Self-funded deal: average IRR for investors

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January 07, 2020

by a searcher from INSEAD in Madrid, EspaƱa

Hi all,

Im currently developing my investor network for a potential acquisition in the manufacturing space in Europe, via a self-funded search. Target company ranges 300k to 700k EBITDA with pretty stable earnings. Acquisition is intended to be leveraged, with roughly ~50% bank debt, ~20% seller financing, ~30% equity.

In talks with investors I have presented an initial Memorandum offering IRRs of 8-10% with preferred return, given the average returns on senior debt and seller notes I was aware of. This IRR range has been too low for many investors (most not savvy in this type of investment) at first impression - I was being asked how this could be so low if, for instance, PE returns with lower risk can range 12-20% IRRs. In general, perception was that the risk was too high for such a return.

Would love to get your experience/ thoughts on the market IRR ranges for this investment type, to update or confirm my pitch to investors.
Thank you.

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Reply by a searcher
from Ivey Business School at Western University in Toronto, ON, Canada
I would say the expected return would have to be in the 12-20% range similar to PE funds. I think the type of business and its stability/growth potential matter as well. For investors this is equivalent to putting money into PE because the business risk is similar but its not diversified (1 company) and the searchers are generally not as experienced. If you're buying a good company though and leveraging it 50%, 15-20% IRR should not be hard to achieve. The company itself should be able to produce 15-20% ROIC. If 50% is leveraged at 6-8%, the IRR should be even higher than 20%.
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Reply by a searcher
from Case Western Reserve University in Cleveland, OH, USA
I recently drafted an informal document to be used with investors that I shared with my advisor. The feedback from my advisor was to target a 20-25% return for investors. Also, he suggested I make it explicit that I expect to deliver an extraordinary return and share disproportionately in the return beyond an agreed base, say 8%.
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