Reading 47: Private Equity Valuation-LOS i 习题精选 class, div, management, interest, private

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Session 13: Alternative Asset Valuation
Reading 47: Private Equity Valuation

LOS i: Calculate management fees, carried interest, net asset value, distributed to paid in (DPI), residual value to paid in (RVPI), and total value to paid in (TVPI) of a private equity fund.

 

 

 

A private equity fund pays a management fee of 3% of PIC and carried interest of 20% to the general partner using the total return method based on committed capital. In 2008 the fund has drawn down 80% of its committed capital of $250 million, and has a net asset value (NAV) before distributions of $260 million. The 2008 management fee and carried interest paid, respectively, is (in millions):

Management fee:

Carried interest:

A) 7.5 50.0

B) 7.8 2.0

C) 6.0 2.0

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(All dollar figures are in millions)
Management fee is paid annually on paid-in capital (PIC), which is just cumulative capital drawn down. 2008 management fee is thus 3% of $200, or $6.0.

Carried interest is the profit distributed to the general partner. The fund specifies a total return method based on committed capital and is calculated as the excess of NAV before distributions above committed capital. The 2008 carried interest paid out is then 20% of ($260 ? $250) = $2.0.

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Which of the following pairs correctly identifies the fees paid to agents for raising funds for the private equity firm, and the fees paid to the general partner (GP) for investment banking services, respectively?

Fees to agents

Fees to GP

A) Placement fees Transaction fees

B) Transaction fees Administrative costs

C) Administrative costs Placement fees

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Placement fees are upfront fees paid to agents for raising funds for the private equity firm. These fees typically are in the 2% range or paid as trailers.

Transaction fees are paid to the GP for investment banking services in the event of a merger or acquisition. Transaction fees are usually split with the limited partners and deducted from management fees.

Administrative costs are various annual costs including custodian fees, fees to transfer agents and accounting costs.

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Dr. Jason Bruno is a qualified investor in the US who is considering a $10 million investment in a private equity fund. Upon reading the fund’s prospectus, Dr. Bruno encounters several contract terms and expressions with which he is unfamiliar. In particular, he would like to know the meaning of ratchet and distributed paid-in capital (DPI). The most appropriate answer by the fund’s manager to Dr. Bruno would be that ratchet and DPI, respectively, is:

Ratchet

DPI

A) The allocation of equity between shareholders and management The limited partner’s realized return from the fund

B) The general partner’s share of fund profits The general partner’s realized return

C) The year the fund was set up Dividends paid out as a fraction of paid-in capital

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Click for Answer and Explanation

Ratchet is a contract term that specifies the allocation of equity between management and shareholders.

DPI, or distributed to paid-in capital, is the cumulative distributions paid out from the fund as a fraction of cumulative invested capital. DPI measures the limited partners’ realized return from the fund.

Note: The GP’s share of fund profits is called carried interest. The year the fund was set up is called the vintage. There should be no distinction between realized and unrealized return for the GP. Also, there is no term for dividends over paid-in capital as dividends are seldom paid out from a private equity fund.

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The net asset value (NAV) after distributions of a private equity fund is calculated as:

A) NAV before distributions + Capital called down – Management fees.

B) NAV before distributions + Carried interest – Distributions.

C) NAV before distributions – Carried interest – Distributions.

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NAV after distributions is calculated as NAV before distributions minus carried interest (the general partner’s profit from the fund) minus distributions from the fund.

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The Nishan private equity fund was established five years ago and currently has a paid-in capital of $300 million and total committed capital of $500 million. The fund paid its first distribution three years ago of $50 million, $100 million the year after and $200 million last year. The fund’s distributed to paid-in capital (DPI) multiple is closest to:

A) 1.17.

B) 0.67.

C) 0.70.

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The DPI multiple is calculated as the cumulative distributions paid by the private equity fund divided by the paid-in capital (the portion of committed capital drawn down).

Nishan’s current DPI is: ($50 + $100 + $200) / $300 = 1.17