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