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what is sweet equity share?

Answer Posted / daalmans llb

Sweet equity is mostly found with Private equity managers and is always involved with normal and preference shares or loans which have a fixed interest. This way the managers get rewarded for making a higher Return on Investment. After the fixed percentages are paid all the extra ROI comes to the normal shares. An example can show how it works:

PE managers have all the normal shares, nominal value 20.000
PE firm places preference shares with ROI of 6% for a value of 0.98 million. (normally this is much higher)

If the ROI on all funds is 10% the total ROI will be 100.000. The PE house gets 0.06 x 980.000 = approx 60.000.
The PE manager will get the other 40.000. With an initial investment of 20.000 het gets a ROI of 200%. Thats sweet (equity)

In Holland there is special tax legislation on this topic. I'm writing my LLM thesis on the subject.

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