to its capital structure and assess the yield that can be expected on their equity investment.

While other options involve important financial metrics such as unlevered free cash flow or EBITDA, these do not directly address the cash flow available to equity holders after debt has been serviced, which is the key insight that levered free cash flow provides. This understanding is particularly valuable in the context of private equity, where leverage plays a significant role in investment performance.