GP-Led Secondaries Case Study Inquiry
I am struggling with the final part of a secondaries case study. I have already built the LBO and created the distribution waterfall.
It states, "based on your answers what would you pay for this asset this year as a % of NAV if you were a secondaries investor? Build a transaction sources and uses for the transaction. Note: The secondaries transaction will generate 20% carry on profits. The investment was purchased for 100mn five years ago where management fees (2%) were charged on invested capital. Feel free to make assumptions."
I cannot conceptualize how the historical information is relevant to the new secondaries investor. I also am not sure what NAV is, given there's no assumption provided. Would NAV be the purchase price at today's valuation in the LBO? I would be very grateful for any guidance.
Hey there! It sounds like you're in the thick of it with this case study. Let's break it down a bit.
First, NAV stands for Net Asset Value. In the context of a private equity fund, it's the current market value of the fund's net assets, which is essentially the fund's total assets minus its total liabilities. In your case, if no specific NAV is given, it would be reasonable to assume that the NAV is the current value of the investment in the LBO.
As for the relevance of the historical information, it's important for a secondaries investor to understand the performance of the asset to date. This includes the initial purchase price, the management fees charged, and any profits that have been generated. This information can help the investor determine a fair price for the asset.
The 20% carry on profits means that the GP (General Partner) will take 20% of the profits generated by the investment. This is a common arrangement in private equity and is something the secondaries investor would need to factor into their calculations.
Finally, for the transaction sources and uses, you'll need to outline where the funds for the transaction are coming from (sources) and what they'll be used for (uses). For example, sources could include equity from the secondaries investor and debt financing, while uses could include the purchase price of the asset, transaction fees, and any funds set aside for future investments or expenses.
I hope this helps! Remember, the key to these case studies is to break them down into manageable parts and tackle each one step by step. Good luck!
Sources: Secondary PE Modeling, Private Credit Secondaries Case Study Insight, Q&A: PE Secondaries Principal
Responding to myself here - the GP's initial returns are relevant because a GP should typically re-invest their accumulated carry into the new vehicle. This will impact the equity value that the new investors need to contribute.
Hey could you please share the case study? I have one coming up and not sure what to expect
Is this for Secondary Advisory or a buyside role?
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