Suppose EBV is considering a $5m series A investment in Newco. EBV proposes to s

Question

Suppose EBV is considering a $5m series A investment in Newco. EBV proposes to structure the investment as RP with APP of $4m plus 5million shares of common stock. (we refer to this basket of RP plus common as “Series A”.). The employees of Newco have claims on 15 million shares of common stock. Following the Series - A investment, Newco will have 20million common shares outstanding.

a. Compute the LP cost for this investment;
b. Solve for the LP valuation equation for this investment
c. Suppose the total valuation is $30m. What is the LP valuation?
d. Find the breakeven valuation for the investment under base-case assumption;
e. Perform a sensitivity analysis for this breakeven valuation

Explanation / Answer

a) LP cost = committed capital/investment capital * $I

= (100)/(100-0.2*100) * 5

= 6.25 Million

b) Partial valuation = V – (15/20)*C(4)     ------- (Where 15/20 is Newco percentage claim on common stocks and 4 is the APP)

= V – ¾*C(4)

LP valuation = Partial valuation – GP valuation

GP valuation = GP% * partial valuation

GP% = 0.20 *(2.5*80 - 100)/(2.5* 80) = 0.10

So, LP valuation = (1-0.1)* V – ¾*C(4)

= (0.9)*( V – ¾*C(4))

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