Basic question on how people determine the equity required on a deal. Do you simply sum all negative cash flow over the hold period and use that as the equity requirement? Or do you take into consideration positive monthly cash flow in some months which may offset some of the required equity? My initial thought is the first way, but I have seen it done other ways and want to get a sense on what is the most "correct".
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Bump, particularly for a value add deal where in place NOI covers some of the capex costs.
Like in a SU?
Don’t overcomplicate sources & uses. If you’re talking about a PE deal, you’re literally going to the store and you see something you like and you’re trying to figure out if you have enough money.
Company is $100 of EBITDA and trading at 14x? Ok, I need $1400. Maybe trx fees and financing OID and fees adds another $100, so I need $1500.
According to market info I can lever it to 5x on senior first lien, so I have $500 bucks there.
Now I need $1000. If management is rolling 10% of EV, that’s another $140, gets me to $640.
So I need $860. That’s my equity requirement, assuming no 2L debt.
Of course, in practice when modeling your OID and financing fees assumptions are linked to your debt amount and increase your overall equity need.
It sounds like you’re asking within the context of the Sources & Uses and there are a few ways to calculate this. Let me know if I’m off the mark though.
(1) The formula for Equity is considered a “plug” which ensures that the Debt-Plus-Equity-Plug is equal to your Total Uses.
(2) In addition to creating your “Closing” S&U you’ll create your “Hold” S&U and here a line item like “NOI Gain” is listed as a Source and calculated similarly to the Equity Plug above.
(3) There’s also “Peak Equity” which is equal to the sum total of all negative cash flows during your hold. If you were to add up all positive and negative cash flows during your hold, this would be your “Net Profit”.
Hope this helps!
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