Let's say a PE firm makes an investment of $100mm in a company (100% equity for simplicity), 5 years later it exits at a TEV of $200mm (100% equity) but maintains a minority stake (20%). Would our MoM multiple be 1.6x (160 / 100) or 2.0x (200 / 100). In other words, do we consider residual value in our MoM multiple?
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x
Realized / Cash MoM = 1.6x Unrealized MoM = 0.4x Total Marked MoM = 2.0x
So if we were just saying the MoM of this deal is X, would we be talking about total marked or realized?
Depends on who is saying it and who it is being said to.
For the purposes of the firm's partners (who will make a cut of the return) and the LPs to whom capital (cash) is returned, the MoM is 1.6x.
For the purposes of the press, marketing to new LPs and public IR docs, you may want to report or emphasize 2.0x (without of course being deceptive).
In most returns documents, there are separate columns for Realized, Unrealized and Total MoMs.
I think the reality is that the 0.4x residual is still at risk. If the company goes bankrupt in the future and the equity is fully wiped out, you only made 1.6x. If a PE firm is reinvesting in the deal, it is putting the 0.4x at risk and betting on a future (higher or lower) return. To me, that means the real MoM is 1.6x.
You'd always caveat as realized, unrealized, partially realized, etc., generally speaking. Nobody says the deal is a 1.6x and leaves it at that. On the flip side if you only sold a 20% stake, you wouldn't say the deal is a 0.4x.
From the LP perspective for cash returned on the overall fund commitment, you'd reference as DPI.
I agree - 0.4x is still at risk. From LP point of view, the realized income received is what it should be included.
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