What Does
Envy Ratio Mean?
Envy ratio is the ratio between the price paid by private equity investors and the price paid by management for their respective shareholding interest. It is used in a leveraged buyout to show how much the management spent compared to the investing company, in proportion to the value of the equity that each party received. It works to show which group paid more per share.
It is calculated as follows:
Envy Ratio = (investment by investors / % of equity) / (investment by management / % of equity)
Divestopedia Explains Envy Ratio
The success of a buyout depends on the quality and commitment of the management. Envy ratio is a way to assess and divide surplus of the value created in a private equity buyout.
Management acquires its shareholding interest at a lower target valuation price than that paid by the private equity investor. This is a part of the management equity incentive scheme in a buyout transaction. Management acquires a larger stake, which enables them to multiply their initial equity investment. This is achieved by issuing specific preferred shares or shares with different share premiums referred to as sweet equity. This is to create financial incentive for the management to approve the buyout and work harder to make the investment successful.
A higher envy ratio means a better deal for the management. The amount of sweet equity offered is dependent upon the keenness of the investors to complete the deal, the competition that they are facing, and other economic factors.
For example, if in a transaction the management paid 3 million dollars while investors paid 40 million and the share of management in equity is 20% while that of other investors is 80%, then the envy ratio would be calculated as:
Envy Ratio = (investment by investors / % of equity) / (investment by management / % of equity)
(40/80%) / (3/20%) = 3.33 (Envy Ratio)