Home Run in PE & VC
Is a good investment one that doubles your money in 3 years? Or is that a home run? We are starting a VC and PE firm to invest in mining startups and I am calibrating my cashflow models so looking for assumptions. Anyone?
The typical targeted returns for a PE investment is 3x MoM over 5 years for a 25% IRR. Given the intense competition over a shrinking number of good PE investment candidates, my understanding is typical IRRs are shifting more towards the 15-20% range, but top tier shops are still well outperforming. I recently spoke with the founder of a fund that banged out a 200%+ IRR on one of their portcos recently.
Mining is a very specific animal, due to its capex intensive nature and sensitivity to commodity pricing. While I don't have any direct experience, it begs to reason that the structure of institutional mining investments and the expected returns are going to differ significantly from typical PE investments. While I'm not directly answering your question, my response is intended to encourage you to decouple the way you're thinking about your endeavor from that of more traditional PE investing. Hope this helps.
Why MoM i think a 25% IRR doubles your money in 3 years? That is 100% return?
2x MoM in 3 years would be a 26.0% IRR. Anyone who works in PE can correct me if I'm wrong, but 3 years is an atypically short holding period. The "base case" for a traditional PE target is a 5 year holding period, which gives you a 24.6% IRR at 3x MoM. As @Whiskey5" says below, the reality of PE returns is trending well below the hypothetical base case many training and interview modeling exercises present. But the financial profiles of these models are completely distinct from that of a mining investment. My sense is that you'd get better information tracking and debt and equity returns of publicly listed mining companies, if you don't have access to institutional investment case studies for mining-focused funds.
The funny thing about our industry is that you will always hear about the "home runs" but not a peep on the donuts. Real returns in PE, on average, is well below 20%. 10%-15% at best. Before you take out your pitchforks, remember this is the average.
Carlyle said last year they were lowering their return exceptions from mid 20s to high teens/20, gross. Anyone telling you otherwise is lying. Mid 20s isn't realistic anymore.
Out of curiosity, how are you able to starting an VC/PE fund in a niche market if you don't know what constitutes a "good return" vs " a fat freakingtastic" one?
First of all, home-runs in PE are very different than home-runs in VC. Second of all, how are you starting a firm if you don't know what a home-run investment is??
I'm in an african country and currently there is no PE/VC fund focused on the mining space. My country is very rich in mining, having produced the second biggest diamond in the world a couple of years ago. PE and VC are also very few in my country so I am calibrating my assumptions based on other markets.
Or even what MoM is and IRR?
I'm an Actuary, going into Finance. Learning from this site, given my experience, learning habits and the wealth of experience in this site it took me less than a month to catch-up so "sit down!", maybe.
Mining you would need a large fund. Typically, with a small fund you would be a minority stakeholder rather than majority. If you wanna invest as majority stakeholders, I think you need over a 1bn fund. Other strategy can be that you can do JVs with foreign companies and help them mine in your home country, it could a more interesting strategy as I am not sure there is gonna be much local born innovation (no offence intended).
Thanks PrivateMarketplace, what local born innovation are you talking about in mining?
2% management fee a year is already 10% over a 5 year holding period. Your LPs will also want to be compensated for illiquidity so you have to beat market equity returns. That's why deals are typically underwritten in the 20-25% IRR range.
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