Hi WSO community,
I’m hoping to leverage the community’s wisdom on the mechanics of levered co-investment.
I have the opportunity to work with a successful ex-entrepreneur to grow his family office, which is mainly focused on micro PE deals and search fund seeding. He has already completed two deals and discussed a compensation that includes next to base and bonus, a levered co-investment on new deals.
The idea of the family office is to acquire targets that traditional PE firms wouldn't consider due to limited exit opportunities or size but with strong and stable cash flows at low multiples, with the goal of acquiring about 10 companies. The deal mechanics look something like this:
- Buy at a 2-3m entry run-rate EBIT (assuming no growth during the deal period)
- 3-4x EV/EBIT multiple
- 80-85% leverage
- 30% Re-investment of seller from his proceeds
- 70% Equity from Family office
- From the first two deals, he expects that 1/3 of the leverage will be paid off after 2-3 years
- Exit: Somewhat difficult, returns rather from leverage pay down, dividend recaps
1) Does anyone know exactly how this levered co-investment would work? 2) Who gives the co-investment to me (e.g. vendor loan, bank, ...). 3) Do I need to pay interest on it? 4) Is it a taxable benefit? Perhaps someone has a useful Excel model to share or an idea on how to approach this?
I have the option to join another PE fund and am currently weighing the upside (entrepreneurial experience + potential compensation from the levered co-investment) vs. the risks of joining such an entrepreneurial venture, compared to joining another PE fund as a Senior Associate with the option to become VP within a year (with carry from VP onwards).
I appreciate any insights.
Hi,
Here’s a quick take on levered co-investments:
How It Works: You invest some of your own money and borrow the rest. This boosts potential returns but also adds risk.
Who Provides It: Usually, the family office provides the co-investment funds.
Interest: Yes, you’ll probably pay interest on the borrowed money.
Taxes: It might be taxable, so it’s good to check with a tax advisor.
When comparing to a PE fund, think about the entrepreneurial experience and upside of the family office versus the more predictable path and potential carry at the PE fund.
Hope this helps!
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