Question

Suppose that EastCapital (EC), a venture capital firm, raises $250 million of committed capital. Over the 11-year life of the fund, $50 million of this committed capital is used to pay EC's management fee. As is typical in the venture capital industry, EC only invests $200 million (committed capital less lifetime management fees). At the end of 11 years, the investments made by the fund are worth $830 million. EC also charges 20% carried interest on the profits of the fund (final fund value minus intial investment net of management fees). The proceeds from the investments are collected at the end of the 11-year fund life.

(a) Calculate the IRR on the investments made by EastCapital.

The IRR on the investments is ________%. (round to 2 decimals)

(b) Calculate the IRR on the investment of a limited partner into EastCapital net of all management fees and expenses.

The IRR for the limited partner is __________%. (round to 2 decimals)

(c) Suppose that the limited partner has a cost of capital of 15%. Which value (net of carried interest) must the fund at the end of 11 years have that the IRR for the limited partner is 15%? (Hint: define the profit to the limited partner in the same way as is done in (b))

The fund must have a value of ____________$ million. (round to the nearest million, no comma as thousand separator)

Answer 1

Time	11	years
Investment made by East Capital	-200	Million
Future Value of Fund	830	Million
Investment made by Limited partner	-250
Fund Received by Limited partner	830.00
Less Profit shared	126.00
Final Value	704.00
Let fund value	1,214.00
Less Profit shared	202.80
Final Value	1,011.20
(a) Calculate the IRR on the investments made by East Capital.
	Year	$ in Million
	1	-200
	2	0
	3	0
	4	0
	5	0
	6	0
	7	0
	8	0
	9	0
	10	0
	11	830
IRR		15.29%
(b) Calculate the IRR on the investment of a limited partner into EastCapital net of all management fees and expenses.
	Year	$ in Million
	1	-250
	2	0
	3	0
	4	0
	5	0
	6	0
	7	0
	8	0
	9	0
	10	0
	11	704.00
IRR		10.91%
(c ) Calculate Value of Fund to have 15% IRR
Value of Fund
	Year	$ in Million
	1	-250
	2	0
	3	0
	4	0
	5	0
	6	0
	7	0
	8	0
	9	0
	10	0
	11	1,011.20
IRR		15.00%
Fund Value should be $ 1214 Million