Sweet equity & envy ratio

Sweet equity is management’s incentive participation in a buyout’s equity upside, often through ordinary shares behind preferred capital or loans. “Envy ratio” has different conventions; the example here compares entry investment per percentage point of ordinary equity, not realized returns.

Sweet equity & envy ratio in round numbers

Hypothetical, at entry in US$ millions: the sponsor invests 80, comprising 16 in ordinary shares and 64 in preferred capital, and owns 80% of the ordinary shares. Management invests 4 in ordinary shares and owns the other 20%. Assume no other ordinary shares or dilutive awards. Total investment per ordinary-equity percentage point is 80 ÷ 80 = 1 for the sponsor and 4 ÷ 20 = 0.2 for management. Under this entry-investment convention, the envy ratio is 1 ÷ 0.2 = exactly 5x. It is not a 5x return or a fivefold discount on identical shares.

Entry-investment convention; US$m per ordinary-equity percentage point
firstSponsor: 80 ÷ 80 = 1
÷Management: 4 ÷ 20 = 0.2
=5x entry envy ratio

Source: SLOVCA: entry-investment envy-ratio formula · ECI Partners: a return-based envy-ratio usage.

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