Table 1. Structure and function.

Simulated performance comparing an all-equity structure (using no debt financing); an RBO structure using a senior and junior debt tranche paying 5 and 8% annual coupon rates, respectively; and a second RBO structure with a single guaranteed senior tranche. The senior tranche is paid before the junior (mezzanine) tranche, which is paid before the equity holder. In the event that the fund defaults or fails to meet its debt obligations, the guarantor will pay the difference. Each structure acquires only preclinical compounds, with a target goal of reaching phase 3 within a maximum horizon of 11 years. Dashes indicate cases in which the corresponding type of financing and/or guarantee is not used. IRR, internal rate of return; ROE, return on equity.

Simulation resultsAll equity
(similar equity)
obligation (RBO)
RBO with guarantee
(no mezzanine)
Number of compounds
Preclinical or IND-enabling91616
Research impact
Number sold in phase
Number sold in phase
Capital ($ millions)230420420
Senior tranche ($ millions)105189
Junior tranche ($ millions)84
Equity tranche ($ millions)230231231
Guarantee ($ millions)100
Equity tranche performance
Equity tranche performance3.255.145.32
Average IRR26.7%N/AN/A
Average MIRR (0% financing)18.3%21.6%22.7%
Average annualized ROE11.6%14.7%15.4%
Probability (equity wiped out)1.3 bp0.52%0.34%
Probability (return on equity <0)8.0%6.2%5.1%
Probability (return on equity >10%)61.9%76.8%78.6%
Probability (return on equity >25%)2.2%10.4%11.0%
Debt tranches performance
Senior tranche: default probability, expected loss (bp)0.1, <0.1<0.1, <0.1
Junior tranche: default probability, expected loss (bp)50, 15
Guarantee performance
Probability (cost of guarantee >0)0.3%
Expected cost, 2% discount ($)65,000
No-arbitrage cost of guarantee ($)110,000