Interviewing for a royalty fund - advice?
I'm interviewing for a royalty fund and am from a biotech background. What kind of modeling exercises should I expect? While I'm pretty familiar with PE modeling, I'm not too familiar with royalties and have heard they operate similar to private credit. Any tips on stuff to study?
Also is this a good space to go into right now given macro environment? What will exit opps be like? Royalties seem like a tough market especially for drugs, but I might be wrong.
Royalties are easy. Its a basic cash flow stream PV primarily sensitized against price x volume and tenor. If the PV is 100 you can think about advancing credit on an LTV basis, i.e., 40% LTV is 40 on the 100. Your P&I comes off the top so royalties are structurally senior to more traditional debt in a cash flow waterfall and should also have a priority lien on the royalty itself. There is a lot of room for creativity with structuring these credits. Some are for the life of the royalty, some have a defined maturity like a regular bond, and some terminate once a pre-determined IRR/MOIC target is hit. There is also a pretty good market for royalties, so monetizing your collateral is relatively straight forward in a default, or alternatively you just hold onto it and harvest the cash flows. The overhead requirement for managing royalties is practically zero and very scalable. There are some publicly traded aggregators of life science / pharma royalties out there and their investor presentations would probably be helpful for you. Royalty Pharma (RPRX) is an example.
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