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excel代写-MSIN0164 2019
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MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 6
Section B: Coursework Brief and Requirements
Context
This assignment comprises two (2) sections: Section A and Section B. Both sections relate
to analysis, valuation or return computations related to i) an LBO situation, and ii) a venture
capital situation.
Section A carries 120 marks (60%) and Section B carries 80 marks (40%). Your mark out
of 200 marks will be converted to a percentage (%).
The use of Excel in Section A is highly advised where applicable.
Brief
Section A [120 marks] This question is compulsory. It is sub-divided into sub-parts.
You are a General Partner (GP) at The Excelsior Fund (referred to as the Fund), a $750
million US-based LBO fund. The Fund has identified Superb Semiconductors, a publicly
traded US semiconductor manufacturing company, as a potential investment. The Fund
intends to take it private and believes that it can achieve its goals after three years. The
fund developed the following forecasts regarding this investment:
Year 1 Year 2 Year 3
$m $m $m
EBIT 104.00 108.16 112.49
Depreciation and Amortization 10.30 10.61 10.93
Increase / (Decrease) in NWC (0.20) 0.30 0.40
CapEx 10.61 10.93 11.26
The Fund is considering the following two capital structures:
Capital Debt Equity Cost Bid
Structure $m $m of Debt $m
A 650 300 9% 950
B 650 230 12% 880
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 7
The marginal tax rate is equal to 21%.
The Fund will use all free cash flows generated by Superb Semiconductors to service the
debt. The Fund estimates that it will be able to sell the company in 3 years at an
EV/EBITDA multiple of 9 times.
a) Required:
,QUHODWLRQWRWKH,55RIWKH)XQG¶VLQYHVWPHQWLQSuperb Semiconductors under
each of capital structures A and B:
i. Calculate the ending balance of debt every year for each structure. You are
advised to take full account of tax-related aspects. Show your workings.
[24 marks]
Capital Structure A
Interest rate = 9%
Year 1 Year 2 Year 3
$m $m $m
EBIT 104.00 108.16 112.49
Depreciation and Amortization 10.30 10.61 10.93
Increase / (Decrease) in NWC (0.20) 0.30 0.40
CapEx 10.61 10.93 11.26
Debt Beginning of Year 650.00 614.17 573.01
Interest 58.50 55.27 51.57
Taxable income 45.50 52.89 60.92
Taxes 9.56 11.11 12.79
Cash flow 35.84 41.16 47.40
Debt End of Year 614.17 573.01 525.61
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 8
Capital Structure B
Interest rate = 10%
Year 1 Year 2 Year 3
$m $m $m
EBIT 104.00 108.16 112.49
Depreciation and Amortization 10.30 10.61 10.93
Increase / (Decrease) in NWC (0.20) 0.30 0.40
CapEx 10.61 10.93 11.26
Debt Beginning of Year 650.00 629.57 604.43
Interest 78.00 75.55 72.53
Taxable income 26.00 32.61 39.96
Taxes 5.46 6.85 8.39
Cash flow 20.43 25.14 30.84
Debt End of Year 629.57 604.43 573.59
ii. Calculate the IRR for the investment under each of the two the different
capital structures. Show your workings.
[14 marks]
EBITDA = EBIT + Depreciation and Amortization (all for Year 3)
EBITDA = 112.49 + 10.93 = $123.42m
Selling price = exit EV/EBITDA multiple times exit EBITDA
Selling price = 9 x $123.43 = $1,110.78 m
For Capital Structure A:
Initial equity investment = $300.00m
Ending equity = selling price ± debt balance
Ending equity = $1,110.78 - $525.61 = $585.17m
ܸܰܲ ൌ െ̈́͵ͲͲ
̈́ͷͺͷǤͳ
ሺͳ ܫܴܴሻଷ
ൌ Ͳ
ܫܴܴ ൌ ቆ
̈́ͷͺͷǤͳ
͵ͲͲ
ቇ
ଵ
ଷൗ
െ ͳ ൌ Ǥ ૢΨ
For Capital Structure B:
Initial equity investment = $230.00m
Ending equity = selling price ± debt balance
Ending equity = $1,110.78 - $573.59 = $537.19m
ܸܰܲ ൌ െ̈́ʹ͵Ͳ
̈́ͷ͵Ǥͳͻ
ሺͳ ܫܴܴሻଷ
ൌ Ͳ
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 9
ܫܴܴ ൌ ቆ
̈́ͷ͵Ǥͳͻ
ʹ͵Ͳ
ቇ
ଵ
ଷൗ
െ ͳ ൌ Ǥ ૠΨ
b) The Fund decides on Capital Structure B. Superb Semiconductors entry EBITDA is
$110m.
Required:
Identify the value drivers for the created equity and calculate the percentage
contribution of each driver. Show your workings.
