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!
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
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.
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.
that’s what i thought (and makes perfect sense) but in a schweser practice test (i think it was 1PM), they took the whole difference of committed capital and NAV * incentive fee, instead of just the delta between actual results and hurdle rate. in other words, they were using the carried interest hurdle rate as just a trigger to see if the fund “earned” any carried interest, and since it did, the GPs earned carried interest on the entire excess of NAV over committed capital. apologies for not having my schweser book to identify the exact question.