7a. Private Equity

Question 1

What are the sources of value creation in private equity?

Answer 1

1. The ability to reengineer the firm,
2. The ability to obtain debt financing on more favorable terms, and
3. Superior alignment of interests between management and private equity ownership.

Question 2

Relative to buyouts, venture capital portfolio companies are characterized by:

Answer 2

1. Unpredictable cash flows and product demand;
2. weak asset base and newer management teams;
3. less debt;
4. unclear risk and exit;
5. high demand for cash and working capital;
6. higher returns from a few highly successful firms;
7. limited capital market presence;
8. smaller subsequent funding; and general partner revenue primarily in the form of carried interest.

Question 3

What is the applicability of DCF Method for Buyout private equity funds? What about venture capital funds?

Answer 3

• Buyout - DCF used frequently
• Venture Cap - Rarely used(Cash flows uncertain)

Question 4

How is the Net IRR supposed to be used to compare peers?

Answer 4

The Net IRR should be benchmarked against a peer group of comparable private equity funds of the same vintage and strategy.