[12 marks]
Ȁ ൌ
̈́ͺͺͲ
̈́ͳͳͲ
ൌ ͺ
Initial equity = $230.00m
Ending equity = $537.19m
Value created = $307.19m
ܧܤܫܶܦܣ݅݉ܽܿݐ ൌ ܧ݊ݐݎݕ
ܧܸ
ܧܤܫܶܦܣ
݉ݑ݈ݐ݈݅݁ ൈ ሺ݁ݔ݅ݐܧܤܫܶܦܣ െ ݁݊ݐݎݕܧܤܫܶܣܦܣሻ
ൌ ͺ ൈ ሺ̈́ͳʹ͵ǤͶʹ െ ̈́ͳͳͲǤͲͲሻ ൌ ̈́ͳͲǤ͵݉
ܧܤܫܶܦܣ݁ݎܿ݁݊ݐܽ݃݁݅݉ܽܿݐ ൌ
ܧܤܫܶܦܣ݅݉ܽܿݐ
ܸ݈ܽݑ݁ܿݎ݁ܽݐ݁݀
ܧܤܫܶܦܣ݁ݎܿ݁݊ݐܽ݃݁݅݉ܽܿݐ ൌ
̈́ͳͲǤ͵
̈́͵ͲǤͳͻ
ൌ Ǥ ૢΨ
ܯݑ݈ݐ݈݅݁݅݉ܽܿݐ ൌ ൬ܧݔ݅ݐ
ܧܸ
ܧܤܫܶܦܣ
݉ݑ݈ݐ݈݅݁ െ ܧ݊ݐݎݕ
ܧܸ
ܧܤܫܶܦܣ
݉ݑ݈ݐ݈݅݁൰ ൈ ܧݔ݅ݐܧܤܫܶܦܣ
ܯݑ݈ݐ݈݅݁݅݉ܽܿݐ ൌ ሺͻ െ ͺሻ ൈ ̈́ͳʹ͵ǤͶʹ ൌ ̈́ͳʹ͵ǤͶʹ݉
ܯݑ݈ݐ݈݅݁݅݉ܽܿݐ݁ݎܿ݁݊ݐܽ݃݁ ൌ
ܯݑ݈ݐ݈݅݁݅݉ܽܿݐ
ܸ݈ܽݑ݁ܿݎ݁ܽݐ݁݀
ൌ
̈́ͳʹ͵ǤͶʹ
̈́͵ͲǤͳͻ
ൌ Ǥ ૡΨ
ܰ݁ݐܾ݀݁ݐ݅݉ܽܿݐ ൌ ܵݐܽݎݐܾ݅݊݃݀݁ݐ െ ܧܾ݊݀݅݊݃݀݁ݐ
ܰ݁ݐܾ݀݁ݐ݅݉ܽܿݐ ൌ ̈́ͷͲ െ ̈́ͷ͵Ǥͷͻ ൌ ̈́ǤͶͳ݉
ܰ݁ݐܾ݀݁ݐ݅݉ܽܿݐ݁ݎܿ݁݊ݐܽ݃݁ ൌ
ܰ݁ݐܾ݀݁ݐ݅݉ܽܿݐ
ܸ݈ܽݑ݁ܿݎ݁ܽݐ݁݀
ൌ
̈́ǤͶͳ
̈́͵ͲǤͳͻ
ൌ Ǥ ૡૠΨ
c) Still with Capital Structure B, suppose a two-tiered sweet equity deal is adopted. Of
the $230 million equity investment, assume the capital partners of the Fund put up
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 10
$130 million in the form of 12% PIK preferred equity, and $90 million as common
shares. The management of Superb Semiconductors, which will remain at the helm
of the company, puts up $10 million as sweet equity common shares.
Required:
Calculate the MoM and the IRR for the capital partners of Fund and for the
management of Superb Semiconductors, Show your workings.
[16 marks]
The proceeds available to shareholders are the ending equity under Capital
Structure B, which is equal to $537.19m. The payoff to the preferred shares is equal
to principal plus interest, or:
ܲݎ݂݁݁ݎݎ݁݀ܽݕݑݐ ൌ ̈́ͳ͵Ͳ݉ ൈ ሺͳ ͳʹΨሻଷ ൌ ̈́ͳͺʹǤͶ݉
Proceeds available to common shareholders is equal to $537.19m minus $182.64 or
$354.55. The Fund owns 90%, while management owns the remaining 10%.
The Fund common equity is worth:
ͻͲΨ ൈ ̈́͵ͷͶǤͷͷ݉ ൌ ̈́͵ͳͻǤͲͻ݉
Management common equity is worth:
ͳͲΨ ൈ ̈́͵ͷͶǤͷͷ݉ ൌ ̈́͵ͷǤͶͷ݉
7KHFDSLWDOSDUWQHUVRIWKH)XQG¶V0R0LVHTXDOWR
̈́ͳͺʹǤͶ݉ ̈́͵ͳͻǤͲͻ݉
̈́ͳ͵Ͳ݉ ̈́ͻͲ݉
ൌ ʹǤʹͺ
7KHFDSLWDOSDUWQHUVRIWKH)XQG¶V,55LVHTXDOWR
ܫܴܴ ൌ ቆ
̈́ͳͺʹǤͶ݉ ̈́͵ͳͻǤͲͻ݉
̈́ʹʹͲ݉
ቇ
ଵ
ଷൗ
െ ͳ ൌ Ǥ Ψ
0DQDJHPHQW¶V0R0LVHTXDOWR
̈́͵ͷǤͶͷ݉
̈́ͳͲ݉
ൌ ͵Ǥͷͷ
0DQDJHPHQW¶V,55LVHTXDOWR
ܫܴܴ ൌ ቆ
̈́͵ͷǤͶͷ݉
̈́ͳͲ݉
ቇ
ଵ
ଷൗ
െ ͳ ൌ Ǥ ૡΨ
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 11
d) In the course of one of the internal meetings at the Fund to discuss this deal, these
opinions are heard from various attendees:
i. I believe we should consider a Capital Structure C that involves using
significantly more debt. Using more debt will mean a lower capital outlay on
our part and hence guaranteed higher returns.
ii. ,GRQ¶WNQRZZK\ZHKDYHQRWFRQVLGHUHGYHQGRUILQDQFLQJ for this deal. If we
could make use of it, it can reduce our outlay and/or further incentivize
management. It is like free debt.
iii. If we make a shareholder loan to the deal rather than issue preferred shares,
our forecast returns (IRR) would be lower.
iv. It is way too soon to think about it, but if our investment in Superb
Semiconductors exceeds our current forecasts, our preferred exit route should
be a sale to a strategic investor, since it allows us to do a partial exit, yet
retain control.
v. If our priority is to be paid top dollar upon exit, rather than retain flexibility, we
should sell our investment to another PE fund.
Required:
State the validity of and comment on each of the five statements listed immediately
above. Each discussion/critique carries 5 marks
[25 marks]
i) I believe we should consider a Capital Structure C that involves using
significantly more debt. Using more debt will mean a lower capital outlay on
our part and hence guaranteed higher returns.
False. Using more debt involves less equity outlay, but the more debt is
added, the higher the cost of debt (interest rate), and the riskier the equity in
the deal becomes as debt has to be paid first.
ii) ,GRQ¶WNQRZZK\ZHKDYHQRWFRQVLGHUHGYHQGRUILQDQFLQJIRUWKLVGHDO,IZH
could make use of it, it can reduce our outlay and/or further incentivize
management. It is like free debt.
False. While vendor financing would reduce outlay (if it is done on top of other
forms of loan, and not instead of some of them), and it can further incentivize
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 12
management (if it takes the form of earnouts), it is not like free debt as it
comes with an interest rate.
iii) If we make a shareholder loan to the deal rather than issue preferred shares,
our forecast returns (IRR) would be lower.
True. As a shareholder loan would have a lower interest rate than a preferred,
the Fund would receive less payment on the preferred. The money saved
would go into the pool of available equity funds, but since the Fund only has
90% common equity, their equity stake would be higher but not by enough to
compensate for the reduce payment on shareholder loan.
iv) It is way too soon to think about it, but if our investment in Superb
Semiconductors exceeds our current forecasts, our preferred exit route should
be a sale to strategics, since it allows us to do a partial exit, yet retain control.
