So let's say I've got a company that needs an equity or even debt infusion for a project, and I'm proposing to charge them 4% of all the equity I raise. They are balking thinking about how much they will make off of that money vs how much I will. I am trying to put together a case study showing that a company that raises say $100m, will expect to earn roughly 20% pre-tax on that money, per year ($19.2m a year), for at least a certain length of years. The investment bank will take $4M in fees from the deal, and has their own assumed rate of return, which they may even roll into the equity of the company. So the investment bank is getting roughly 20% of the profits from the proceeds. Maybe you can help me come up with a more concrete example of the high cost of money (in terms of the ratio of what the intermediary charges and what the company earns)?
Thanks, and sorry if the question comes out vague and poorly-worded, I'm doing my best to explain it.
You're going to have a hard time convincing them that your # is appropriate until they shop around or try to do it without an adviser.
True.
The reason I'm trying to break it down into the profits made by each side on a normal equity or debt deal, is because I am proposing rolling my fee into the project for 25% of it's profits. My 4% would roughly equate to about 16% of their projected project profits, but I'd have to factor in some risk premium for accepting equity and not taking an upfront cash payout.
I'm hoping that they don't want to try to go do this themselves, because I have an amazing investor interested in the project, who is super flexible on a number of terms, but they are acting like they are god's gift to the economy.
Yeah that is a hard sell. Cash is cheaper than giving up equity for the same amount.
How are you valuing the business to get to your 25%?
Basically taking the NPV of the project related to that cash. So if they raise $100M debt and earn an NPV of $25m off that project, and pay out $4m in banking fees, then they could alternatively give roughly 1/6th of the equity in the project to the banker.
Don't all founder run companies without institutional backing? That's almost a truism.
Is this a joke?
Debt doesn’t pay out 4% fee.
Your the one asking to invest. They are welcome to say no. Also you are asking to get into the equity portion of the deal and asking for better terms than just equity (I need a risks premium) when in reality if they let you invest $4 million they would expect you to pay 2 and 20 or promote on your equity. Good chance they don’t want to dilute their equity.
No asset that can deliver 20% asset level returns can raise that much debt. Anything that can put up 20% asset level returns is fairly high risk (witness US equity priced to return around 8% at constant multiples).
If you were raising them equity capital then a 4% fee could work. That’s within ipo fee ranges.
Are you underwriting or just capital raising?
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