Alternatives and Fixed Income - Private Equity Valuation

Question 1

Carried Interest

Answer 1

When Fund value > Invested Capital

Question 2

1. Tag Long - Drag Along (Private Equity)
2. Ratchet
3. Distribution Waterfall

Answer 2

1. Tag along: When management has the ability to get equity upon sale of the company
2. Ratchet: Specifies equity allocation between LPs and Management
3. Distribution Waterfall: How profits flow to the LPs and whether the GP may receive carried interest

Question 3

Calculate % Ownership of Private Equity First Round Investors (F1)

Answer 3

F1 = Investment / Post1

• • Investment: amount invested at the beginning (before post1)*
• • Post 1: The present value of the company post the first round of financing*

Question 4

Calcuate # of Shares F1 Investors need to get % ownership (Spe1)

Answer 4

Spe1 = Se(F1 / 1-f1)

• • Spe1: Shares for Private Equity Investors in round 1*
• • F1: Fractional ownership of first round investors*
• • Se: Number of shares owned by management*

Question 5

Determine Stock Price after First Round of Private Equity Financing

Answer 5

P1 = Inv1 / Spe1

• • P1: share price post financing first round*
• • Inv1: Initial financing*
• • Spe1: Shares owned by Private Equity investors after round 1*