2: Private Equity Flashcards

0
Q

Bailey’s criteria for an appropriate investment benchmark

A
Unambiguous
Investible
Measurable
Specified in advance
Appropriate (for what is being measured)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
1
Q

RPVI (residual value to paid in ratio)

A

Measures how much of investor’s capital is still tied up in the fund.
RPVI = NAV / paid-in capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

TOPSCAN framework

A
Team building
Operations
Perspective
Skill building
Customer development
Analysis
Network
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Key performance drivers for PE

A

Selection of fund manager
Management of diversification
Management of capital commitments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the resources that VCs should assess in terms of their value proposition?

A
  • Brand resources
  • Cash resources
  • In house expertise
  • Network resources
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Benefits of FoF investing (4)

A

Diversification and intermediation
Resources and information
Selection skills and expertise
Incentives, oversight and agreements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Hurt money

A

GP’s contribution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Type 1 conflict

A

Conflict between firm’s and client’s interests. Mitigated by aligning interests

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Type 2 conflict

A

Firm favors one client to detriment of another. Worse than type 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Steps of PE investment process (6)

A
Portfolio objectives 
Portfolio design 
Liquidity management (over commit) 
Fund selection 
Monitoring
Actions and implementation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Bottom up

A

Find best manager

Drawback: can result in unbalanced/risky portfolio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Top down

A

Focus on sector or strategy

Drawback: strict allocations may be impractical to attain

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Advantages of core satellite

A

Diversification
Customization
Target risks
Focus on satellite portfolios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Effects of diversification

A

Lowers risk, return, skew and kurtosis

20-30 funds diversifies 80% of SD; 5 funds diversify 80% of K

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Market timing

A

Predict vintage years that will perform well

Issues: PE markets over react to news

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Cost averaging

A

Invest consistently in each fund type each vintage year (ie vintage year diversification)

16
Q

Fund manager selection process

A

Wish list
Deal sourcing
DD
Decision and commitment

17
Q

Drawback of IIRR

A

Assumes distributions reinvested at IIRR. Solution is to use modified IRR as it assumes a different investment rate and accounts for cost of capital

18
Q

Drawbacks of paid in ratios

A

Ignore TVM and requires estimates of NAV

19
Q

Potential actions for poorly performing funds

A
Do not commit to follow on funds
Negotiate for change
Petition for lower management fees
Threaten action against or terminate managers
Investor default
20
Q

Pro for using NAV

A

Investors prefer valuation based on current (not future) information

21
Q

Cons for NAV

A

Private funds cannot be divided up into underlying portfolio companies
Aggregate NAV does not reflect economic value

22
Q

NAV does not reflect economic value. why?

A
It doesn't account for:
Undrawn commitments 
Value add provided by managers
Future fund expenses 
Capital constraints
23
Q

Shortcomings of CAPM

A
Assumes the following:
No transaction costs
Fully informed buyers and sellers
Tradable assets 
Markets always in equilibrium
24
4 methods of estimating PE betas
1: Estimation based on quoted comps 2: Relative risk measures 3: bottom up beta 4: beta based on data corrected for staleness and smoothing (not recommended)
25
Why is bottom up beta better than simple regression
1: averaging regression betas reduces noise 2: estimates reflect current fund 3: leveraged betas calculated using current leverage Drawbacks: difficult to find quoted comps and assumptions needed for future cash flows
26
Sources of funding/liquidity for PE investors
1: follow on funding 2: liquidity lines 3: maturing treasury investments 4: realizations of other investments 5: sell off LP shares 6: distributions from PE fund 7: LP default
27
Estimation (CF projections)
Short term (3-6m) Based on current market conditions Data gathering and analysis
28
Forecasting (CF)
``` Medium term (1-2y) Based on specific market environment Quantitative (ie regression) modeling ```
29
Scenarios (CF)
``` Long term (2+yrs) Based on uncertain market environment ```
30
Automatic conversion
Pref stock automatically converted (based on trigger price) to common stock at IPO, if IPO price is high enough Higher automatic conversion hurdles better for investors
31
Bad leaver clause
- enables removal of GP with a simple majority vote (for cause) - suspends investments until replacement is found - in extreme situations, fund can be liquidated Sidey: In contrast to good leaver clauses, bad leaver clauses provide no entitlement to carried interest, but provide a vesting schedule so that part of the carried interest remains available as an incentive for the new manager
33
Good leaver clause
- "without cause" removal; allows LPs with a qualified majority (a vote of more than 75%) to stop funding a partnership - enables LP to end a failing partnership and is especially important for funds that do not have a track record - sometimes provide compensation in the form of management fees for a period of time
34
Traditional asset allocation techniques should not be used in private equity markets because:
1. there are issues with private equity data (such as scarcity of data and exposure to survivorship bias), 2. non-normality of private equity data, and 3. the implicit correlation that exists between private equity data and public equity data.