Question
A private equity fund focused on venture capital deals is raising capital for a potential transaction. During the fundraising roadshow, a prospective investor stated that
A private equity fund focused on venture capital deals is raising capital for a potential transaction. During the fundraising roadshow, a prospective investor stated that in order to invest his minimum deal requirements are:
A preferred return (yield) of at least 10% per year.
Maximum investment time horizon: 4 years, including the investment year, which is assumed to be the current year of 2020.
Minimum internal rate of return (IRR): 16%.
The level of funds to be obtained from this investor is 28 million. Assume that the cash available for the fund is as given in Table 3.
2021 | 2022 | 2023 | 2024 |
4 million | 14 million | 18 million | 22 million |
a. What is the expected yearly payment to the investor between 2021 and 2023? Explain your answer, decomposing the payment into interest payment, repayment of principal, and extra funds. [15 marks]
b. Is the stream of expected cash flows to be paid to the prospective investor enough to attract the investor to invest in the private equity fund? Explain your answer. [5 marks]
c. Consider the following statement: The extensive use of multiples in the Private Equity world is a guarantee of the high quality of the valuation exercises done. In your view, is this statement true or false? Explain your answer. [10 marks]
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