Working Capital

Hi All,

I was looking at a few syndicated deals where the sponsor was modeling working capital. At the end of the hold, the sponsor was showing the return of working capital. I've seen deals where working capital is not returned and where it is returned. Can someone comment on why syndications show the return of working capital upon sale? Wouldn't it be best to be conservative and assume you don't get the capital back, therefore showing a slightly lower IRR? Can anyone provide some insight? Being in the institutional space, this is not an issue I ever get exposed to. 
Thanks!

Comments (3)

 
Jan 10, 2021 - 10:13pm

We show the return of working capital in our underwriting (large, discretionary, institutional fund), and candidly I've never really asked why.  Our calc for us includes some cash on hand, ~2 months of taxes (untrended value), and the first year's worth of insurance.  I assume it is a) to juice returns and b) serves as a proxy for what we might expect to get back during prorates. 

 
Jan 11, 2021 - 9:39am

Interesting. Thank you. The large institution I used to work at looked at it and said it didn't matter, because it'll just come from the House balance sheet. Just don't model it. The PE fund that I was at next was a syndicator which used to do it but than stopped once they raised a fund. 
 

How do you guys determine how much cash you need on hand? 

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