It is the beginning of 2014, and the management team has $5 million of their own capital, including their share of the sales price, available to purchase all of the ventures existing equity capital. The intent is to retire all of the old stock and issue 2 million shares of common stock in the new venture to the management team. LBO financiers will put up $20 million in 8 percent, 5-year subordinated debt funds plus 1.9 million warrants that can be converted into 1.9 million shares of common stock. A bank will also offer a $10 million, 14 percent interest rate, 4-year fully amortized loan. To make the deal work, Brian Motley was asked to provide seller financing in the form of a below market 10 percent, 5-year, sellers note. The amount of the note was to be for the difference between the $45 million selling price and the amount of funds raised from management, the LBO financiers, and the bank.

In exchange for the seller financing by Brian Motley, the existing venture capitalists agreed to reduce their ownership rights from 43 percent to 40 percent. The management team also lowered their claim on the existing venture from 7 percent to 5 percent. Thus, as the result of agreeing to provide seller financing, Brians percentage ownership of the $45 selling price was 55 percent. Brian estimated that the interest rate being paid on similar risk subordinated seller loans was currently at 16 percent.

Assume that when MiniDiscs is sold at the end of 2018 for $60 million that the LBO financiers will have their debt retired and will sell their share of interest in the venture. What compound rate of return would the LBO financiers receive?