How do you typically consider the investment amount in a transaction that you intend to back-lever shortly after an acquisition?
For simplicity...suppose I acquire a company/asset for $100. One month later, I get $50 of debt and return $50 to equity. Six months after that, suppose I sell the company/asset for $150.
Would it be inappropriate to calculate the MOIC on the post-levered investment (and note calculation is based on a back-levered amount)?
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In a fund structure this would not work as you can only call the capital once. So returning 50% of an equity ticket after 1 month without returns will impact your fund performance significantly.
In the case you describe I would indeed follow your logic.
Yes, your MOIC is against capital called. Unless you have a pocket of recyclable capital or subscription lines, what you described will be a drag on fund performance.
Many many funds have a recalling provision, which is created exactly for situations like this. Under capital recalling provision, if you return capital (actual capital, not dividend) with X period (ones I've seen are within 6-18 months), then you can treat that capital as if it was never called and call it all over again. This allows the LPs to lock-in a defined duration to their capital, and it allows sponsors to be a bit more tactical and to some extent "double dip" to generate fees off the same committed dollars more than once.
To answer your question, the MOIC would be calculated off the initial dollars invested. You would not look at it net of the capital subsequently returned. If you really had visibility into being able to do this, you'd perhaps utilize a capital commitment revolver to bridge that 1 month float, or maybe a more structured piece of junior debt.
We are in a similar spot now and going to use fund revolver. I think we also have the 6 month allowance to disregard capital called if returned or something
Quick question: I work on the sellside and we frequently pitch and structure backleverage transactions for sponsors - in fact we are executing multiple such tx right now. I'm only an analyst but wasn't aware backleverage is viewed as a significant drag on returns. I always thought of it as upside as it allows an additional decrease of the equity check.
Are there really many funds not willing to participate in backlevered structures?
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