Envy ratio

Envy ratio in finance is the ratio of the price paid by investors to that paid by the management team for their respective shares of the equity. This metric is used when considering an opportunity for a management buyout. Managers are often allowed to invest at lower valuation to make their ownership possible and to create a personal financial incentive for them to approve the buyout and to work diligently towards the success of the investment. The envy ratio is somewhat similar to the concept of financial leverage, for managers can increase returns on their investments by using other investors' money.

Basic formula


\mbox{Envy ratio} = {\mbox{Investment by investors / Percent of equity} \over \mbox{Investment by managers / Percent of equity}}


Source[1]

Example

If private equity investors paid $500M for 80% of a company's equity, and a management team paid $60M for 20%, then ER=(500/80)/(60/20)=2.08x. This means that the investors paid for a share 2.08 times more than did the managers. The ratio demonstrates how generous institutional investors are to a management team—the higher the ratio is, the better is the deal for management.[2]

As a rule of thumb, management should be expected to invest anywhere from six months to one year’s gross salary to demonstrate commitment and have some "skin in the game".[3] In any transaction, the envy ratio is affected by how keen the investors are to do the deal; the competition they are facing; and economic factors.[4]

See also

References

  1. ↑ M&A Academy Dealing with underwater management equity arrangements
  2. ↑ Structuring a venture capital deal
  3. ↑ MBOs & MBIs - MBO Guide
  4. ↑ Structuring a venture capital deal

External links

This article is issued from Wikipedia - version of the Friday, November 27, 2015. The text is available under the Creative Commons Attribution/Share Alike but additional terms may apply for the media files.