Secondaries - GP-led model
Hi all,
I'd like to learn more about GP-led modelling (model assumptions, structure, waterfall, LBO, etc.).
I'm becoming more familiar with LP-led models where returns can be derived from fund-level analysis or bottom-up by looking at individual underlying assets, but still struggling to understand how it would work for a single-asset CV.
Does anyone have a template I can learn from?
Thanks!
If you understand waterfalls from your LP-led models, LBOs and three statement models, then you basically just combine all three for a CV model. A CV model is simply an LBO with a waterfall on top. Start with your S&U (extremely simple for a CV since debt stays in place) and then assume an entry multiple, net debt, etc. Then project out your 3 statements for 3-5 years, debt pay down assumptions and assume an exit multiple (typically flat from entry). You don’t even really need a full three statements tbh. In theory it could be as simple as revenue to FCF with debt assumptions.
You then flow through your equity proceeds to each investor. Then layer a waterfall on top to calculate net returns. Market standard is return of capital to LPs then 10% carry over 8-10% net IRR, 15% carry over 15% net IRR and 1.5x net MOIC, 20% carry over 20% net IRR and 2.0x net MOIC with full GP catch-up at each tier. Management fees are typically 1% of invested capital. Small wrinkle that most people usually miss is the GP typically commits at least 5% to the CV so that needs to be stripped out of LP proceeds.
Tbh, for the sake of a case study, if we were interviewing someone that doesn’t have secondaries experience I’m not sure we would have them do a multi-tiered waterfall. We’d probably give them simple terms like 20% over 8% net. Especially if it was a short case study.
Thank you for the explanation! For single asset continuation vehicles, I read online that the debt level tend to stay the same, is it because of dividend recap before the secondaries transaction to pay the LPs that doesn't want to stay? How would the sources & uses table look like? Would the equity paid (premium / discount to NAV) be on the sources side and on the uses side assume company cash to pay for the transaction fees?
CVs aren’t a change of control transactions so debt stays in place. Sometimes a recap can happen before or after the transaction but somewhat unrelated to the CV itself.
S&U:
Sources: Secondary investor capital (plug), GP-roll, LP-roll, any management / minority / co-investor roll
Uses: Existing LPs / management / minority / co-investor cash-out, GP-roll (need to show on both sides to make it balance)
It honestly varies though. Sometimes we show it like the above, sometimes it’s simplified to make it clear what the “CV size” is. Transaction expenses come out of seller proceeds with the exception of the buyside expenses and vehicle formation legal fees which either go into uses or come out of unfunded.
Thank you! This is really helpful! Is it right to say the total for sources or uses (excluding buyside legal fees) would be the CV valuation (% of NAV)?
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