Hi guys, sorry in case the doubts have been solved already. Schweser Book 4 on Alternative Aset valuation: 1. Page 57: “The duration of Private Equity Investment is usually shorter than expected.” Can’t it be longer than expected if exit does not happen as required? 2. Page 70: In the “Calculating Cash Flow from an LBO”: Why is depreciated subtractred? Thanks!
Pg 70: Depreciation is subtracted, then added back as Recaptured Depreciation, right. Essentially - that piece can be ignored!
- Yes it can, this is on a per investment basis. Yet with a PE Fund, the GP would want to return the monies faster to the LP’s take a realized gain, collect your carried interest and begin the next fund! Yet dealing with portfolio companies, the state of the capital markets affects the exit which can lengthen the initial duration of holding the company
Thanks. But my doubt was why do we do this only in case of LBO? We have calculated Cash flows for non-LBOs and we don’t add back recaptured depreciation for them cpk123 Wrote: ------------------------------------------------------- > Pg 70: Depreciation is subtracted, then added back > as Recaptured Depreciation, right. > > Essentially - that piece can be ignored!
you do it everywhere… don’t you? only it is not called “Recaptured Depreciation”, a fancy term. In your regular cashflows - you start with net income - where you removed depreciation. then promptly - you add it back to arrive at your after tax cash flows. (this add back is your recaptured depreciation).
recaptured depreciation might be taxed at a different ( punitive) rate than capital gains or ordinary income