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. It is used to consider an opportunity for a management buyout. Managers are often allowed to invest at a 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; managers can increase returns on their investments by using other investors' money.

## Contents

* 1 Basic formula
* 2 Example
* 3 See also
* 4 References
* 5 External links

## Basic formula

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

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=(500/0,8)/(60/0,2)=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 personal financial risk.[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

* Management buy-in
* LBO
* Takeover
* Financial ratio

## References

1. ↑ "M&A Academy Dealing with underwater management equity arrangements". http://www.pwcblogs.be/transactions/wp-content/uploads/2009/11/MA_Delaling-with-underwater_1911_Presentation.pdf.
2. ↑ "Structuring a venture capital deal". http://www.tomorrowsleaders.com/A5569D/icaew/content.nsf/DocumentLookup/ICAEWFIN0112/$file/FM12+Finance.pdf.
3. ↑ "MBOs & MBIs - MBO Guide". http://www.iconcorpfin.co.uk/WhatWeDo/MBOsMBIs/WhatWeDo/MBOGuide.htm.
4. ↑ "Structuring a venture capital deal". http://www.tomorrowsleaders.com/A5569D/icaew/content.nsf/DocumentLookup/ICAEWFIN0112/$file/FM12+Finance.pdf.

## External links

* Envy Ratio
* Envy ratio in EVCA.com

{{Navbox

| name = Private equity and venture capital

| state = autocollapse | title = [[Finance:Private equitPrivate equity and venture capital

| image =
| bodyclass = hlist

| group1 = Basic investment types | list1 =

* Buyout
* Venture
* Mezzanine
* Growth
* Secondaries
* Equity co-investment

| group2 = History | list2 =

* History of private equity and venture capital
* Early history of private equity
* Private equity in the 1980s
* Private equity in the 1990s
* Private equity in the 2000s

| group3 = Terms and concepts

| list3 =

Buyout|

* Financial sponsor
* Management buyout
* Divisional buyout
* Buy–sell agreement
* Leveraged recapitalization
* Dividend recapitalization

|

Venture|

* Angel investor
* Business incubator
* Post-money valuation
* Pre-money valuation
* Seed money
* Startup company
* Venture capital financing
* Venture debt
* Venture round

Structure|

* Private equity firms and funds
* Limited partnership
* Limited liability company
* Carried interest
* Management fee
* Publicly traded private equity
* Business Development Company
* Venture capital trust
* Private investment in public equity (PIPE)
* Pledge fund

| group4 = Investors | list4 =

* Corporations
* Institutional investors
* Pension funds
* Insurance companies
* Fund of funds
* Endowments
* Foundations
* Investment banks
* Merchant banks
* Commercial banks
* High-net-worth individuals
* Family offices
* Sovereign wealth funds
* Crowdfunding

| group5 = Related financial terms | list5 =

* AUM
* Cap table
* Capital call
* Capital commitment
* Capital structure
* Distribution waterfall
* EBITDA
* Envy ratio
* High-yield debt
* IPO
* IRR
* Leverage
* Liquidation preference
* M&A
* PME
* Taxation of private equity and hedge funds
* Undercapitalization
* Vintage year

| below =

* Private equity and venture capital investors
* Private equity firms
* Venture capital firms
* Angel investors
* Portfolio companies

0.00

(0 votes)

Original source: https://en.wikipedia.org/wiki/Envy ratio. Read more

|

Retrieved from "https://handwiki.org/wiki/index.php?title=Finance:Envy_ratio&oldid=3316313"