Not true. Strategics require majority stake, hence the Fund would lose control
if it went that route.
v) If our priority is to be paid top dollar upon exit, rather than retain flexibility, we
should sell our investment to another PE fund.
Not true. While another PE fund is a more sophisticated buyer than a
strategic, they are not likely to overpay. Top dollar is usually obtained from an
IPO.
Part e) immediately below draws upon the original data detailed at the start of this
section (Section A) and the additional information and data shown below.
After 7 years, the Fund is in the winding-down stage. Over its lifetime, the Fund invested in
Superb Semiconductors in its first year, another company Buzzing Utilities in its second
year, another company Your Radio Vibe in its third year, and another company DoN in its
fourth year. It fully exited Superb Semiconductors during the fourth year, and fully exited its
investments in Your Radio Vibe and DoN during the seventh year. As for Buzzing Utilities, it
partially exited the investment during the fifth year before completely exiting during the sixth
year. The following table contains the capital it invested and realized over its lifetime (cash
inflows and outflows are assumed to take place at the end of the year):
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 13
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
$m $m $m $m $m $m $m
Invested 230 300 120 100 - - -
Realized - - - 520 250 350 400
The Fund charged a 1.5% management fee on committed capital for the first three years
and 1% of invested capital thereafter. The fund also charged a 25% deal-by-deal carry fee.
(Note: GP catch-up and hurdle rate calculation are not relevant in this case due to the
profitability of the deals).
e) Required:
Calculate the IRR and Net IRR for the Fund. (Hint: Keep track of each investment
and its corresponding cash flows.) Show your calculations.
[29 marks]
Year Invested Realized
Net to
GPs
Invested
Capital
Management
Fee Carry
Net to
LPs
1 230 0 -230 230 11.25 -241.25
2 300 0 -300 530 11.25 -311.25
3 120 0 -120 650 11.25 -131.25
4 100 520 420 520 5.2 72.5 342.3
5 250 250 270 2.7 247.3
6 350 350 220 2.2 75 272.8
7 400 400 0 0 45 355
IRR = 24.35% Net IRR = 17.29%
END OF SECTION A
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 14
Section B [80 marks] This question is compulsory. It is divided into sub-parts.
You are an associate working for The Platinum Star Fund (referred to as the Fund), a $300
million venture capital fund. The Fund is focused on investing in start-up medical
companies in the US. It has identified a company it would like to invest in, Golden Years
Devices. You are part of the team working on this deal.
Jude Diamond (referred to as Jude or the founder) is a first-time entrepreneur and the
founder of Golden Years Devices, a US-based start-up medical equipment and devices
maker. Last year, Golden Years Devices successfully launched a cardiovascular device
with patented technology. So far, Golden Years Devices has been funded exclusively with
-XGH¶VRZQPRQH\JLYLQJ-XGH00% of equity in the firm. To hit the next development
milestone and build on the success of Golden Years Devices, the founder decided to
approach a VC fund for seed money of $4.5 million.
Jude estimates that Golden Years Devices has a cash burn rate of $125,000 per month,
and believes that should everything go according to plan, only one additional round of
external funding of $6.7 million would be needed before Golden Years Devices becomes
profitable. The founder reached out to the Fund, and after both parties conducted their due
diligence the Fund and Jude realized they are a good match.
The Fund identified three comparable companies to Golden Years Devices with the
following forward enterprise value to revenue (EV/REV) ratios:
Abbott Labs Boston Scientific Medtronic
3-Year Fwd EV/REV 2.88 4.14 4.48
6-Year Fwd EV/REV 4.67 5.68 4.44
The Fund forecast a revenue of $15 million in two years, $17 million in three years, $18.5
million in four years, $19.5 million in five years and $20 million in six years. The Fund also
gathered the following information regarding Golden Years Devices:
Probability of Failure
Cost of Equity on a
Similarly Risky Investment
Years 0-3 35% 6%
Years 0-6 30% 7%
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 15
a) The Fund is contemplating investing either $4.5 million in one round or investing
$2.25 million in the first round and another $2.25 million a year later, contingent on
*ROGHQRequired:
i. Identify the implications of each option for the founder.
[5 marks]
If Jude accepts the first option, they would be giving up more of an equity
stake. However, they would be raising enough capital in one shot which
allows them to achieve the next development milestone in a quicker manner.
The second option would allow Golden Years Devices to raise additional
capital in exchange for a lower stake of the company.
ii. Identify five other considerations that the founder must keep in mind while
raising capital from a VC fund for the first time.
[5 marks]
Other considerations they should keep in mind are:
1. Approach funds whose expertise fit in with the company (geography,
sector, verticals, etc.).
2. Conduct due diligence on the VC funds they approach.
3. Decide on the timing and size of various rounds of funding.
4. Recognize that planning the amount of funding needed to achieve the next
development milestone and optimizing the time between rounds are
determined by the burn rate.
5. .QRZWKDWSUHYLRXVLQYHVWRUV¶HTXLW\VWDNHVGHFOLQHIROORZLQJeach round
of investment which leads to dilution when raising external funding.
b) The Fund estimates that the time horizon for this investment is six years.
Required:
i. Calculate the percentage ownership of the fund after it invests $4.5 million.
Show your workings.
[12 marks]
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 16
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏܻ݁ܽݎ݀݅ݏܿݑ݊ݐݎܽݐ݁ ൌ ݎכ ൌ
ሺͳ ሻ
ሺͳ െ ሻ
െ ͳ
ݎכ ൌ
ሺͳ Ψሻ
ሺͳ െ ͵ͲΨሻ
െ ͳ ൌ ͷʹǤͺΨ
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏ ܧܸ ܴܧܸΤ ݕ݁ܽݎݏ ൌ
ͶǤ ͷǤͺ ͶǤͶͶ
͵
ൌ ͶǤͻ͵
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏݒ݈ܽݑܽݐ݅݊ ൌ
ͶǤͻ͵ ൈ ʹͲǡͲͲͲǡͲͲͲ
ሺͳǤͷʹͺሻ
ൌ ̈́ǡʹͻǡͻ
݄ܶ݁ܨݑ݊݀ᇱݏ݁ݎܿ݁݊ݐܽ݃݁ݓ݊݁ݎݏ݄݅ ൌ
ͶǡͷͲͲǡͲͲͲ
ǡʹͻǡͻ
ൌ ͷͺǤʹʹΨ
ii. Calculate the pre-money value of Golden Years Devices. Show your
workings.
