Compute the lp cost for investment, Business Economics

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Suppose that EBV is considering a $5m Series A investment in Newco. EBV proposes to structure the investment as 5m shares of CP with FV of $5m, one-to-one conversion to common, and no dividends. EBV estimates the total valuation of Newco as $30m. The founders of Newco, who will continue with the firm, currently hold 15m shares of common stock. Thus following the Series A investment, Newco will have 15m common shares outstanding, with another 5m shares upon conversion of the Series A. EBV has lifetime fees of 25% and carried interest of 20%.

a)  Compute the LP cost for this investment

b)  Compute the partial valuation of this investment

c)  Divide this partial valuation into its two components: GP valuation and LP valuation

d)  Should EBV make this investment?

e)  Perform a sensitivity analysis of this investment recommendation


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