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There are a few ways you can look at this 20% discount rate: * Cost of capital for the fund * Cost of capital for investors in the fund * Cost of capital
by todsul 15y ago
There are a few ways you can look at this 20% discount rate:
* Cost of capital for the fund
* Cost of capital for investors in the fund
* Cost of capital for the business
If you can't earn 15-20% on a business, you really should invest the capital in a less risky investment. Additionally, most PE funds look to double their investments in 5 years. So using a 20% discount rate is somewhat conservative with this in mind.
However, I tend to agree that you wouldn't want to be throwing a 20% discount rate around against yourself in deal. It's certainly not outrageous though. Think of it as opportunity cost too.
- lacker 15y agoAdditionally, most PE funds look to double their investments in 5 years. So using a 20% discount rate is somewhat conservative with this in mind. PE funds tell themselves they can achieve a 20% return, but in reality they are on average no better than index funds. See: http://www.google.com/search?sourceid=chrome&ie=UTF-8&q=average+pe+fund+return http://www.google.com/search?sourceid=chrome&ie=UTF-8... I stand by my claim that in assuming 20% returns for vendor finance, PE funds are tricking themselves by a greater magnitude than they are tricking founders.