IRR of Bankrupt Transaction?
When a PE deal is exited through bankruptcy, is the IRR considered -100% or does the PE firm recoup anything to make it more than that?
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It will be more than that because your 100% loss is in the future, not today. Try to calculate it alegbraically on paper.
But if the equity payment is made upfront (marking deal entry), and exit equity value is zero or negative, then shouldn't IRR be -100% (or technically lower)?
So exit equity value is equal to: Exit enterprise value + Cash - Outstanding debt
If this amount is =0, then the IRR should be -1 (technically a divide by 0 error). But is it common for this exit equity value to be >0 (and therefore have a value greater than -100%) when going through a bankruptcy exit? I know in many cases, equity is worthless in bankruptcies.
But let's say the exit equity value is negative, would the PE firm be on the hook for paying this over time, and technically make the returns even lower?
There are more iterations of this and structuring ways to play it but at the core that's how a PE fund views it.
Iterations being... DIP w/ rights offering and exit financing, partnering with creditors to roll a portion of the existing debt and throwing in new money, etc.
If you're Apollo you actually make more when your portfolio co goes tits
Need more details. the recovery isn't automatically 0 or -100% loss of principal. There are actually scenarios where you will recover > 100% of par and actually still generate a positive return.
Lets assume that you are a creditor of a company that is going into BK and has a simple cap structure consisting of an ABL and Term Loan... Regardless of valuation point lets assume that the term loan rolls over some portion into new debt and gets the remainder as an equity recovery. The initial recovery may be par but the equity provides an upside scenario where Lenders can ultimately generate a positive IRR post-reorg.
In the case of a restructuring that makes sense, being the PE firm can still run the business. What about in the case of a chapter 7 liquidation? In that case, when senior creditors in the capital structure are paid off first to the extent possible and there is nothing left to equity holders, would that essentially mean your IRR is -100%?
I've looked for any info on the IRR's of famous bankruptcies such as TXU but haven't had any luck.
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