[5 marks]
Pre-money valuation ൌ ̈́ǡʹͻǡͻ െ ̈́ͶǡͷͲͲǡͲͲͲ ൌ ̈́͵ǡʹʹͻǡͻ
iii. Jude and the Fund agreed that Golden Years Devices would issue 2,500,000
shares. Calculate the number of shares that the Fund owns and the value per
share. Show your workings.
[5 marks]
ൌ ʹǡͷͲͲǡͲͲͲ ൈ ͷͺǤʹʹΨ ൌ ͳǡͶͷͷǡͷͲͲ
ൌ
ͶǡͷͲͲǡͲͲͲ
ͳǡͶͷͷǡͷͲͲ
ൌ ̈́͵ǤͲͻ
c) Required:
%DVHGRQ-XGH¶VDVVXPSWLRQVDQGWKHLQIRUPDWLRQJDWKHUHGE\WKH)XQG
i. Calculate how long the funding from the initial round would last, before
additional funding is required. Show your workings.
[4 marks]
ൌ
ܫ݊ݒ݁ݏݐ݉݁݊ݐ
ܤݑݎ݊ݎܽݐ݁
ൌ
ͶǡͷͲͲǡͲͲͲ
ͳʹͷǡͲͲͲ
ൌ ͵ ൌ ͵
Jude would need to raise funds in 3 years.
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 17
ii. Calculate the value of Golden Years Devices at the time when the additional
funding is required. Show your workings.
[4 marks]
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏ Τ ͵ ൌ
ʹǤͺͺ ͶǤͳͶ ͶǤͶͺ
͵
ൌ ͵Ǥͺ͵
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏ͵ ൌ ͵Ǥͺ͵ ൈ ͳǡͲͲͲǡͲͲͲ ൌ ̈́ͷǡͳͳͲǡͲͲͲ
iii. Calculate the price per share when the second round of funding is taking
SODFHDQGWKHIXQG¶VHTXLW\VWDNH6KRZ\RXUworkings.
[5 marks]
ൌ
ͷǡͳͳͲǡͲͲͲ
ʹǡͷͲͲǡͲͲͲ
ൌ ̈́ʹǤͲͶ
ǯ ൌ ̈́ʹǤͲͶ ൈ ͳǡͶͷͷǡͷͲͲ ൌ ̈́͵ǡͻͲǡͲͶʹ
d) The Fund is willing to invest the additional $6.7 million required if the assumptions
hold up.
Required:
Calculate the dollar value of -XGH¶VVWDNHLQGolden Years Devices following the
second round of financing. Show your workings.
[7 marks]
ǯ ൌ
̈́͵ǡͻͲǡͲͶʹ ̈́ǡͲͲǡͲͲͲ
̈́ͷǡͳͳͲǡͲͲͲ
ൌ ͺǤͷͳΨ
ᇱ ൌ ͳͲͲΨ െ ͺǤͷͳΨ ൌ ͵ͳǤͶͻΨ
ǯ͵ͳǤͶͻΨ ൈ ̈́ͷǡͳͳͲǡͲͲͲ ൌ ̈́ʹͲǡͷͲʹǡͻͷͺ
e) Required:
Briefly describe what the purpose of clawback is as related to venture capital.
[3 marks]
The LPs would try to include a clawback provision in the Limited Partnership
Agreement. The triggering of a clawback provision allows LPs to reclaim any
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 18
overdistribution to GPs. The provision protects them in case GPs receive too much
distributions or in case the LPs do not achieve their hurdle rate.
f) As part of a planning meeting with higher-ups at the fund, you note the following
SURQRXQFHPHQWVPDGHE\YDULRXV*3¶V
i. I would prefer to avoid the Employee Stock Ownership Plan altogether. It may
be beneficial to Jude, but it is not for us as it is dilutive.
ii. We will be asking for convertible preferred shares in return for our investment
as those are advantageous to us.
iii. The one downside to convertible preferred shares is the forced conversion in
the event of a downround.
iv. We need to have a say in management decisions at Golden Years Devices. If
we need to maximize our influence, we must convert our preferred shares into
common equity, so we have more voting rights.
v. The way I understand it, if we own more than 50% shares in Golden Years
Devices, the drag-along clause is meant to protect Jude whereas the tag-
along clause is meant to protect us.
State the validity of and comment on each of the five statements listed immediately
above. Each discussion/critique carries 5 marks
[25 marks]
i) I would prefer to avoid the Employee Stock Ownership Plan altogether. It may
be beneficial to Jude, but it is not for us as it is dilutive.
False. While ESOPs are dilutive, the higher % the Fund requires as available
(unused) post-closing option pool, the lower the price they are paying for
their shares, and the more dilution the founders (Jude) are absorbing.
ii) We will be asking for convertible preferred shares in return for our investment
as those are advantageous to us.
True. Convertible preferred shares are attractive. Preferred shareholders are
given preference over any distributions received in case of a defined liquidity
event. They receive their invested capital back first before any distributions
are made to common shareholders. Preferred shareholders may convert at
any time to common stock at their sole discretion.
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 19
iii) The one downside to convertible preferred shares is the forced conversion in
the event of a down round.
False. In the event of a down round, there is no forced conversion. Instead,
the conversion price of the preferred share class is adjusted downwards to the
level of the new valuation, allowing preferred shareholders who invested at a
higher valuation in earlier rounds to receive additional shares to maintain their
ownership stake and avoid dilution.
iv) We need to have a say in management decisions at Golden Years Devices. If
we need to maximize our influence, we must convert our preferred shares into
common equity, so we have more voting rights.
False. Convertible preferred shareholders do not need to convert to exercise
voting rights since those are given to WKHPRQD³DVFRQYHUWHG´EDVLV
v) The way I understand it, if we own more than 50% shares in Golden Years
Devices, the drag-along clause is meant to protect us whereas the tag-along
clause is meant to protect Jude.´
True. The drag-along clause allows majority shareholders to force minority
shareholders to sell their shares when the majority shareholders wish to exit.
If the fund is the majority shareholder, this clause protects the fund. The tag-
along clause allows minority shareholders to join majority shareholders in the
sale of their shares when the majority shareholders wish to exit. If Jude is the
minority shareholder, this clause protects Jude.
