Courts Asia

[specuvestor]

bad deal to buy from a private equity, challenger makes more sense

Assume required return of market is 10%, so if an asset book is $10 throws out $1 cashflow ie $1/$10= 10%, the asset is worth $10.

A PE takes $5 out and leverage it by $5 means book is now only $5 but asset still throws out $1 cashflow means $1/$5= 20% return so you would pay 2X book ie $10 for it.

In both cases above, an "investor" is indifferent to 10% return.

Hence this is how financial engineering works and why have to be careful buying from PE. Somebody is paying for the $5 that the PE took out before IPO. That's why value investing looks at unleverage ROIC.