Assignment Paper

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Failure to complete or significantly attempt to complete assignment will result in an incomplete or possible failure.

You may choose to work in groups of no more than three people. Be sure and include all the individual names in your group when submitting the problem set.

Part I. FUND RETURNS

You are an LP who has committed $180 million to a $900 million fund – McKinzie-McMillan Partners Fund VII which is a mid-cap US buyout focused fund. The fund was formed January 20, 2011

The terms are as follows: 2.0 percent annual management fee accrued annually on committed capital. There is a 20% carried interest provision, there is no hurdle rate.

The fund draws down the $900 million fund in three tranches on 5/15/2011, 5/14/2013, and 8/31/2015. The Fund invests in three companies on those dates (one investment on each date).. The total equity transaction for portco A is 200 million, on portco B is 300 million and on portco C 400 million.

On 12/31/15 the value of the portco A is 300M, the value of the portco B is 500M and the value of the portco C is 350M.

The fund exits portco A on 3/28/16, selling the company for $400m.On 12/31/16 the value of portco B is $650m and value of the portco C is 395m .

The fund exits portco B on 7/1/2017 for $700M and on 12/31/2017 the value of the portco C is $475M

Assume that when the fund exits any of these investments that it distributes the pro-rata proceeds to its investors instead of reinvesting the proceeds. Assume that if a value is not given at year end then the value is at the lower of the prior value or cost. Assume profit on the deal is simply value at sale minus cumulative invested amount.

NOTE: What is important here is the return to the limited partner from its investment in the fund, not the return the fund got on its portfolio company investments

.    A)  Develop a model for each portfolio company investment. Calculate the profit on the investment and what the LP’s portion of that profit will be.

.    B)  Using the portfolio company model, develop a cashflow stream for you as the limited partner from the date of first drawdown through 12/31/2017. Include contributions/distributions and any for each cashflow to/from the LP and an NAV for the LP for each year end. Be sure and account for GP/LP profit split.

.    C)  Calculate the following for each year end from 12/31/11 to 12/31/17. Calculation should be from inception to each year end.

a.                  IRR

b.                  DPI

c.                   RVPI

d.                  TVPI

e.                  PICC – dry powder ratio

.    D)  You should tabulate your calculations in a spreadsheet – you may use the worksheet on blackboard as a template but don’t be constrained by the template.

Part II-PUBLIC MARKET COMPARISON AND PERFORMANCE

To push your analytical skills further calculate a public market equivalent:

.    A) Using your own resources select a stock market index to use and determine index values 
for each cashflow date in the fund data set from Part I.

.    B) Calculate a PME, a Direct Alpha PME and a Kaplan/Schoar PME since inception using the index – only calculate a single PME for the entire series, that is, for the period beginning at inception of the fund and ending 12/31/2017. No need to calculate PMEs for each interim period – just use the entire series lifetime and only calculate the PMEs for the terminal value at 12/31/17

.    C) Using the results in #2 and your fund results from Part I, indicate whether this fund performed better or worse (and by how much) than the public markets using the benchmark index you chose.

.    D) Write a short paragraph answering the question: Do these result seem intuitive to you?

There is a spreadsheet template for both parts