END OF SECTION B
END OF COURSEWORK
Section B: Coursework Brief and Requirements
Context
This assignment comprises two (2) sections: Section A and Section B. Both sections relate
to analysis, valuation or return computations related to i) an LBO situation, and ii) a venture
capital situation.
Section A carries 120 marks (60%) and Section B carries 80 marks (40%). Your mark out
of 200 marks will be converted to a percentage (%).
The use of Excel in Section A is highly advised where applicable.
Brief
Section A [120 marks] This question is compulsory. It is sub-divided into sub-parts.
You are a General Partner (GP) at The Excelsior Fund (referred to as the Fund), a $750
million US-based LBO fund. The Fund has identified Superb Semiconductors, a publicly
traded US semiconductor manufacturing company, as a potential investment. The Fund
intends to take it private and believes that it can achieve its goals after three years. The
fund developed the following forecasts regarding this investment:
Year 1 Year 2 Year 3
$m $m $m
EBIT 104.00 108.16 112.49
Depreciation and Amortization 10.30 10.61 10.93
Increase / (Decrease) in NWC (0.20) 0.30 0.40
CapEx 10.61 10.93 11.26
The Fund is considering the following two capital structures:
Capital Debt Equity Cost Bid
Structure $m $m of Debt $m
A 650 300 9% 950
B 650 230 12% 880
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 7
The marginal tax rate is equal to 21%.
The Fund will use all free cash flows generated by Superb Semiconductors to service the
debt. The Fund estimates that it will be able to sell the company in 3 years at an
EV/EBITDA multiple of 9 times.
a) Required:
,QUHODWLRQWRWKH,55RIWKH)XQG¶VLQYHVWPHQWLQSuperb Semiconductors under
each of capital structures A and B:
i. Calculate the ending balance of debt every year for each structure. You are
advised to take full account of tax-related aspects. Show your workings.
[24 marks]
Capital Structure A
Interest rate = 9%
Year 1 Year 2 Year 3
$m $m $m
EBIT 104.00 108.16 112.49
Depreciation and Amortization 10.30 10.61 10.93
Increase / (Decrease) in NWC (0.20) 0.30 0.40
CapEx 10.61 10.93 11.26
Debt Beginning of Year 650.00 614.17 573.01
Interest 58.50 55.27 51.57
Taxable income 45.50 52.89 60.92
Taxes 9.56 11.11 12.79
Cash flow 35.84 41.16 47.40
Debt End of Year 614.17 573.01 525.61
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 8
Capital Structure B
Interest rate = 10%
Year 1 Year 2 Year 3
$m $m $m
EBIT 104.00 108.16 112.49
Depreciation and Amortization 10.30 10.61 10.93
Increase / (Decrease) in NWC (0.20) 0.30 0.40
CapEx 10.61 10.93 11.26
Debt Beginning of Year 650.00 629.57 604.43
Interest 78.00 75.55 72.53
Taxable income 26.00 32.61 39.96
Taxes 5.46 6.85 8.39
Cash flow 20.43 25.14 30.84
Debt End of Year 629.57 604.43 573.59
ii. Calculate the IRR for the investment under each of the two the different
capital structures. Show your workings.
[14 marks]
EBITDA = EBIT + Depreciation and Amortization (all for Year 3)
EBITDA = 112.49 + 10.93 = $123.42m
Selling price = exit EV/EBITDA multiple times exit EBITDA
Selling price = 9 x $123.43 = $1,110.78 m
For Capital Structure A:
Initial equity investment = $300.00m
Ending equity = selling price ± debt balance
Ending equity = $1,110.78 - $525.61 = $585.17m
ܸܰܲ ൌ െ̈́͵ͲͲ
̈́ͷͺͷǤͳ
ሺͳ ܫܴܴሻଷ
ൌ Ͳ
ܫܴܴ ൌ ቆ
̈́ͷͺͷǤͳ
͵ͲͲ
ቇ
ଵ
ଷൗ
െ ͳ ൌ Ǥ ૢΨ
For Capital Structure B:
Initial equity investment = $230.00m
Ending equity = selling price ± debt balance
Ending equity = $1,110.78 - $573.59 = $537.19m
ܸܰܲ ൌ െ̈́ʹ͵Ͳ
̈́ͷ͵Ǥͳͻ
ሺͳ ܫܴܴሻଷ
ൌ Ͳ
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 9
ܫܴܴ ൌ ቆ
̈́ͷ͵Ǥͳͻ
ʹ͵Ͳ
ቇ
ଵ
ଷൗ
െ ͳ ൌ Ǥ ૠΨ
b) The Fund decides on Capital Structure B. Superb Semiconductors entry EBITDA is
$110m.
Required:
Identify the value drivers for the created equity and calculate the percentage
contribution of each driver. Show your workings.
