What might a private equity firm observe in a successful investment regarding cash flow?

When evaluating a successful investment, a private equity firm typically focuses on the performance of cash flow, particularly levered free cash flow, which is the cash available to equity holders after accounting for interest payments and other expenses.

In this context, increasing levered free cash flow in proportion to the initial equity investment signifies that the investment is generating more cash returns relative to what was invested. This increase suggests the company is becoming more efficient, capturing more market share, or improving its operational processes, which enhances profitability and cash generation. A positive trend in levered free cash flow is a key indicator of financial health and an essential factor for any investment's performance.

This aspect aligns with the firm’s goal of creating value, as investors anticipate not just the return of their capital but also a significant return on that capital over time. Therefore, the observation of increasing levered free cash flow relative to the initial equity investment directly correlates with successful investment outcomes in private equity.