FIN 655 Alternative Investment [1] SV Venture Partners launched a fund SV II with $125M in committed capital 10 years ag
Posted: Thu May 19, 2022 6:33 am
FIN 655 Alternative Investment
[1] SV Venture Partners launched a fund SV
II with $125M in committed capital 10 years ago. The fund has
achieved a GVM of 2.5 and is now fully distributed. The partnership
agreement has the following relevant terms:
*
Lifetime of partnership 10 years
*
Annual management fee of 2% for the lifetime of the fund
*
Carried interest for the General Partners at 20% on invested
capital.
For SV II, what is (a) the net value multiple (VM)?
(b)
the carry interest paid to the GPs?
(c)
the GP%?
If you were a limited partner in this fund and had given up the
opportunity to subscribe to a municipal bond with 5% coupon rate,
would you consider the choice a good one, from a financial
stand-point?
[2] Acme Ventures LLC is considering 2
different structures for its new AV II fund of $100 million with a
lifetime of 10 years. The firm is going to adhere to the industry
standard of 2% management fees per year on committed capital and a
25% carry on the basis of committed capital in Structure 1, and 20%
on investment capital basis in Structure 2. As part of the planning
process, the firm assumes the exit proceeds at the end of the
fund’s lifetime to be $150 million, and the managing partner wants
to know:
(a)
What would be the carried interest earned under each of these 2
structures?
(b)
If these numbers are different, what would be the amount of exit
proceeds that will produce
the same carry in both
structures?
Please find the answers for Acme Ventures.
[3] The 10-year cash flows (in $ million)
of a VC fund investment is given in the table below:
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Investments
5.0
10.0
10.0
15.0
10.0
0
0
0
0
0
Portfolio value
5.0
16.1
31.3
54.4
70.8
77.7
82.6
85.2
87.2
103.6
Carry
0
0
0
0
0
0
2.5
5.0
3.0
1.5
Distributions to LPs
0
0
0
5.4
7.1
10.6
12.0
12.0
3.5
50.5
Cumulative distributions to LPs
0
0
0
5.4
12.5
23.1
35.1
47.1
50.6
101.1
Portfolio value less distributions to LPs
5.0
16.1
31.3
49.0
63.7
67.1
70.6
73.2
83.7
0
Management fee
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
[4] When a private equity fund makes an
acquisition, a part of the price is raised through debts. The use
of debt is known as leverage. If in an acquisition, the leverage is
1x, it means that the acquisition price is made up of equal parts
of equity and debt. At the same time, the acquisition price is
usually determined as a multiple of the target company’s current
EBITDA, which is known as acquisition multiple. Based on the
following chart:
During Period 1, the average leverage multiple was 4.5x, and the
acquisition multiple 5.8x. The corresponding multiples in Period 2
were 6.7x and 8.7x, respectively.
[1] SV Venture Partners launched a fund SV
II with $125M in committed capital 10 years ago. The fund has
achieved a GVM of 2.5 and is now fully distributed. The partnership
agreement has the following relevant terms:
*
Lifetime of partnership 10 years
*
Annual management fee of 2% for the lifetime of the fund
*
Carried interest for the General Partners at 20% on invested
capital.
For SV II, what is (a) the net value multiple (VM)?
(b)
the carry interest paid to the GPs?
(c)
the GP%?
If you were a limited partner in this fund and had given up the
opportunity to subscribe to a municipal bond with 5% coupon rate,
would you consider the choice a good one, from a financial
stand-point?
[2] Acme Ventures LLC is considering 2
different structures for its new AV II fund of $100 million with a
lifetime of 10 years. The firm is going to adhere to the industry
standard of 2% management fees per year on committed capital and a
25% carry on the basis of committed capital in Structure 1, and 20%
on investment capital basis in Structure 2. As part of the planning
process, the firm assumes the exit proceeds at the end of the
fund’s lifetime to be $150 million, and the managing partner wants
to know:
(a)
What would be the carried interest earned under each of these 2
structures?
(b)
If these numbers are different, what would be the amount of exit
proceeds that will produce
the same carry in both
structures?
Please find the answers for Acme Ventures.
[3] The 10-year cash flows (in $ million)
of a VC fund investment is given in the table below:
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Investments
5.0
10.0
10.0
15.0
10.0
0
0
0
0
0
Portfolio value
5.0
16.1
31.3
54.4
70.8
77.7
82.6
85.2
87.2
103.6
Carry
0
0
0
0
0
0
2.5
5.0
3.0
1.5
Distributions to LPs
0
0
0
5.4
7.1
10.6
12.0
12.0
3.5
50.5
Cumulative distributions to LPs
0
0
0
5.4
12.5
23.1
35.1
47.1
50.6
101.1
Portfolio value less distributions to LPs
5.0
16.1
31.3
49.0
63.7
67.1
70.6
73.2
83.7
0
Management fee
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
[4] When a private equity fund makes an
acquisition, a part of the price is raised through debts. The use
of debt is known as leverage. If in an acquisition, the leverage is
1x, it means that the acquisition price is made up of equal parts
of equity and debt. At the same time, the acquisition price is
usually determined as a multiple of the target company’s current
EBITDA, which is known as acquisition multiple. Based on the
following chart:
During Period 1, the average leverage multiple was 4.5x, and the
acquisition multiple 5.8x. The corresponding multiples in Period 2
were 6.7x and 8.7x, respectively.