Envy ratio, in finance, is the ratio of the price paid by investors to that paid by the management team for their respective shares of the equity.
Overview
The ratio is used to consider an opportunity for a
management buyout
A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or individual. Management- and/or leveraged buyouts became noted phenomena of 19 ...
. Managers are often allowed to invest at a lower valuation to make their ownership possible and to create a personal financial incentive for them to approve the buyout and to work diligently towards the success of the investment. The envy ratio is somewhat similar to the concept of
financial leverage
In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment.
Financial leverage is named after a lever in physics, which amplifies a small input force into a greater output force. Financial leverag ...
; managers can increase returns on their investments by using other investors' money.
Basic formula
:
Source
Example
If
private equity
Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...
investors paid $500M for 80% of a company's equity, and a management team paid $60M for 20%, then ER=(500/0,8)/(60/0,2)=2.08x. This means that the investors paid for a share 2.08 times more than did the managers. The ratio demonstrates how generous institutional investors are to a management team—the higher the ratio is, the better is the deal for management.
As a rule of thumb, management should be expected to invest anywhere from six months to one year's gross salary to demonstrate commitment and have
some personal financial risk. In any transaction, the envy ratio is affected by how keen the investors are to do the deal; the competition they are facing; and economic factors.
See also
*
Management buy-in
A management buy-in (MBI) occurs when a manager or a management team from ''outside'' the company raises the necessary finance, buys it, and becomes the company's new management. A management buy-in team often competes with other purchasers in the ...
*
LBO
*
Takeover
In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are publicly listed, in contrast to the acquisi ...
*
Financial ratio
A financial ratio or accounting ratio states the relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall fin ...
References
External links
Envy RatioEnvy ratio in EVCA.com
{{Private equity and venture capital
Financial ratios
Private equity