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+Kamal Al Mazam You would have to change the distribution order and allocate a certain % to the PE firm (or GPs if you're looking at a GP/LP split) such that above the hurdle rate, the investors get an IRR equal to the hurdle rate. And then once they receive that amount back, the normal split specified above the hurdle rate would apply. This isn't really applicable here, but if we set it up such that the LPs were required to receive a certain IRR before the GPs got anything it would make more sense... because then they would actually have something to "catch up" on.

+bravo mir If you click on "Show More" and then scroll to the bottom, you will see the Excel files under "Resources."

Yes, please see the bottom of the description under "RESOURCES:" and the links there.

+ReckStyle I'm sorry, I don't understand the first part of your question. Please contact us via email and we'll see if we can explain it there.Lenders charge you what they can afford to charge you on money. They are not aiming for the same return you are as the equity investor - they accept lower potential returns in exchange for lower risk. So you can't assume the time value of money is the same for lenders and for equity investors. Equity investors aim for higher returns and also accept higher risk along with that.

+Mergers & Inquisitions / Breaking Into Wall Street I think I'm getting your point but i still can't really comprehend a couple of things. First in your example here, are you not supposed to earn the big income anyway - the net of Debt and your equity and only get your chunk of it, which will be proportional. Also, arent your lendors supposed to charge you more on your debt than the time value of money as otherwise they would be losing money?

+Mergers & Inquisitions / Breaking Into Wall Street Thank you!

+Ferdinand Campbell If you invest $1 million and need to earn 10%, that is $100,000. If you invest $100 and need to earn 10%, that is $10. It's much easier to earn $10 than it is to earn $100,000, because you just need good ideas to make small amounts of money. But to make big amounts of money, you need ideas that are both good and big. And there aren't many big opportunities that other people haven't already noticed.

+William Hu Are you referring to Term Loans? Term Loans are a type of debt (sometimes called "Bank Debt" or "Senior Capital" as opposed to "Junior Capital"). I am not sure I fully understand your question, though.

+learnandgrow No, it is not. That only happens when the underlying assets go bad (which is exactly what happened in the mortgage crisis in 2008 which originated the financial crisis). If the assets do not go bad, YOU CAN pay the principal, simply by selling the business.

Well good thing we brought that stuff up to find out what "boil-out" means :D

And gentleman, that's how you get economic crisis since can't pay back principle sum

Guys isnt the underlying assumption that the loan's body is being paid back after the exit of the PE - assuming overall asset value did not shrink and thus the body would pay back itself? To cover the time to exit, the body (if necessary) could be financed by other loans... Thus the calculation of this concept above seems correct for me (not including the body). Thx for comments

Ok. But eventually you will have to pay for principal of the loan you took to cover first principal. It's not a solution, it's awoiding of solution. Normal LBO model has to cover principal return. Just saying.

+DavidNimber Yes, you have to pay loan's principal. But you can get a new loan (from somewhere else per se) to pay for that principal. Then you have to pay interest for your new loan. When that new loan matures and you have to pay for its principal, you get another loan. The cycle continues.

+Duc Dam Not in every country. In CIS you have to pay loan's principal (or how they call it here "loan's body").

Technically, you don't have to. If the debt matures, you can get a new debt to pay for the old debt. You only have to pay for the interest expense.

You cannot calculate IRR to equity investors in that case because there are no equity investors. You would only be able to calculate the IRR to debt investors, and this type of analysis would not make any sense since debt investors do not benefit from EBITDA growth or multiple expansion.

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Click on "Show More" under "Published on Dec 2, 2014." Then click the second link there.

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