CAIA - 09 - Fund Manager Selection And Monitoring

Question 1

The ___ phase takes place at the fund level and focuses on financial performance and the fund manager’s structural and behavioral developments.

Answer 1

The monitoring phase takes place at the fund level and focuses on financial performance and the fund manager’s structural and behavioral developments.

Question 2

There are 2 issues related to selecting top quartile managers: ___ and ___them.

Answer 2

There are 2 issues related to selecting top quartile managers: identifying and accessing them.

Question 3

A solution to access top quartile managers is to use a ___ of ___.

Answer 3

A solution to access top quartile managers is to use a fund of funds.

Question 4

Performance persistence has ___ since the early 2000s

Answer 4

Performance persistence has decreased since the early 2000s

Question 5

There are three capabilities that support performance persistence for managers:

1. ___
2. ___ ___
3. ___ ___

Answer 5

There are three capabilities that support performance persistence for managers:

1. Networks
2. Domain Expertise
3. Operational Improvement

Question 6

___ ___is having specialized knowledge of a sector.

Answer 6

Domain expertise is having specialized knowledge of a sector.

Question 7

There are six key challenges to the performance persistence hypothesis:

1. ___ regarding “top performance” measure
2. Comparing ___to ___
3. ___or ___
4. ___fund size
5. ___market trends
6. Performance relates to different ___

Answer 7

There are six key challenges to the performance persistence hypothesis:

1. Ambiguity regarding “top performance” measure
2. Comparing apples to oranges
3. Luck or skill
4. Larger fund size
5. Secular market trends
6. Performance relates to different niches

Question 8

The relationship between PE fund size and performance is found to be ___. This means that larger funds have ___returns, but when funds become very large, their performance tends to ___.

Answer 8

The relationship between PE fund size and performance is found to be concave. This means that larger funds have higher returns, but when funds become very large, their performance tends to decline.

Question 9

When all market participants make money at the same time, performance is likely to be driven by a ___ trend.

Answer 9

When all market participants make money at the same time, performance is likely to be driven by a secular trend.

Question 10

In the post 2000 period, persistence among poorly performing funds was ___.

Answer 10

In the post 2000 period, persistence among poorly performing funds was strong.

Question 11

Classifying managers can be based on quality of ___ ___and duration of ___ ___.

Answer 11

Classifying managers can be based on quality of track record and duration of joint experience.

Question 12

A ___ ___team is one that generated top-quartile performance for all of its funds for at least 2 business cycles.

Answer 12

A blue chip team is one that generated top-quartile performance for all of its funds for at least 2 business cycles.

Question 13

An ___ team is one that generated top-quartile performance for most of its funds for at least 2 business cycles.

Answer 13

An established team is one that generated top-quartile performance for most of its funds for at least 2 business cycles.

Question 14

An ___ team is one with limited joint history, but with all the characteristics to become at least an established team.

Answer 14

An emerging team is one with limited joint history, but with all the characteristics to become at least an established team.

Question 15

A ___-___team is one where previous blue chip or established team that is no longer a top performer, having been through a restructuring after poor performance or operational issues; has regained the potential to re-emerge as established or blue chip.

Answer 15

A re-emerging team is one where previous blue chip or established team that is no longer a top performer, having been through a restructuring after poor performance or operational issues; has regained the potential to re-emerge as established or blue chip.

Question 16

Top management teams often (do/ do not) participate in fundraising

Answer 16

Top management teams often do not participate in fundraising

Question 17

A ___ investor is one that has a history of reneging on capital commitments

Answer 17

A defaulting investor is one that has a history of reneging on capital commitments

Question 18

Some fund managers prefer not to have investors who are required to disclose their investment data under the ___ of ___ ___.

Answer 18

Some fund managers prefer not to have investors who are required to disclose their investment data under the Freedom of Information Act.

Question 19

Empirically, private equity LPs (are/are not) found to engage in significant monitoring.

Answer 19

Empirically, private equity LPs are not found to engage in significant monitoring.

Question 20

Intensive monitoring with numerous interventions by LPs can ___ the fund manager’s responsibility. In extreme cases, LPs may be reclassified as ___and lose their ___ ___. PE investors should adopt a long-term view and limit intervention during the ___years of a fund.

Answer 20

Intensive monitoring with numerous interventions by LPs can dilute the fund manager’s responsibility. In extreme cases, LPs may be reclassified as GPs and lose their limited liability. PE investors should adopt a long-term view and limit intervention during the early years of a fund.

Question 21

Monitoring PE investments has two key objectives for LPs: to ___ ___and ensure ___ ___.

Answer 21

Monitoring PE investments has two key objectives for LPs: to control risk and ensure style discipline.

Question 22

Risks associated with ___ ___can be alleviated by incorporating investors’ risk profiles into LPAs at the outset and engaging in continuous monitoring and portfolio adjustment.

Answer 22

Risks associated with style drift can be alleviated by incorporating investors’ risk profiles into LPAs at the outset and engaging in continuous monitoring and portfolio adjustment.

Question 23

When endowment funds invest in a follow-on fund, the performance is ___ ___than those in which they do not invest.

Answer 23

When endowment funds invest in a follow-on fund, the performance is significantly better than those in which they do not invest.

