Anyone built a financial model that mimics the Stanford Primer's returns?

October 21, 2020

by a searcher from Harvard University - Harvard Business School in Plano, TX, USA

I ran into a few problems trying to match their results.
1) In Structure 2, why do the principals not own more than 30% of common stock if they paid off the entire portion of redeemable preferred equity (RPE)? If RPE was 35% of equity, and is now zero, then the principals should own 30%/(100% - 35%) = 46% of common stock at the time of the sale. What am I missing?
2) What are the interest rates and terms of the loans you used? With Senior Debt @ 4% over 7y and Seller Debt @ 6% over 7y, I get a negative FCF in year 1.

Happy to dive through and discuss the numbers on a call.

Reply by a searcher
from Harvard University in Plano, TX, USA

Thanks all for the advice. Tarun and Johnson helped me discover the reason for the discrepancy in the fine print. Half the preferred stock is redeemable and non-participating (Series A). This acts just like a lone but is not convertible to common even if it is not redeemed prior to a sale. The other half of the preferred stock is participating (Series B), and it participates as if it was **all** of the preferred stock. So redeeming the Series A stock early merely reduces the interest burden on the business but doesn't grant the principals any more equity.

I'll post a link to a google drive with the model soon.

Feel free to use this model, just make a copy of it to your own drive. It is built to allow different interest rates, loan terms, and any of the scenarios listed in the search fund primer. The numbers don't match theirs exactly but they are pretty close. The 2 sheets let you see the difference of paying the redeemable down first or the loans. If the loan covenants allow it, it is always better to pay the redeemable first since it has a higher interest rate and it will increase investor IRR and therefore the % of common that you receive.

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