A private equity firm is guaranteed to receive 80% of the residual value of a leveraged buyout investment, with the remaining 20% owing to management. The initial investment is $500 million, and the deal is financed with 70% debt and 30% equity. The projected multiple is 2.0. The equity component consists of:
- $120 million preference shares.
- $25 million private equity firm equity.
- $5 million management equity.
At exit in 5 years the value of debt is $150 million and the value of preference shares is $300 million. The payoff multiple for the private equity firm and for management, respectively, is closest to:
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Private equity |
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Management |
The calculations at exit are as follows (all in million $):
- The exit value will be $500 × 2.0 (the specified multiple) = $1,000.
- Outstanding debt is $150.
- Preference shares are worth $300.
- Private equity firm’s value: 80% of the residual exit value:
(0.80)($1,000 ? $150 ? $300) = $440.
- Management’s value: 20% of the residual exit value:
(0.20)($1,000 ? $150 ? $300) = $110. Total initial investment by the private equity firm is $145, and by management $5.
Total payoff to the private equity (PE) firm at exit is $440 + $300 = $740.
Payoff multiple for the PE firm is $740 / $145 = 5.10.
Total payoff to management at exit is $110.
Payoff multiple to management is $110 / $5 = 22.0.
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发表于 2010-4-20 13:45
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