[12 marks]
Ȁ ൌ
̈́ͺͺͲ
̈́ͳͳͲ
ൌ ͺ
Initial equity = $230.00m
Ending equity = $537.19m
Value created = $307.19m
ܧܤܫܶܦܣ݅݉ܽܿݐ ൌ ܧ݊ݐݎݕ
ܧܸ
ܧܤܫܶܦܣ
݉ݑ݈ݐ݈݅݁ ൈ ሺ݁ݔ݅ݐܧܤܫܶܦܣ െ ݁݊ݐݎݕܧܤܫܶܣܦܣሻ
ൌ ͺ ൈ ሺ̈́ͳʹ͵ǤͶʹ െ ̈́ͳͳͲǤͲͲሻ ൌ ̈́ͳͲǤ͵݉
ܧܤܫܶܦܣ݁ݎܿ݁݊ݐܽ݃݁݅݉ܽܿݐ ൌ
ܧܤܫܶܦܣ݅݉ܽܿݐ
ܸ݈ܽݑ݁ܿݎ݁ܽݐ݁݀
ܧܤܫܶܦܣ݁ݎܿ݁݊ݐܽ݃݁݅݉ܽܿݐ ൌ
̈́ͳͲǤ͵
̈́͵ͲǤͳͻ
ൌ Ǥ ૢΨ
ܯݑ݈ݐ݈݅݁݅݉ܽܿݐ ൌ ൬ܧݔ݅ݐ
ܧܸ
ܧܤܫܶܦܣ
݉ݑ݈ݐ݈݅݁ െ ܧ݊ݐݎݕ
ܧܸ
ܧܤܫܶܦܣ
݉ݑ݈ݐ݈݅݁൰ ൈ ܧݔ݅ݐܧܤܫܶܦܣ
ܯݑ݈ݐ݈݅݁݅݉ܽܿݐ ൌ ሺͻ െ ͺሻ ൈ ̈́ͳʹ͵ǤͶʹ ൌ ̈́ͳʹ͵ǤͶʹ݉
ܯݑ݈ݐ݈݅݁݅݉ܽܿݐ݁ݎܿ݁݊ݐܽ݃݁ ൌ
ܯݑ݈ݐ݈݅݁݅݉ܽܿݐ
ܸ݈ܽݑ݁ܿݎ݁ܽݐ݁݀
ൌ
̈́ͳʹ͵ǤͶʹ
̈́͵ͲǤͳͻ
ൌ Ǥ ૡΨ
ܰ݁ݐܾ݀݁ݐ݅݉ܽܿݐ ൌ ܵݐܽݎݐܾ݅݊݃݀݁ݐ െ ܧܾ݊݀݅݊݃݀݁ݐ
ܰ݁ݐܾ݀݁ݐ݅݉ܽܿݐ ൌ ̈́ͷͲ െ ̈́ͷ͵Ǥͷͻ ൌ ̈́ǤͶͳ݉
ܰ݁ݐܾ݀݁ݐ݅݉ܽܿݐ݁ݎܿ݁݊ݐܽ݃݁ ൌ
ܰ݁ݐܾ݀݁ݐ݅݉ܽܿݐ
ܸ݈ܽݑ݁ܿݎ݁ܽݐ݁݀
ൌ
̈́ǤͶͳ
̈́͵ͲǤͳͻ
ൌ Ǥ ૡૠΨ
c) Still with Capital Structure B, suppose a two-tiered sweet equity deal is adopted. Of
the $230 million equity investment, assume the capital partners of the Fund put up
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 10
$130 million in the form of 12% PIK preferred equity, and $90 million as common
shares. The management of Superb Semiconductors, which will remain at the helm
of the company, puts up $10 million as sweet equity common shares.
Required:
Calculate the MoM and the IRR for the capital partners of Fund and for the
management of Superb Semiconductors, Show your workings.
[16 marks]
The proceeds available to shareholders are the ending equity under Capital
Structure B, which is equal to $537.19m. The payoff to the preferred shares is equal
to principal plus interest, or:
ܲݎ݂݁݁ݎݎ݁݀ܽݕݑݐ ൌ ̈́ͳ͵Ͳ݉ ൈ ሺͳ ͳʹΨሻଷ ൌ ̈́ͳͺʹǤͶ݉
Proceeds available to common shareholders is equal to $537.19m minus $182.64 or
$354.55. The Fund owns 90%, while management owns the remaining 10%.
The Fund common equity is worth:
ͻͲΨ ൈ ̈́͵ͷͶǤͷͷ݉ ൌ ̈́͵ͳͻǤͲͻ݉
Management common equity is worth:
ͳͲΨ ൈ ̈́͵ͷͶǤͷͷ݉ ൌ ̈́͵ͷǤͶͷ݉
7KHFDSLWDOSDUWQHUVRIWKH)XQG¶V0R0LVHTXDOWR
̈́ͳͺʹǤͶ݉ ̈́͵ͳͻǤͲͻ݉
̈́ͳ͵Ͳ݉ ̈́ͻͲ݉
ൌ ʹǤʹͺ
7KHFDSLWDOSDUWQHUVRIWKH)XQG¶V,55LVHTXDOWR
ܫܴܴ ൌ ቆ
̈́ͳͺʹǤͶ݉ ̈́͵ͳͻǤͲͻ݉
̈́ʹʹͲ݉
ቇ
ଵ
ଷൗ
െ ͳ ൌ Ǥ Ψ
0DQDJHPHQW¶V0R0LVHTXDOWR
̈́͵ͷǤͶͷ݉
̈́ͳͲ݉
ൌ ͵Ǥͷͷ
0DQDJHPHQW¶V,55LVHTXDOWR
ܫܴܴ ൌ ቆ
̈́͵ͷǤͶͷ݉
̈́ͳͲ݉
ቇ
ଵ
ଷൗ
െ ͳ ൌ Ǥ ૡΨ
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 11
d) In the course of one of the internal meetings at the Fund to discuss this deal, these
opinions are heard from various attendees:
i. I believe we should consider a Capital Structure C that involves using
significantly more debt. Using more debt will mean a lower capital outlay on
our part and hence guaranteed higher returns.
ii. ,GRQ¶WNQRZZK\ZHKDYHQRWFRQVLGHUHGYHQGRUILQDQFLQJ for this deal. If we
could make use of it, it can reduce our outlay and/or further incentivize
management. It is like free debt.
iii. If we make a shareholder loan to the deal rather than issue preferred shares,
our forecast returns (IRR) would be lower.
iv. It is way too soon to think about it, but if our investment in Superb
Semiconductors exceeds our current forecasts, our preferred exit route should
be a sale to a strategic investor, since it allows us to do a partial exit, yet
retain control.
v. If our priority is to be paid top dollar upon exit, rather than retain flexibility, we
should sell our investment to another PE fund.
Required:
State the validity of and comment on each of the five statements listed immediately
above. Each discussion/critique carries 5 marks
[25 marks]
i) I believe we should consider a Capital Structure C that involves using
significantly more debt. Using more debt will mean a lower capital outlay on
our part and hence guaranteed higher returns.
False. Using more debt involves less equity outlay, but the more debt is
added, the higher the cost of debt (interest rate), and the riskier the equity in
the deal becomes as debt has to be paid first.
ii) ,GRQ¶WNQRZZK\ZHKDYHQRWFRQVLGHUHGYHQGRUILQDQFLQJIRUWKLVGHDO,IZH
could make use of it, it can reduce our outlay and/or further incentivize
management. It is like free debt.
False. While vendor financing would reduce outlay (if it is done on top of other
forms of loan, and not instead of some of them), and it can further incentivize
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 12
management (if it takes the form of earnouts), it is not like free debt as it
comes with an interest rate.
iii) If we make a shareholder loan to the deal rather than issue preferred shares,
our forecast returns (IRR) would be lower.
True. As a shareholder loan would have a lower interest rate than a preferred,
the Fund would receive less payment on the preferred. The money saved
would go into the pool of available equity funds, but since the Fund only has
90% common equity, their equity stake would be higher but not by enough to
compensate for the reduce payment on shareholder loan.
iv) It is way too soon to think about it, but if our investment in Superb
Semiconductors exceeds our current forecasts, our preferred exit route should
be a sale to strategics, since it allows us to do a partial exit, yet retain control.
