Venture Capital Fund

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Outline: In today’s exercise you are going to model on a very simple basis the returns of a Venture Capital Fund. The specifications of the Fund are listed in the date below. The aim is a very simple, single sheet, Excel model that gives you some idea of what the returns look like given the various assumptions and inputs provided below.

As with last week’s Cash Budgeting you are not looking for an exact answer, but instead for a well build model. That means that you are looking to have all assumptions correctly represented and all aspects of the fund correctly mapped.

Why this exercise: When launching a fund it is important to have a good understanding of expected returns. These expected returns are what your investors back when investing. It is also key to understand these expected returns in the context of what running costs you will have as the Fund’s managers.

Key considerations: To model should be built using a series of assumptions which are listed below. Take an objective look at these data and consider how it is best put together. There is no right or wrong method. What determines if this model is right or wrong is whether it shows you an expected return which also includes all input date.

The expected return should be calculated as both an IRR figure and Money Multiple.

Assumptions and Input data:

Capital and Fund Assumptions:

Total Committed Capital: £25m

GP Commit, as % of committed capital: 2% of the £25m sourced from GPs

Organizational Expenses (one time): £150k, one time expense for set up

Operational Expenses (annual): £50k, structural costs each year

Management Fees, per year, as % of committed capital: 2% of Fund Size

Management Fees Recycled: 100% of management fee reinvested into the fund

Carry: 20% carried interest in the fund

Portfolio Construction:

% Allocation of Invested Capital: 70% of Capital to new investments, 30% to follow

on investments

Average Check Size: £340k for new investments and £240k for follow on investments

Fund Operations time period (years): 10 years

Average Holding period, from investment to exit: 5 years

Return Assumptions:

Writeoff: 60% investments fail

Small: 15% generate a 1.5x return

Medium: 10% generate a 5x return

Large: 15% generate a 25x return

Portfolio Flows:

Rather than assuming a simple returns profile, this time you are required to map the flows of capital within the fund. This means that you need to create an additional worksheet which tracks the capital as it flows through the fund. In Year 1 you start to draw capital from the available pool of £25m and you invest this. You know you need to make a certain number of investments each year to ensure that all capital is deployed and to ensure you deploy all follow on capital as well. You also know that you can take fees out of this drawn capital to the tune of the Fee arrangement as indicated earlier. You also know that at some point you will start to sell investments using the same average multiples as calculated before. Therefore you now have the basic ingredients to calculate the starting capital at the start of each year and how that evolves over the years. Important in this exercise is to make a distinction between Gross and Net Returns. Gross Returns will not make deductions for the Fees charged to the fund. Net Returns will only calculate returns post the calculation of all fees charged.

Metrics to be calculated:

Fund IRR Both Net and Gross

Fund Money Multiple both Net and Gross