Minority equity investment - three statement model
How should I approach modelling a minority equity investment in the form of a three-statement model?
Some thoughts below, but not sure if this is correct
- Purchase price should just be current Equity value (EV - net debt) * % desired minority ownership
- There should be no PF balance sheet / purchase price adjustments? Or should shareholders equity and cash on balance sheet be adjusted?
- Any fees incurred by the growth fund should be kept separate and not flown through three statement model
- Essentially the three-statement model remains unchanged [expect for additional cash?]
- Can there be an element of leverage? e.g. what happens if the company also does a re-financing? Will the % minority equity purchase be calculated of new PF cap. structure?
- Returns should simply be dividends (% of ownership) + % of equity value at sale
- How can a growth fund increase returns via leverage in a minority investment? Can it take on debt on the side / separate vehicle that it uses to purchase minority stake?
Anything I am missing?
Thanks in advance!
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I hope those threads give you a bit more insight.
Assuming that you mean a minority investment where you buy new issued shares (share capital increase) and following your list: - Purchase price typically is worked out as negotiation between the current and incumbent shareholders in terms of % of company the investor is getting for the money put in - The money of the investor enters into the balance sheet as cash (how would you increase equity without increasing something else?) - Fees incurred by the growth fund - not sure what you mean here. Of course you might have costs related to the transaction that might be charged (or not) to the company. It really depends on the type of the expense. In my experience, the board of the fund wouldn't complain for paying a lawyer for the investment agreement while it would for an introduction fee - See n.2 - Returns yes, let's just add that it depends on the structure of the equity (e.g. preferred) and if the investor puts some money as loan - leveraging not really common, of course you need to use the balance sheet of the vehicle instead of that of the company
There's another type of minority investment, where the investor buys a stake from a current shareholder. In this case, the company isn't affected by the transaction as the price is paid to the shareholder.
Assuming you're injecting growth capital
Purchase Price typically = Enterprise Value - Debt + Cash = Pre-money Equity Value + Growth Capital to BS = Post-money equity value Note that price per share for pre and post should be the same.
CF: Growth capital is reflected in financing activities
BS: Growth capital cash increases BS Cash and increases shareholders equity or (additional paid in capital).
Transaction fees should be captured in Sources and Uses. Cash for those transaction fees usually get's paid with primary capital, assuming the investors are covering them.
Fees that the investor charges to the company are usually recorded as non-recurring expenses, so they typically don't affect "Adjusted EBITDA"
Typically you're not taking on a minority position and using debt to juice returns. That creates misalignment between the shareholders and management.
Assuming you invest in all common, then yes returns are dividends + exit equity proceeds. Usually though you're taking preferred stock which makes you more senior to common. In a bad exit scenario you're recouping some or all of your initial investment before common. Hopefully you'll never have to do that in an investment.
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