Not true. Strategics require majority stake, hence the Fund would lose control
if it went that route.
v) If our priority is to be paid top dollar upon exit, rather than retain flexibility, we
should sell our investment to another PE fund.
Not true. While another PE fund is a more sophisticated buyer than a
strategic, they are not likely to overpay. Top dollar is usually obtained from an
IPO.
Part e) immediately below draws upon the original data detailed at the start of this
section (Section A) and the additional information and data shown below.
After 7 years, the Fund is in the winding-down stage. Over its lifetime, the Fund invested in
Superb Semiconductors in its first year, another company Buzzing Utilities in its second
year, another company Your Radio Vibe in its third year, and another company DoN in its
fourth year. It fully exited Superb Semiconductors during the fourth year, and fully exited its
investments in Your Radio Vibe and DoN during the seventh year. As for Buzzing Utilities, it
partially exited the investment during the fifth year before completely exiting during the sixth
year. The following table contains the capital it invested and realized over its lifetime (cash
inflows and outflows are assumed to take place at the end of the year):
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 13
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
$m $m $m $m $m $m $m
Invested 230 300 120 100 - - -
Realized - - - 520 250 350 400
The Fund charged a 1.5% management fee on committed capital for the first three years
and 1% of invested capital thereafter. The fund also charged a 25% deal-by-deal carry fee.
(Note: GP catch-up and hurdle rate calculation are not relevant in this case due to the
profitability of the deals).
e) Required:
Calculate the IRR and Net IRR for the Fund. (Hint: Keep track of each investment
and its corresponding cash flows.) Show your calculations.
[29 marks]
Year Invested Realized
Net to
GPs
Invested
Capital
Management
Fee Carry
Net to
LPs
1 230 0 -230 230 11.25 -241.25
2 300 0 -300 530 11.25 -311.25
3 120 0 -120 650 11.25 -131.25
4 100 520 420 520 5.2 72.5 342.3
5 250 250 270 2.7 247.3
6 350 350 220 2.2 75 272.8
7 400 400 0 0 45 355
IRR = 24.35% Net IRR = 17.29%
END OF SECTION A
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 14
Section B [80 marks] This question is compulsory. It is divided into sub-parts.
You are an associate working for The Platinum Star Fund (referred to as the Fund), a $300
million venture capital fund. The Fund is focused on investing in start-up medical
companies in the US. It has identified a company it would like to invest in, Golden Years
Devices. You are part of the team working on this deal.
Jude Diamond (referred to as Jude or the founder) is a first-time entrepreneur and the
founder of Golden Years Devices, a US-based start-up medical equipment and devices
maker. Last year, Golden Years Devices successfully launched a cardiovascular device
with patented technology. So far, Golden Years Devices has been funded exclusively with
-XGH¶VRZQPRQH\JLYLQJ-XGH00% of equity in the firm. To hit the next development
milestone and build on the success of Golden Years Devices, the founder decided to
approach a VC fund for seed money of $4.5 million.
Jude estimates that Golden Years Devices has a cash burn rate of $125,000 per month,
and believes that should everything go according to plan, only one additional round of
external funding of $6.7 million would be needed before Golden Years Devices becomes
profitable. The founder reached out to the Fund, and after both parties conducted their due
diligence the Fund and Jude realized they are a good match.
The Fund identified three comparable companies to Golden Years Devices with the
following forward enterprise value to revenue (EV/REV) ratios:
Abbott Labs Boston Scientific Medtronic
3-Year Fwd EV/REV 2.88 4.14 4.48
6-Year Fwd EV/REV 4.67 5.68 4.44
The Fund forecast a revenue of $15 million in two years, $17 million in three years, $18.5
million in four years, $19.5 million in five years and $20 million in six years. The Fund also
gathered the following information regarding Golden Years Devices:
Probability of Failure
Cost of Equity on a
Similarly Risky Investment
Years 0-3 35% 6%
Years 0-6 30% 7%
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 15
a) The Fund is contemplating investing either $4.5 million in one round or investing
$2.25 million in the first round and another $2.25 million a year later, contingent on
*ROGHQ
i. Identify the implications of each option for the founder.
[5 marks]
If Jude accepts the first option, they would be giving up more of an equity
stake. However, they would be raising enough capital in one shot which
allows them to achieve the next development milestone in a quicker manner.
The second option would allow Golden Years Devices to raise additional
capital in exchange for a lower stake of the company.
ii. Identify five other considerations that the founder must keep in mind while
raising capital from a VC fund for the first time.
[5 marks]
Other considerations they should keep in mind are:
1. Approach funds whose expertise fit in with the company (geography,
sector, verticals, etc.).
2. Conduct due diligence on the VC funds they approach.
3. Decide on the timing and size of various rounds of funding.
4. Recognize that planning the amount of funding needed to achieve the next
development milestone and optimizing the time between rounds are
determined by the burn rate.
5. .QRZWKDWSUHYLRXVLQYHVWRUV¶HTXLW\VWDNHVGHFOLQHIROORZLQJeach round
of investment which leads to dilution when raising external funding.
b) The Fund estimates that the time horizon for this investment is six years.
Required:
i. Calculate the percentage ownership of the fund after it invests $4.5 million.
Show your workings.
[12 marks]
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 16
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏܻ݁ܽݎ݀݅ݏܿݑ݊ݐݎܽݐ݁ ൌ ݎכ ൌ
ሺͳ ሻ
ሺͳ െ ሻ
െ ͳ
ݎכ ൌ
ሺͳ Ψሻ
ሺͳ െ ͵ͲΨሻ
െ ͳ ൌ ͷʹǤͺΨ
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏ ܧܸ ܴܧܸΤ ݕ݁ܽݎݏ ൌ
ͶǤ ͷǤͺ ͶǤͶͶ
͵
ൌ ͶǤͻ͵
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏݒ݈ܽݑܽݐ݅݊ ൌ
ͶǤͻ͵ ൈ ʹͲǡͲͲͲǡͲͲͲ
ሺͳǤͷʹͺሻ
ൌ ̈́ǡʹͻǡͻ
݄ܶ݁ܨݑ݊݀ᇱݏ݁ݎܿ݁݊ݐܽ݃݁ݓ݊݁ݎݏ݄݅ ൌ
ͶǡͷͲͲǡͲͲͲ
ǡʹͻǡͻ
ൌ ͷͺǤʹʹΨ
ii. Calculate the pre-money value of Golden Years Devices. Show your
workings.
