• 058 01/16/2017

    Private equity funds are closed-end investment vehicles, which means that there is a limited window to raise funds and once this window has expired no further funds can be raised. These funds are generally formed as either a Limited Partnership (“LP”) or Limited Liability Company (“LLC”). The advantages of these structures for a private equity fund are as follows:

    1) Perhaps the biggest advantage for investors is that they are exposed to limited liability. If anything goes wrong in the investment process (bankruptcy, lawsuits, etc.), the investor risks only the capital they have committed. 

    2) LPs and LLCs are pass-through entities for federal income tax purposes.

    Illustrated Organizational Chart:

    Private Equity Fund Structure

    Raising a private equity fund requires two groups of people:

    1) Financial Sponsor (“Sponsor” in image): The team of individuals that will identify, execute and manage investments in privately-held operating businesses. This is generally comprised of a General Partner and a Management Company.

    General Partner: The entity with the legal authority to make decisions for the fund. This entity also assumes all legal liability.

    Management Company: The operating entity that employs the investment professionals responsible for allocating capital and managing investments.

    2) Investors: The individuals that will provide the capital to make those investments. Because funds are generally formed as Limited Partnerships, investors are often referred to as limited partners.

    In raising a fund, the fund founders will reach out to sources of institutional capital such as pension plans and university endowments, as well as high net worth family offices and individuals. The commitment to the fund, known as the “capital commitment,” will be made via a partnership agreement stipulating that the capital invested or resulting assets will be returned within a fixed period of time (typically 10 years). In most cases this is structured as a limited partnership agreement (LPA). The LPA will typically include the following:

    Mandate: The partnership agreement may provide parameters for acceptable investments. These restrictions could relate to scale, geography and security type, etc.

    Fund Term: This defines the time horizons available for investment and divestment.

    Management Fees: This defines the fee tied to the capital raised, or assets under management (“AUM”). The Management Company will typically earn an annual 2% fee on AUM.


    Distribution Waterfall: Distribution waterfalls define the economic relationship between the general partner (“GP”) and limited partners (“LP”). This is how the GP earns what is known as a carried interest, which is typically 20% of the proceeds after the LP has received distributions equal to the original capital invested plus a defined preferred return. Please follow this link for an example.


    For more information about leveraged buyouts please visit the Leveraged Buyout Video Series.

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  • 057 01/16/2017
    I recently developed a quick template to look at potential commission structures for a business with customer concentration and large contracts. I thought a simple version of the Excel workbook would provide some decent Excel formula practice. 

    The idea was to create a structure where a salesperson would receive a tiered commission for each new customer gained. To provide the ability to evaluate different structures, the workbook attached applies the percentages shown to the dollar sums listed in "Tiers." For example, per the image below, the salesperson would earn 4% on the first $2M of revenue, 3% on the second $2M of revenue and 2% on the last $1M of revenue. In year two, for that same customer, the percentages would change to 3%, 2% and 1%, respectively. This same logic applies to the remaining years.

    For the calculation to work, the first year that the salesperson lands the customer needs to count as year 1, which is what the third schedule, titled "Count," calculates. Finally to arrive at "Commission" the worksheet uses the HLOOKUP function to pull the appropriate percentage from the figures under "Commission Structure."   

    Commission Structure


  • 056 12/02/2016
    Note: Excel file available for download at the bottom of this post. 

    The two most commonly used functions for scenario selection are =CHOOSE() and =OFFSET(). The =CHOOSE() function is the simpler of the two, and is sufficient for most simple scenario analysis. If, for example, you only intend to run three scenarios, then you may prefer =CHOOSE(). This function can cause frustration, however, if you are constantly adding or deleting the number of scenarios in your model. The reason is that it requires you link directly to the scenario. The image that follows demonstrates:

    For this reason, as the number of scenarios expands, or if you intend to add or delete scenarios regularly, =OFFSET() may be a more flexible alternative. With the added flexibility comes some additional complexity, but nothing that can't be learned in a few extra minutes. As you can see, the =OFFSET() function does not link directly to the scenario, but instead to a "reference cell" from which it counts to retrieve the correct scenario:

    From this "reference cell," which is indicated by a blue box in the image above, =OFFSET() can count both rows and columns, which provides even greater flexibility should you require it. In the example pictured, the formula is referencing the value 1 in cell C14 to count down one row from cell G15 (blue box) and retrieve the value 5%. 

    To select a value to the left or right of the reference cell, input a value for the column (this is the last variable in the formula). As an example, look to the image below. With the exception of the inputs listed in the column titled "Period 1," all of the other inputs have been deleted to demonstrate that the function is referencing the same cell across all periods (this will make more sense when you look at the file). 

    =OFFSET Microsoft Excel 



Models are:
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above



*Answers a, b, c, d, e, f and g are all correct.