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