Questions on a litigation finance case study

A London-based hedge fund is seeking to invest $100m into a litigation funding vehicle that has been newly
established by its current owners with a $20m common equity injection. The current owners have also taken
out a $10m, four year term loan with a well-known lender at LIBOR plus 3.5%, amortising quarterly on a
straight line basis, with interest also payable quarterly in cash.

Of the $100m capital injection, the hedge fund is seeking to invest $50m in the form of common equity and
$50m in the form of a debt instrument that will sit junior to the existing term loan. The proposed terms of the
debt instrument are as follows:
• Five year term, bullet repayment;
• Payment in kind interest cost of 8% (non-cash, rolled up);
• The capital is to be drawn by the vehicle as required for investment into new litigation cases; and
• A 2% commitment fee payable is on undrawn capital (non-cash, rolled up onto the principal balance)
You should assume that of the $130m day one capital, $120m is available for deployment into the financing
of new cases, with the remaining capital available to operating costs and interest payments on the term loan.
The current owner of the vehicle has a good track record and we can assume in relation to the case
• Average duration of 18 months;
• Average MOIC (multiple of invested capital) of 2.5x;
• Average case success rate of 80%; and
• The funder is able to deploy a maximum of $40m in the first year into new cases given its current
operating cost base (assume operating costs of $3m per annum in the first year), which it can scale
up by $10m per year thereafter (with a proportionate increase in the cost base to accommodate this).
Cash proceeds from case completions can be recycled into new case investments (subject to the limit above).
• Build a quarterly model, with a ten year time horizon showing a high level income statement, balance
sheet and cash flow statement for the vehicle.
• Assume the vehicle accounts for its case investments at cost i.e. no fair value mark ups are applied
through the life of the case and income is only recognised on case completion.

So my questions are:
1) How do I know when to use the $50m Junior Financing - should the HF's equity be used to invest first and when thats run out only then does financing from the revovler kick in?
2) For the re-investment part of the question, I presume that is referring to FCF
3) The quarterly aspect of the model is confusing for the $50m Junior Financing - non-cash interest is charged at 8% per year and commitment fees on undrawn capital at 2%, so does this mean the addition to the debt balance in each quarter is equal to the annual change in the debt balance divided by 4, since the debt?


Fiddy_c, hey, look at the bright side, at least you didn't get a ton of monkey shit thrown at is my best guess on threads that might be helpful:

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Here is my take: 

1. Assuming they invest $50m of equity at closing, this will sit as cash on the balance sheet. You should draw on the revolver once cash levels reach a minimum level.

2. The cash proceeds should just flow through the cash flow statement onto the balance sheet. Cash is fungible. You should think about it in terms of the deployment restriction or availability of cash / capital not deploying specific dollars that are returned back into cases.

3. For private credit, PIK interest and fees will usually accrue monthly or quarterly (usually just stated as an annual rate). Because they asked you to build a quarterly model, I would just accrue it quarterly and you can footnote that you assumed it accrues/gets paid quarterly.


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