keeping PE on lockdown

easy q but with the failure little twist to calc: The founders of a small technology firm are seeking a $3 million venture capital investment from prospective investors. The founders project that their firm could be sold for $25 million in 4 years. The private equity investors deem a discount rate of 25% to be appropriate, but believe there is a 20% chance of failure in any year. The adjusted pre-money valuation (PRE) of the technology firm is closest to (in millions): i won’t even give the answers b/c they make guessing too easy. calc it boys and girls.

r-effective = 1.25 / 0.8 = 1.5625 POST = 25 / (1.5625 ^ 4) = 4.1943 INV = 3 PRE = 1.1943

nice work. i just did it 25/1.25^4 x .8^4 and it worked… i think this is kosher to do also and i didn’t get lucky, but the qbank answer did it your way cpk. this one i just made a really dumb mistake on and got wrong in qbank: The Dragonhill Group manages a $250 million private equity fund. Investors committed to a total of $300 million over the term of the fund and specified carried interest of 20% and a hurdle rate of 10%. Carried interest is distributed on a deal-by-deal basis. 60% of the $250 million has been invested at the beginning of year 1 in Deutsch Co. (Deutsch), with the remaining 40% invested in Reiner Ltd (Reiner). Both firms are sold at the end of the third year, realizing a $45 million profit for Deutsch and a $35 million profit for Reiner. The carried interest paid to the fund’s general partner after Deutsch and Reiner, respectively, is: Deutsch Reiner again, q is a better q without having answers to lean on. give it to me.

$250 million PE fund -> I guess this is the paid in capital Committed capital is $300 For Deutsche PV = -0.6*250 = -150 FV = repayment of capital + profit = 150+45 n = 2 (IS THIS THE TRICK??? :P) CPT I/Y IRR = 14% > 10% hurdle rate Therefore, Carried interest is 20%*45 = 9 million For Reiner PV = -.4*250 = -100 FV = 100 + 35 = 135 n = 2 CPT I/Y I/Y = 16.1% 16.1% > 10% hurdle rate, so carried interest included CI = 20%*35 = 7 million Does this look right?

9.13928831% < 10% Hence CI to GP for Deutsch = 0 10.5209449% > 10% Hence CI to GP for Reiner = 7m ?

nevermind, n should be 3 :wink:

TheAliMan, nice profile, lol. Are you going to put that on your resume?!

Ali- I did the exact same thing and only did a 1 year return, not 3 yrs… so I bit on both over the hurdle rate. Good job SG! A) $0 $7 million B) $9 million $0 C) $9 million $7 million Your answer: C was incorrect. The correct answer was A) $0 7 million Since carried interest is paid on a deal-by-deal basis, profits are not netted. Also, carried interest is only paid if the investmentfs IRR at least meets the hurdle rate of 10%. (All figures are in million): The initial allocation between the firms was: Deutsch: (0.60)($250) = $150 Reiner: (0.40)($250) = $100 The IRRs for the two firms are: IRRDeutsch: PV = -$150; FV = $195, N = 3; CPT I/Y ¨ IRR = 9.14%. IRRReiner: PV = -$100; FV = $135; N = 3; CPT I/Y ¨ IRR = 10.52%. Since the return on Deutsch fell short of the 10% hurdle rate, the general partner only receives profits after Reiner. The profit is 20% of $35 million, or $7 million.

I thought PE was bad - but came to Taxes in Port Mgmt and just gave up.

that is because they go completely formula crazy on you there…

sublimity Wrote: ------------------------------------------------------- > TheAliMan, nice profile, lol. Are you going to > put that on your resume?! Pretty much right under my name on the first page :wink: