WILDCAT CAPITAL INVESTORS: REAL ESTATE PRIVATE EQUITY Case Solution
Subject Matter:Financial Modeling, analysis of assumptions and office building property valuation.
Wildcat Capital Investor is looking for a proposed acquisition of an office building in suburban Chicago. Currently, the market for the properly seems to be good and the value of the property offered is also good given the initial purchase price paid by the investor. However, the market conditions are tight and changes in the key metrics of the real estate market can make this deal risky and increase the risks for the outside investors who would be providing equity for financing this transaction.
A set of the benchmark assumptions and the pro forma cash flow calculations have been performed by the MBA intern of Wildcat, Jessica Zaski which shows that the property would yield good returns over its three to five years holding period returns. However, in order to analyze these benchmark assumptions and compute the internal rates of return which could be earned by the limited partners and Wildcat, first of all the equity waterfall analysis has been performed.
Assuming a holding period of 3 years, the equity waterfall analysis has been completed as shown in the excel spreadsheet based upon the benchmark assumptions provided in the case. Based upon this analysis and the initial equity capital investments, the returns generated by the limited partners would be 119% and for Wildcat it would be 379% compared to the property level returns of 14%. This shows the true potential of the property and its market dynamics.
Furthermore, in order to analyze the benchmark assumptions in case if the market conditions change, the returns for the limited partners and Wildcat have been computed under three different scenarios as shown in the excel spreadsheet. In the first scenario, if North Shore Bank does not renew its lease and the property is vacant in year 4 and in year 5 a new tenant comes in, then the returns generated by the limited partners would be 94% and for Wildcat it would be 470% compared to the property level returns of 14%. .................
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