I was reading this today and got confused.
I Was under the impression that post pref shares reaching their required return say 12%, and subsequently the ordinary/sweet equity had caught-up, the pref shares accrued value on top of this at the same rate as the ordinary in excess of the 12% hurdle, resulting in both types of shares being valued at the same price upon exit.
Am I now right in saying that, once a pref hurdle is hit the pref shares accrue no more value following this, and only the gains above the 12% are achieved on the ordinary equity (of course only accruing value post the pref satisfaction)?
Cheers in advance.
Edit: let me know if picture is blurry
Can’t read the pic. Depends on what the docs say. In LBOs it’s nearly always just 12% pa compounding. In venture it can be a liq pref and pari passu with the ords thereafter
Solid, thanks
Agree, can't read it and don't totally understand the question. In private equity, this is a common waterfall (and might match you example but different terminology):
What you’ve written was the understanding I had (that pref is a hurdle and then following pref satisfaction the pref shares still accrue value over and above the hurdle).
I believe this isn’t what the text was suggesting. To save reuploading a blurry photo again, the underlined text says “if the value of the common/ordinary shares exceeds the value of the preferred, the sweet equity receives a greater return than the preferred equity.”
This implies that after the pref is satisfied no further value/return would be attributable to the pref, and that the excess value is attributed to the ordinary/sweet shares. (Based on your response the text is wrong).
There is no standard ‘all prefs work like X.’ Depends on the drafting. You can do whatever you want
Agree with VP. I’d suggest sketching out the waterfall in Excel and sensitizing a few exit scenarios to see the impact including crossover point where one share class is more valuable, etc.
Iure quaerat modi fugiat aut at voluptas. Rem magnam incidunt est facilis. Totam est esse sunt dolore blanditiis. Accusamus quaerat non est eum dicta culpa beatae.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...