4.1 Private Equity Assets Flashcards
3 major categories of Private Equity
1) Venture capital - start ups
2) Growth equity - non controlling interest in successfully growing companies
3) Buyouts
From the investors perspective payouts to most PE Investments resemble? What does it mean?
Resemble payouts to long out-of-the-money call positions.
This reflecting PE’s frequent losses and sporadic large gains (particularly in venture capital)
Equity kicker?
Right/option to purchase equity stock of the companing
Mezzanine debt?
Debt with an option to convert debt to ownership
Distressed debt?
2 types:
1) Debt in troubled issuers (may go bankrupt, etc)
2) Debt in price distressed assets (selling for significantly below the face value)
Vultures?
Distressed debt investors
Differences between Hedge fund and PE investment strategy regarding distressed debt?
Hedge fund investors aim to earn short-term profits from event-driven/ distressed strategies, the results of which are based on resolution of bankruptcy proceedings.
Leveraged loan?
Loan to companies with bad credit rating or a lot of debt already
Typical size of VC investments & value of companies?
5m average investment
10-100m average value of company
Return expectations of VC investors?
10-20x
Typical Growth equity investment size and requirements?
25m typical investment
At least 100m in size (25-50m annual revenue)
So substantial control by PE investors
Venture Capitalist’s involvement in investment?
Act as advisers or as directors on the company’s board, set goals, and can hire and fire key managers
Provide access to service providers (e.g., accountants, lawyers, consultants, investment bankers) and, to other businesses that may buy the start-up company’s product.
Cash burn rate
Rate at which the company uses up their supplies of cash
How VCs attain ownership in start ups?
By receiving preferred stock or equity linked securities
Why do VCs invest in Convertible preferred stocks?
Provides the right to convert preferred shares to common shares = an implicit call option to share in the upside.
What are debentures and convertible notes (bonds)
Debt securities that are not secured by collateral and may have the right to change to equity
What is follow on financing?
Financing from existing investors
Which option investment resembles a VC investment?
Buying a call option. The investment is the premium paid
What is a 20-bagger?
The investment payout is 20x initial investment
VC Investments skew amd kurtosis?
Both large positive
Prudent person standard (prudent man rule)
That fiduciaries should exercise the same care in investing as they would do for their own portfolio
What did the 1979 rule clarify in relation to the VC investments?
That they should be considered on a portfolio basis = high risk VC investments are allowed however, if they are diversified
5 stages of VC financing
1) angel
2) seed capital
3) first stage/start up/ early stage
4) second/late stage/expansion VC
5) mezzanine VC
Angel investment stage key characteristics?
- No business yet
- test the idea, MVP created, alpha testing (adherence to requirements)
- Team is assembled
- little financing (50-500k)