Carry without Sale - Calculations on Returns

by a searcher from Georgetown University

2 years ago

Looking for some help wrapping my head around returns and carry if a business is not sold at the end of year 5.

In classic Search Fund models, an exit is assumed at Year 5, and LP IRR/MOIC is calculated at that time with market Enterprise Value. The Searcher/GP carry is paid through the final tranche according to the LP investors' return.

Question I have: What if the business isn't sold? How is IRR/MOIC calculated? How do you determine market Enterprise value of the business?

Further details: I am wanting to hold a business longer term (10yrs+). Some of the LP investors are also looking for a longer hold. How would I calculate my carry at the end of Year 5? 3rd Party valuation? Using the entry multiple on the new EBITDA?

Appreciate viewpoints here...

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2 comments

searcher from State University of New York (SUNY)

Hi Yas, it's an interesting question. I'd encourage you to check out how Permanent Equity handles it (https://www.permanentequity.com/writings/2017-annual-letter-going-pro). It sounds like they have several tiers where they receive a larger % of cash distribution based on cash available to distribute relative to the initial equity investment. The tiers and % would be negotiated with the investors. I'd imagine investors would require some kind of cumulative preferred return (10%, 12%) before you got any carry to disincentive you from gaming the cash flow so you hit a higher carry level in one year at the expense another.

2 years ago | like reply | 1 like

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