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IRR and Venture Capital

Forums › ACCA Forums › General ACCA Forums › IRR and Venture Capital

  • This topic has 0 replies, 1 voice, and was last updated 12 years ago by Francesco.
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  • July 2, 2013 at 11:41 am #133468
    Francesco
    Member
    • Topics: 2
    • Replies: 0
    • ☆

    Anyone interested in helping a poor soul getting out of this please?

    Suppose venture capital firm Stellar partners raised $100 of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay Stellar’s management fee. As is typical in the venture capital industry, Stellar will only invest $80 million (committed capital less lifetime management fees). A the end of 10 years, the investments made by the fund are worth $350 million. Stellar also charges 20% carried interest on the profits of the fund (net of management fees).
    Assume that Stellar collects the $100 million of committed capital and invests all investable funds immediately. Also assume that Stellar collects all proceeds from its investments at the end of the 10 year term.

    a) What is the IRR on the investment of Limited Partners (LP) in the fund?
    b) What is the IRR on the investment of the General Partner (GP), Stellar Ventures in the fund?

    I have the solution for a) which i understand,

    NPV = 0 = -100+((100+(350-100)*80%)/1+ IRR) = which gives me (300/100)^1/10 = 11.6%

    But just cannot understand how my tutor got to this:

    NPV = 0 = -5+(100+(350-100)*80%*5%) + ((350-100)/1+IRR)*20% = 28.2%

    I could really do with some help as my tutor is away and I’ve got an exam tomorrow in which this will be tested. Thank you.
    Fran

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