A private equity fund focused on venture capital deals is raising capital for a potential transaction. During
Question:
A private equity fund focused on venture capital deals is raising capital for a potential transaction. During the fundraising roadshow, a prospective investor stated that in order to invest his minimum deal requirements are:
A preferred return (yield) of at least 10% per year.
Maximum investment time horizon: 4 years, including the investment year, which is assumed to be the current year of 2020.
Minimum internal rate of return (IRR): 16%.
The level of funds to be obtained from this investor is €28 million. Assume that the cash available for the fund is as given in Table 3.
2021 | 2022 | 2023 | 2024 |
€4 million | €14 million | €18 million | €22 million |
a. What is the expected yearly payment to the investor between 2021 and 2023? Explain your answer, decomposing the payment into interest payment, repayment of principal, and extra funds.
b. Is the stream of expected cash flows to be paid to the prospective investor enough to attract the investor to invest in the private equity fund? Explain your answer. [5 marks]
c. Consider the following statement: “The extensive use of multiples in the Private Equity world is a guarantee of the high quality of the valuation exercises done”. In your view, is this statement true or false?
Expert Answer:
A The expected return is the profit or loss that an investor anticipates on an investment that has known historical rates of return RoR It is calculated by multiplying potential outcomes by the chance... View the full answer
