Question.2574 - Fund Return Calculation This is an individual assignment where you will be given a problem: you will be requested to calculate the expected return on a venture fund given specific parameters and assumptions. The deliverable is an excel sheet model and a 1-2 page document with the description of your analysis. Assumptions The management fee is calculated on total committed capital, not remaining capital. 2.5% annual management fee, with decreasing amount after 7 years: 7th = 2.25% 8th =2% 9th =1.75% 10th=1.5% Fund expenses: include legal, accounting and back-office, audit, taxes, diligence expenses. For a 10M fund, Legal = 20K/year Back Office= 40K/year Audit = 25K/year Taxes = 1K/year Diligence Expenses = 14K/year Waterfall: Up to 3x, 80/20 >3x and <6x, 75/25 6x+, 70/30 Construct a portfolio and financial model to find a scenario for a FUND SIZE: $50M Target # of portfolio companies: 30 WHERE: LP gets 3x return for his/her committed capital (ignore GP 1%)
Answer Below:
Fund Return Calculation Analysis The scenarios I chose for the 30 companies for my analysis were as follows to be able to achieve a higher 3X return for the LP After deductions. ? 13 companies are winners that is they are able to generate revenue get profits ? 11 companies are breakeven where no profit or no loss cases ? 6 companies are loss making With these chosen scenarios for the returns on the different companies chosen for investing, I got a total of 2.925X. For this the total management fees for the 10-year period with a reducing percentage fee from year 7 to year 10. With this year-to-year management fee calculation I got a total of $11250000 for the 10 years. Third, I looked at the calculation of total costs of operation, one thing I noticed was using a 10M dollar fund model for the fees, so to get the right amount of transactions costs for the 10 years for the $50M fund I technically had to get each year’s costs in multiples of 5 (10*5=50M) and the this would be the value for one year multiplied by 10 for 10 years. With this model I got a total expense of $5000000 for the10 years. For a sum of all the expenses for the 10 years, I summed a total of $11250000 for the 10 years for management fees together with a total expense of $16250000 for the10 years to get a total company’s expense at $16250000. After getting all the calculations out of the way, now I need to get the average return for LP which should be 3X the fund invested, and I was able to get the total income minus the total company’s expense for all the 30 companies. The calculation included total income for the 10 years for the 30 company’s $ 16,99,99,932 minus a total company’s expense at $16250000 to get a final amount of $14,24,99,938 and total gain is $11,99,99,946 for LP For the waterfall, a return of 2.92X on fund invested will earn a 80/20 ratio in profits since the return ratio is less than 3 so you get a ratio of 80/20. LP will therefore get =0.8 $11,99,99,946 = $9,59,99,957More Articles From Finance
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