Question

In what situation, we should invest in some company shares, as an executive of a private equity fund? What should be IRR, equity exit value, etc. And also, if we decide to invest, how should we structure it?

Answer 1

As an executive of private equity fund, one should be looking to invest into some company after analysing various kinds of factors which are financial ratios and valuation so that the fund must be investing into such companies which are offering a great value to the private equity fund and it would maximize the rate of return of the fund.

Internal rate of return related to the company should always be compared with the hurdle rate which is acceptable by the company for investment into several projects. When the internal rate of return is higher than and that of capital then the investment is to be made when the internal rate of return is lower than cost of capital the investment is not to be made.

Private equity firm acquires business with an intent of exiting the business at a higher equity value than it was initially invested, so mostly private equity investors require expected internal rate of return in excess of 25% before considering a potential target company.

Private equity firms generally have three options when exiting an investment. it can exit through a corporate acquisition or an initial public offer or a secondary deal like selling a company to another private equity firm.

Private equity fund would fund a company in different ways. It can either be funded by common stock or convertible preferred stock so the deal is structured after negotiation with the investor and laid down in a term sheet and mostly the funding will have an anti dilution provision which will be protecting the investors from equity dilution and issuing the shares at a lower value than the investment of private equity fund.