Private Equity about, tested, breath, noticed, feeling

malbec

So I have noticed there has not been alot of talk about Private Equity. I have a good feeling this is going to cause some profane language under our breath for alot of us. This is a new subject so it is almost guaranteed to be tested. Lets start a list of all we need to know for the Private Equity section!

Houjichasan

Value Creation
1) Ability to re-engineer the firm and operate more efficiently
2) Ability to obtain favorable financing
3) Superior alingment of interest between mgt and private equity owners

Mgt Fee: fee paid to GP annually (based upon committed capital)
Transaction Fee: split between GP and LP, fee for investment banking services
Carried Interest: GP's share of funds profits (usually 20% after mgt fee)
Ratchet: allows mgt to increase ownership in company based upon performance
Hurdle Rate: IRR the fund must meet before GP recieves carried interest

PIC: % of capital utilized by the GP
DPI: realized return (cumulitive distribution paid divided by cumulative invested capital)
RVPI: unrealized return (value of fund holdings divided by cumulative invested capital)
TVPI: total return net of mgt fees and carried interest (DPI + RVPI)

% of ownership = investment / post value
# of shares = (existing shares)x(% of ownership / (1-% of ownership))

CF for LBO
Net Income
+Depreciation/Amortization
- Reinvested Depreciation
- New CapEx
- Increase (decrease) in NWC
= CF Available for Debt Repayment

Beta of Equity = Beta of Assets (1+D/E)
*Remember to recalculate the beta each period to comute the appropriate discount rate

economicz

can anyone confirm how carried interest is calculated?

say the hurdle rate is 8% and the incentive fee is 20%, and the fund earns 10% in reality. since actual return > hurdle rate, the GPs are eligible for carried interest. do the GPs earn 20% of 2% (difference between actual results and hurdle) or 20% of 10% (actual return)?

i know how this works in real life (usually with a true up period to get to 80/20) but not sure how it works in CFA land.

onelife1

dynamutt Wrote:
-------------------------------------------------------
> can anyone confirm how carried interest is
> calculated?
>
> say the hurdle rate is 8% and the incentive fee is
> 20%, and the fund earns 10% in reality. since
> actual return > hurdle rate, the GPs are eligible
> for carried interest. do the GPs earn 20% of 2%
> (difference between actual results and hurdle) or
> 20% of 10% (actual return)?
>
> i know how this works in real life (usually with a
> true up period to get to 80/20) but not sure how
> it works in CFA land.

In CFA land, carried interest is the % excess of beginning NAV minus committed capital. I'm assuming if they threw in a hurdle rate, we would take the difference of beginning NAV and committed capital times the % hurdle rate. Any excess would be attributed to carried interest.

NO EXCUSES