Private Equity & Exit OppsHard

A deal needs $400 of equity funding. Instead of writing it all, the sponsor puts in $300 of common and brings in $100 of 10% PIK preferred from a structured-equity investor. Exit equity value is $1,000 in year 5 (and, downside, $500). Show how the pref changes the sponsor's returns.

Model answer

The preferred accretes at 10% PIK: 100 × 1.1⁵ ≈ $161 at year 5, paid ahead of common in the waterfall. Base case ($1,000): pref takes 161, common gets 839; sponsor MOIC = 839/300 ≈ 2.8x (~23% IRR)…

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A deal needs $400 of equity funding. Instead of writing it all, the sponsor puts in $300 of common and brings in $100 of 10% PIK preferred from a structured-equity investor. Exit equity value is $1,000 in year 5 (and, downside, $500). Show how the pref changes the sponsor's returns.

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