Envy ratio
Encyclopedia
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. This metric is used when considering an opportunity for a management buyout
. Managers are often allowed to invest at 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, for managers can increase returns on their investments by using other investors's money.
investors paid $500M for 80% of a company's equity, and a management team paid $60M for 20%, then ER=(500/80)/(60/20)=2.08x. This means that 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 "skin in the game".
Management buyout
A management buyout is a form of acquisition where a company's existing managers acquire a large part or all of the company.- Overview :Management buyouts are similar in all major legal aspects to any other acquisition of a company...
. Managers are often allowed to invest at 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, for managers can increase returns on their investments by using other investors's money.
Basic formula
ER = (investment by investors / % of equity) / (investment by management / % of equity)Example
If private equityPrivate equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
investors paid $500M for 80% of a company's equity, and a management team paid $60M for 20%, then ER=(500/80)/(60/20)=2.08x. This means that 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 "skin in the game".