Hi All,
Unfamiliar situation for me here.
We recently IPO'd a company that has done extremely well post going public (Up 300%-400% from pricing). We now need to calculate the fund IRR as of 9/30/13. The one portfolio company has done so well, it's moving the IRR number over 10%+ from last quarter to this quarter.
The caveat is the stock is only averaging about 175K shares volume a day. Given this, I'm wondering if we need to factor in a liquidity discount for the shares we own (1m - 2m). Reasoning for this is if we sell all these shares once the lockup date ends then that large sell would drive the price down. Knowing this would justify the need for a discount potentially.
However, the counter caveat is that the LPA says on the share lock up end-date the fund must distribute the shares. Thus, it is not our responsibility sell the asset, rather just distribute shares back to all LP's and give them the right to buy and sell as they see fit, and our realized value is the share distribution date.
Anyone run unto this before?
Interesting. I think its somewhat common for funds to add a liquidity discount when shares are in lock-up (usually 10% or so), independent of the ultimate distribution method. Btw, although your Fund may think you're doing a service to LPs by distributing shares immediately post-lock-up, its a bit disingenuous. You get to book the distribution in your track record (and carry calc) at the share value, whereas the majority of LPs will turn around and sell immediately, likely taking the liquidity hit in the open market. So the returns you show don't ultimately match what the underlying LPs receive.
You can sort of get around this by booking the share distribution at a trailing 5 or 10 day average to account for the selling.
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