Growth equity returns

Hi,

What modelling techniques would you use to calculate returns for growth equity investments? Other than a simple LBO (which is less relevant because I'm assuming the growth investments in question are not reliant on leverage), I'm not familiar with other methodologies.

Thanks in advance

 
Best Response

I like using a Revenue to FCF model so you have a good picture of the expected cash burn. Once the company goes positive you start having distributions. For returns you run an IRR on burn + distributions + equity value at exit.

For example: Purchase price: $(10,000) FCF Year 1: ($1,000) FCF Year 2: ($500) FCF Year 3: $0 FCF Year 4: $1,000

FCF Year 5: $5,00

EBITDA @ Yr. 5: $8,000

IRR on: FCF + $8,000 * some multiple

Given growth equity will often require some cash burn funding, it's important to take that into account when calculating the returns.

Hope that helps.

 

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