Chap 21 Private Equity Funds

Question 1

Relationship PE firm, PE fund, underlying business enterprise

Answer 1

A PE firm serves as the general partner to a PE fund that invests money in underlying business enterprise

Question 2

Two roles of PE firms

Answer 2

general partner

investment advisor

Question 3

Five lifecycle stages of VC fund

Answer 3

Fund raising
Sourcing investment
Investing
Operation & management
Windup & liquidation

Question 4

Three phases of relationship between GPs and LPs in PE funds

Answer 4

Entry & establish
Build & harvest
Decline, exit or transition to new managers

Question 5

Define bad-leaver and good-leaver clauses in PE partnership

Answer 5

Bad-leaver:
a for clause removal of the GP that, if exercised, causes investments to be suspended until a new fund manager is elected or, in extreme, the fund is liquidated

Good-leaver:
enable investors to cease additional funding of the partnership with a vote requiring a qualified majority. “without-cause” clause provides a clear framework for shutting down a partnership

Question 6

Define club deal

Answer 6

When 2 or more LBO firms work together to share costs, present business plan and contribute capital to the deal

Question 7

Are non-public private equity investments subjected to less return volatility and more diversification than listed BCDs investments?

Answer 7

Not necessarily, private equity lacks liquid market price data, hence any empirical evidence is comparing liquid vs illiquid pricing data. Risk, return volatility & diversification indicators can be understated.

Question 8

Why PE fund of funds are better for new investors

Answer 8

They can address information gap, through due diligence, monitoring and restructuring

Question 9

Difference between traditional and toxic PIPE

Answer 9

Traditional PIPE - buy common stock at fixed price

Toxic PIPE - adjustable conversion terms that can generate higher shareholder dilution when there’s deteriorating prices in common stock

Question 10

Six differences between Hedge fund and PE fees

Answer 10

HF - front loaded
PE - collected at termination

HF - fees based on changes in net asset value (realized or unrealized)
PE - based on realized valuation of exited position

HF - collected regularly
PE - collected at time of event (exit)

HF - capital does not need to be returned to collect fee
PE - return capital before collecting fee

HF - no provision for clawback
PE - has clawback provision to return fees on prior profits when subsequent losses are made

HF - rarely has hurdle rate of return
PE - has hurdle rate, must exceed before the fund manager can collect fee