[5 marks]
Pre-money valuation ൌ ̈́ǡʹͻǡͻ െ ̈́ͶǡͷͲͲǡͲͲͲ ൌ ̈́͵ǡʹʹͻǡͻ
iii. Jude and the Fund agreed that Golden Years Devices would issue 2,500,000
shares. Calculate the number of shares that the Fund owns and the value per
share. Show your workings.
[5 marks]
ൌ ʹǡͷͲͲǡͲͲͲ ൈ ͷͺǤʹʹΨ ൌ ͳǡͶͷͷǡͷͲͲ
ൌ
ͶǡͷͲͲǡͲͲͲ
ͳǡͶͷͷǡͷͲͲ
ൌ ̈́͵ǤͲͻ
c) Required:
%DVHGRQ-XGH¶VDVVXPSWLRQVDQGWKHLQIRUPDWLRQJDWKHUHGE\WKH)XQG
i. Calculate how long the funding from the initial round would last, before
additional funding is required. Show your workings.
[4 marks]
ൌ
ܫ݊ݒ݁ݏݐ݉݁݊ݐ
ܤݑݎ݊ݎܽݐ݁
ൌ
ͶǡͷͲͲǡͲͲͲ
ͳʹͷǡͲͲͲ
ൌ ͵ ൌ ͵
Jude would need to raise funds in 3 years.
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 17
ii. Calculate the value of Golden Years Devices at the time when the additional
funding is required. Show your workings.
[4 marks]
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏ Τ ͵ ൌ
ʹǤͺͺ ͶǤͳͶ ͶǤͶͺ
͵
ൌ ͵Ǥͺ͵
ܩ݈ܻ݀݁݊݁ܽݎݏܦ݁ݒ݅ܿ݁ݏ͵ ൌ ͵Ǥͺ͵ ൈ ͳǡͲͲͲǡͲͲͲ ൌ ̈́ͷǡͳͳͲǡͲͲͲ
iii. Calculate the price per share when the second round of funding is taking
SODFHDQGWKHIXQG¶VHTXLW\VWDNH6KRZ\RXUworkings.
[5 marks]
ൌ
ͷǡͳͳͲǡͲͲͲ
ʹǡͷͲͲǡͲͲͲ
ൌ ̈́ʹǤͲͶ
ǯ ൌ ̈́ʹǤͲͶ ൈ ͳǡͶͷͷǡͷͲͲ ൌ ̈́͵ǡͻͲǡͲͶʹ
d) The Fund is willing to invest the additional $6.7 million required if the assumptions
hold up.
Required:
Calculate the dollar value of -XGH¶VVWDNHLQGolden Years Devices following the
second round of financing. Show your workings.
[7 marks]
ǯ ൌ
̈́͵ǡͻͲǡͲͶʹ ̈́ǡͲͲǡͲͲͲ
̈́ͷǡͳͳͲǡͲͲͲ
ൌ ͺǤͷͳΨ
ᇱ ൌ ͳͲͲΨ െ ͺǤͷͳΨ ൌ ͵ͳǤͶͻΨ
ǯ͵ͳǤͶͻΨ ൈ ̈́ͷǡͳͳͲǡͲͲͲ ൌ ̈́ʹͲǡͷͲʹǡͻͷͺ
e) Required:
Briefly describe what the purpose of clawback is as related to venture capital.
[3 marks]
The LPs would try to include a clawback provision in the Limited Partnership
Agreement. The triggering of a clawback provision allows LPs to reclaim any
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 18
overdistribution to GPs. The provision protects them in case GPs receive too much
distributions or in case the LPs do not achieve their hurdle rate.
f) As part of a planning meeting with higher-ups at the fund, you note the following
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i. I would prefer to avoid the Employee Stock Ownership Plan altogether. It may
be beneficial to Jude, but it is not for us as it is dilutive.
ii. We will be asking for convertible preferred shares in return for our investment
as those are advantageous to us.
iii. The one downside to convertible preferred shares is the forced conversion in
the event of a downround.
iv. We need to have a say in management decisions at Golden Years Devices. If
we need to maximize our influence, we must convert our preferred shares into
common equity, so we have more voting rights.
v. The way I understand it, if we own more than 50% shares in Golden Years
Devices, the drag-along clause is meant to protect Jude whereas the tag-
along clause is meant to protect us.
State the validity of and comment on each of the five statements listed immediately
above. Each discussion/critique carries 5 marks
[25 marks]
i) I would prefer to avoid the Employee Stock Ownership Plan altogether. It may
be beneficial to Jude, but it is not for us as it is dilutive.
False. While ESOPs are dilutive, the higher % the Fund requires as available
(unused) post-closing option pool, the lower the price they are paying for
their shares, and the more dilution the founders (Jude) are absorbing.
ii) We will be asking for convertible preferred shares in return for our investment
as those are advantageous to us.
True. Convertible preferred shares are attractive. Preferred shareholders are
given preference over any distributions received in case of a defined liquidity
event. They receive their invested capital back first before any distributions
are made to common shareholders. Preferred shareholders may convert at
any time to common stock at their sole discretion.
MSIN0164 2019-20 Private Equity and Venture Capital P a g e | 19
iii) The one downside to convertible preferred shares is the forced conversion in
the event of a down round.
False. In the event of a down round, there is no forced conversion. Instead,
the conversion price of the preferred share class is adjusted downwards to the
level of the new valuation, allowing preferred shareholders who invested at a
higher valuation in earlier rounds to receive additional shares to maintain their
ownership stake and avoid dilution.
iv) We need to have a say in management decisions at Golden Years Devices. If
we need to maximize our influence, we must convert our preferred shares into
common equity, so we have more voting rights.
False. Convertible preferred shareholders do not need to convert to exercise
voting rights since those are given to WKHPRQD³DVFRQYHUWHG´EDVLV
v) The way I understand it, if we own more than 50% shares in Golden Years
Devices, the drag-along clause is meant to protect us whereas the tag-along
clause is meant to protect Jude.´
True. The drag-along clause allows majority shareholders to force minority
shareholders to sell their shares when the majority shareholders wish to exit.
If the fund is the majority shareholder, this clause protects the fund. The tag-
along clause allows minority shareholders to join majority shareholders in the
sale of their shares when the majority shareholders wish to exit. If Jude is the
minority shareholder, this clause protects Jude.
END OF SECTION B
END OF COURSEWORK
