If a public company has a shareholder owning, say 30% of the outstanding stock and a financial sponsor builds a model to acquire the target, assuming the minority shareholder rolls 50% of their equity into the new capital structure. Would this rollover increase the sponsor's IRR because it is reducing the amount of equity they have to put up, all else equal? Or would this just increase their ROIC or MOIC?
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Your IRR depends on your ultimate return. If I'm following correctly, I think you're asking whether the old shareholder's 15% in the new company will increase your IRR on 85% compared to 100% ownership. The answer to that is "it depends", but "not likely". It doesn't matter who owns the equity in a firm - the firm's value will still be attributed evenly to all equity holders.
If you owned 100% - valued at $100 today. It goes up to $200 tomorrow. IRR - 100%. If you owned 85% - total company value is $100 today (your share is $85). It goes up to $200 tomorrow. Your portion is 85% of 200, or $170. $85 -> $170. IRR - 100%.
The only case where I imagine your IRR will be impacted is if you introduce debt into the equation given its lack of upside ownership and static return requirements.
Hope that helps...
P.S. This actually highlights one of the main weaknesses of IRR vs. NPV - the fact that IRR doesn't take the scale of the deal into account.
Thank you, this makes more sense now.
wtf? OP, are you suggesting the sponsor gets those shares for free?
or are you suggesting the sponsor gets a piece of that shareholder's returns on the equity that was rolled in (the answer is no)
I'm pretty sure he means that the sponsor (PE firm) is looking to buy this firm out 100% - but there's a current 30% shareholder that wants in for 15%.
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