Supposed EBV is considering a $5M investment in Newco. EBV proposes to structure

Question

Supposed EBV is considering a $5M investment in Newco. EBV proposes to structure the investment as 5M shares of CP. The employees of Newco have claims on 15M shares of common stock. Following the Series A investment, Newco will have 15M common shares outstanding, with another 5M shares on conversion of the Series A.

The $100M EBV fund has annual fees of 2 percent for each of its 10 years of life and earns 20% carried interest on all profits with committed capital as base. Expected GVM is 2.5 and GP%=10%. Use VCV tools

a. Compute the LP cost for this investment.

B. Solve for the LP valuation equation for this investment

C. Supposed that total valuation is 30M. What is LP valuation?

D. Find the breakeven valuation for the investment under base-case assumptions on option valuation

Explanation / Answer

Answer:

1. LP Cost:

Lifetime Fees = $20 Million @2% for a life of 10 years.

   Commited Capital: $100 M-$20M = $ 80 Million.

   LP Cost = (Committed Cost/Investment Capital)*$I = (80/100)*5 = $4 Million.

2. % GP = 10%.

LP Valuation = Partial Valuation - GP Valuation

   GP Valuation = % GP *Partial Valuation.

   Partial Valuation for series A= %Ownership*Total Valuation.

3. LP Valuation at total valuation of $ 30 Million.

   Partial Valuation = 0.25*30 = $7.5 Million.

LP Valuation = 0.90 * 7.5 = $6.75 Million.

4. VCV Tool: Break Even Valuation: $18.24 Million.

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