How Carried Interest Changes an Investor’s Target Purchase Price

Summary

The document asks for a verbal explanation of how carried interest affects the purchase price consistent with an investor’s target net return multiple. It presents an example involving a stated payoff, a target return multiple, and a manager’s percentage share of profits. The proposed carry multiple adjusts the target multiple for the manager’s share, and the example applies that factor to the payoff to obtain a maximum purchase price.

The text itself contains no answer or derivation, so it does not establish the assumptions behind the formula. In particular, it does not explain how the manager’s carry is calculated, whether it applies only above invested capital, or how fees and timing affect the result. The example is therefore a useful prompt about the relationship between carried interest and investor proceeds, but not a complete valuation method. Any application would need to specify the fund’s carry terms and confirm the algebra against those terms.

Key ideas

• Carried interest reduces the investor’s share of an investment’s profit.
• The example adjusts a target net return multiple to derive a carry multiple.
• Applying that factor to the payoff gives the example’s implied purchase price.
• The document asks for a derivation but provides no explanation or answer.
• Carry terms and fee assumptions must be specified before applying the calculation.

Tags

# Logic behind calculating a Carry Multiple associated with Startup Valuation


# Logic behind calculating a Carry Multiple associated with Startup Valuation












I'm reading a book called "The #1 Guide to Startup Valuation: How to value your startup in 12 easy steps" (p. 22-23) by Joachim Blazer.

As one of the building blocks, namely "Return", the Carry Multiple is calculated.

There it says literally:

> Assume that the investor buys shares with a payoff of 100. And that he wants to make a net return multiple of 1.6. And that he pays his investment manager (often in addition to fees) 20% of his profit in carried interest. How much does he want to pay for this investment? If you only look at the carry: 100 / ((1.6 – 20%) / (1.6 – 20% * 1.6)) = 100 / (1.4 / 1.3) = 100 / 1.1 = 91. Or a carry multiple of: (1.6 – 20%) / (1.6 – 20% * 1.6) = 1.4 / 1.3 = 1.1.

What I don't understand is the logic behind the calculation of the carry multiple. Why is the equation for the multiple written like that, what is the explanation behind this equation? So to say, I search for a verbal explanation of the equation instead of the given mathematical explanation.

I appreciate any help!

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