Envy Ratio

A ratio that compares the price paid by investors to the price paid by the management team for their individual shares of common equity in the company

Author: Sid Arora
Sid Arora
Sid Arora
Investment Banking | Hedge Fund | Private Equity

Currently an investment analyst focused on the TMT sector at 1818 Partners (a New York Based Hedge Fund), Sid previously worked in private equity at BV Investment Partners and BBH Capital Partners and prior to that in investment banking at UBS.

Sid holds a BS from The Tepper School of Business at Carnegie Mellon.

Reviewed By: Austin Anderson
Austin Anderson
Austin Anderson
Consulting | Data Analysis

Austin has been working with Ernst & Young for over four years, starting as a senior consultant before being promoted to a manager. At EY, he focuses on strategy, process and operations improvement, and business transformation consulting services focused on health provider, payer, and public health organizations. Austin specializes in the health industry but supports clients across multiple industries.

Austin has a Bachelor of Science in Engineering and a Masters of Business Administration in Strategy, Management and Organization, both from the University of Michigan.

Last Updated:September 8, 2023

What Is An Envy Ratio?

The envy ratio describes the price paid by the investors per share relative to the price paid per share by the business management team for their respective shares in private equity.

The ratio is an opportunity for management buyouts, where-in the management team buys the shares of the private equity to increase their ownership over the company, and the team is incentivized for the company's profits

This concept works similar to financial leverage, where the management team's investment is leveraged via the investments of the company's private equity investors. Management uses investments by investors to further profit for their respective firms.

As the company's success depends on the commitment made by its management team, they are subsequently provided with "sweet equity," and the stocks are therefore more valuable for the outside investors. 

What is a management buyout? In a management buyout, a company's management team acquires a large(or all) portion of their respective company's equity, either through the parent company or a legal person. Though it originated in the US, this concept is now globally used.

What is financial leverage? Leverage in Finance is defined as leveraging a person's funds by borrowing capital and using that capital to profit more than the rate at which the money was borrowed. 

Leverage, even though it increases the opportunity of earning amplified profits, it also increases the level of risk taken by the individual, as losses will also get amplified. Usually, the contract has a permitted risk position where-in losses are capped at the total (or less than) non-leveraged fund.

What are sweet equity shares? Sweet equity refers to the equity reserved for the management to buy at a discount as an incentive for working in the respective company. Sweet equity is priced lower than the equity available to purchase for outside investors.

Key Takeaways

  • The envy ratio compares the price per share paid by investors to the price per share paid by the management team in a private equity transaction.
  • The envy ratio is often used in management buyouts, where the management team purchases shares of the company to increase their ownership stake, aligning their interests with the company's profitability.
  • The concept of the envy ratio works similarly to financial leverage, where the management team's investment is amplified through the investments of private equity investors, potentially leading to higher profits.
  • The envy ratio calculation helps evaluate different buyout deals, with a higher ratio indicating a lower cost for management relative to investors.

Interpreting Envy Ratio

The ratio measures the discount the management offers compared to the investors for owning a stake in the company's equity. A higher envy ratio translates to a lower cost basis for the management relative to investors.

The formula for calculating the Envy ratio goes as follows:

Envy Ratio = (Investor's Investment / Investor's percentage Equity) / (Management's Investment/ Management's percentage Equity)

Envy Ratio Example

Let's say a company wants to go private, and due to lack of capital, it goes to private equity firms for the company's buyouts.

To compare the deals offered by the firms, the envy ratio is used as follows: 

Firm A offers 45 million dollars for 80% of the company's equity, and management will buy the other 20% for 5 million dollars.

While Firm B offers 40 million dollars for 70% company's equity and management will buy out the other 30% for 10 million dollars.

Envy ratio for firm A = (45/80) / (5/20) = 2.25

Envy ratio for firm B = (40/70) / (10/30) = 1.71

The deal offered by firm A is better as it provides equity at a lower cost to the management, but at the same time, the percentage of ownership by management is also low compared to firm B's deal.

Researched and Authored by Abhijeet AvhaleLinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: