FVC2232. Valuation and Carried Interest

This presentation discusses the unique challenges of valuing carried interest in private equity and venture capital funds. We will review the most common types of distribution waterfalls. We will then present a case study of how to build a discounted cash flow model using a basic fund structure of 2/20 with a European waterfall and an estimated fund life of 10 years. We will discuss how to develop model assumptions from key terms in a fund's legal agreements (PPM and operating agreement) using a top-down methodology. We will illustrate an example of an option pricing model as applied to carried interest valuation. We will present an example of Monte Carlo simulation, and highlight its key assumptions. Finally, we will provide our perspective on how to select a suitable valuation approach for carried interest, after considering data availability, characteristics of expected cash flows, and risk features of the underlying funds. 

Learning Objectives:

• Recognize asset management operating structures and carried interest contractual provisions
• Identify appropriate valuation techniques and assumptions for carried interest valuations
• Recall valuation techniques accepted in industry practice