33: Private Equity Flashcards
Used to prevent unauthorized changes in business plans
Required approvals
Ensures that anytime an acquirer obtains control of the company, the acquirer must extend the acquisition offer to all shareholders, including the firm’s management
Tag-along, drag-along clauses
Drag along rights prevent minority investors from:
vetoing a sale
Ensures that the private equity firm maintains control if the portfolio company experiences a major event such as a takeover, restructuring, initial public offering (IPO), bankruptcy, or liquidation.
Board representation clause
The two main forms of Private Equity investments are:
Venture Capital
&
Buyout
Compared to Buyout targets, companies financed with Venture capital are typically less ___
VC is less mature
emphasis is on revenue growth
Buyouts focus on EBIT or EBITDA growth with stable earnings growth
Venture Capital:
* Funded through: _
* little or no: _
* measurement of _, is challenging due to short operating history
Venture Capital:
* Funded through: equity
* little or no: debt
* measurement of risk, is challenging due to short operating history
In the early years of a fund, measures of return are_, and produce:
return measures are of little relevance because the fees drag down the returns, producing the J-curve effect
Two main measure of performance for PE, are:
IRR
Return Multiples
When Carried Interest is paid on a deal by deal basis, who receives payments? & when?
General Partner receives carried interest payments when the fund’s IRR exceeds the hurdle rate
Deal by deal waterfalls allow earlier distribution of:
(American Waterfall)
Carried Interest to the GP after each individual deal
not as great for LPs
Carried Interest is not paid until GP:
generates realized & unrealized returns, greater than the committed capital
A clawback provision requires managers to payback previous performance fees if:
the fund performance declines later
Ratchet is a mechanism that determines the allocation of equity between:
Shareholders & management team of PE company
The sources of value creation in PE include:
- Re-engineering the portfolio company
- Obtaining favorable debt financing
- Superior alignment of interests between management & PE ownership
