I have a presentation from a growth debt fund which invests in senior debt in small early stage companies ($15-30MM tickets). They talk about 15+% gross IRR (YTM) (before carry and management fees). Now, when looking at the investments they have done so far, it always seems to be debt with coupons in the range of LIBOR/EURIBOR + 7%-11% and maturity of 4-5 years. They mention structuring fees of 2-4% and potential additional upside to IRR from warrants, etc.
My question is HOW can they achieve 15+% IRRs while providing debt at c.10% coupon? Would their returns not be limited to the coupon plus one time structuring fees spread across the maturity?
They do not seem to be using leverage on their funds, as when summing up their debt investments one can get to the amount to which the fund is drawn to date.
To give a concrete example:
They have provided a $15MM worth of financing at EURIBOR+7.75%, with maturity of 4 years, issued in 15M bonds at $1 each. A small portion of bonds has warrants attached to them, which represents c.0.8% of stock capital (<$1M based on current share price - pretty much negligible and it shouldn't be included in the IRR calc anyways). They state 14% IRR for this particular investment. How is this possible?
Would appreciate your thoughts / insight.