Question 24

A strong relationship with fund managers helps LPs in their decisions to ___-___, improves the ___ ___process, can accelerate ___of ___, and can extend to ___ ___who establish their own funds.

Answer 24

A strong relationship with fund managers helps LPs in their decisions to re-up, improves the due diligence process, can accelerate finalization of contracts, and can extend to junior managers who establish their own funds.

Question 25

\_\_\_ refers to the degree in which investment details are disclosed to investors.

Answer 25

**Transparency** refers to the degree in which investment details are disclosed to investors.

Question 26

PE fund monitoring process typically involves a dual approach that uses both ___ reports and \_\_\_reports.

Answer 26

PE fund monitoring process typically involves a dual approach that uses both **formal** reports and **informal** reports.

Question 27

The standardized information that is part of ___ reporting enables regular monitoring for downside protection.

Answer 27

The standardized information that is part of **formal** reporting enables regular monitoring for downside protection.

Question 28

The specific information that is part of ___ reporting enables LPs to maximize returns.

Answer 28

The specific information that is part of **informal** reporting enables LPs to maximize returns.

Question 29

Much of the level of information provided in fund management reports is standardized by reporting and valuation guidelines issued by the ___ \_\_\_ ___ \_\_\_.

Answer 29

Much of the level of information provided in fund management reports is standardized by reporting and valuation guidelines issued by the **Institutional Limited Partners Association.**

Question 30

Collection and analysis of PE information can be extremely ___ and ___ \_\_\_.

Answer 30

Collection and analysis of PE information can be extremely **expensive** and **time consuming**.

Question 31

Due to ___ of \_\_\_in Private Equity, intermediaries are needed to verify information.

Answer 31

Due to **asymmetry** of **information** in Private Equity, intermediaries are needed to verify information.

Question 32

Due to the ___ nature of PE funds, investors cannot react quickly to new information.

Answer 32

Due to the **illiquid** nature of PE funds, investors cannot react quickly to new information.

Question 33

GPs sometimes prefer less transparency because it could enable competitors to ___ \_\_\_, access ___ \_\_\_, or jeopardize ___ \_\_\_. It may also increase the likelihood that LPs make a ___ \_\_\_. Finally, information can be damaging and affect a portfolio company's ___ \_\_\_.

Answer 33

GPs sometimes prefer less transparency because it could enable competitors to **copy strategies**, access **deal flow**, or jeopardize **negotiating positions**. It may also increase the likelihood that LPs make a **direct investment**. Finally, information can be damaging and affect a portfolio company's **trading ability**.

Question 34

Secondary transactions have increase because: 1. ___ \_\_\_and reallocation 2. ___ \_\_\_to PE assets 3. ___ \_\_\_for vintage years 4. High \_\_\_ 5. Countering ___ \_\_\_ 6. More \_\_\_experience 7. Many LPs use secondary \_\_\_-of-\_\_\_

Answer 34

Secondary transactions have increase because: 1. **Portfolio management** and reallocation 2. **Instant exposure** to PE assets 3. **Risk reduction** for vintage years 4. High **IRRs** 5. Countering **J-curve effect** 6. More **transaction** experience 7. Many LPs use secondary **fund**-of-**funds**

Question 35

A market for ___ \_\_\_has also recently developed, in which GPs sell portfolios of directly held portfolio companies to other managers.

Answer 35

A market for **synthetic secondaries** has also recently developed, in which GPs sell portfolios of directly held portfolio companies to other managers.

Question 36

The 2 primary reasons for secondary purchases: 1. Buying ___ assets 2. Less \_\_\_

Answer 36

The 2 primary reasons for secondary purchases: 1. Buying **distressed** assets 2. Less **uncertainty**

Question 37

The primary reasons for selling secondary assets are: 1. ___ \_\_\_decisions 2. Poor \_\_\_ 3. \_\_\_in returns 4. \_\_\_effect

Answer 37

The primary reasons for selling secondary assets are: 1. **Portfolio management** decisions 2. Poor **performance** 3. **Lock** in returns 4. **Denominator** effect

Question 38

The ___ \_\_\_refers to illiquid asset proportions in a portfolio increasing as the overall portfolio decreases, resulting in an unintentional over-allocation to illiquid investments.

Answer 38

The **denominator effect** refers to illiquid asset proportions in a portfolio increasing as the overall portfolio decreases, resulting in an unintentional over-allocation to illiquid investments.

Question 39

Secondary transactions for relatively small funds are typically \_\_\_. Large and complex funds tend to use an \_\_\_process.

Answer 39

Secondary transactions for relatively small funds are typically **negotiated**. Large and complex funds tend to use an **auction** process.

Question 40

The discount rate applied for secondary sales from lowest to highest type: 1. ___ funds 2. \_\_\_funds 3. \_\_\_funds

Answer 40

The discount rate applied for secondary sales from lowest to highest type: 1. **Mezzanine** funds 2. **Buyout** funds 3. **VC** funds

Question 41

There are a number of challenges associated with investing in the secondary PE market: 1. ___ \_\_\_ 2. ___ \_\_\_ 3. \_\_\_

Answer 41

There are a number of challenges associated with investing in the secondary PE market: 1. **Risk management** 2. **Small size** 3. **Liquidity**