medium · Investment Banking

In an LBO, if the Sponsor's Equity earns a 25% IRR over 5 years, and the Management team is granted a 'promote' of 10% of the total exit proceeds after the sponsor's capital is returned, what describes the management's return compared to the sponsor's?

1. Management's return is significantly higher due to the leverage provided by the 'promote' structure.
2. The returns are identical since every party is aligned on the same exit price target.
3. Management's return is legally capped at the same level as the sponsor's IRR by the agreement.
4. Management's return is lower overall because they simply don't have enough capital at risk in the deal.

Sign up free to see the explanation and track your rank →