Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay GSBs management fee.

As is typical in the venture capital industry, GSB will only invest $80 million (committed capital less lifetime management fees). At the end of 10 years, the investments made by the fund are worth $400 million. GSB also charges 20% carried interest on the profits of the fund (net of management fees).

• Assuming the $80 million in invested capital is invested immediately and all proceeds were received at the end of 10 years, what is the IRR of the investments GSB partners made? That is, compute IRR ignoring all management fees.
• Ofcourse,asaninvestororlimitedpartner,youaremoreinterestedinyourownIRR(thatis,theIRRincludingallfeespaid).AssumingthatinvestorsgaveGSBpartnersthefull$100millionupfront,whatistheIRRforGSBslimitedpartners(thatis,theIRRnetofallfeespaid)?

Your firm has 10 million shares outstanding, and you are about to issue 5 million new shares in an IPO. The IPO price has been set at $20 per share, and the underwriting spread is 7%. The IPO is a big success with investors, and the share price rises to $50 on the first day of trading.

• How much did your firm raise from the IPO?
• What is the market value of the firm after the IPO?
• Assume that the post-IPO value of your firm is its fair market value. Suppose your firm could have issued shares directly to investors at their fair market values in a perfect market with no underwriting spread and no underpricing. What would the share price have been in this case, if you raise the same amount as in part a)?
• Comparing part b) and part c), what is the total cost to the firms original investors due to market imperfections from the IPO?