Investments in Private Capital

Question 1

Management buyouts

Answer 1

Company’s existing management team participates in purchase

Question 2

Management buy-ins

Answer 2

PE manager replaces portfolio company’s management team

Question 3

[VC] Formative stage

Answer 3

1) Pre-seed / Angel investing: Ideation stage - used for business plans and market potential
2) Seed-stage: Product development, marketing, market research (Usually VC capital comes in)
3) Early-stage: Leads up to production and sales

Question 4

[VC] Later-stage financing

Answer 4

Support initial growth, expansion, product improvement, marketing

Question 5

[VC] Mezzanine-stage financing

Answer 5

Capital provided to prepare firm for IPO

Question 6

Minority equity investing

Answer 6

Less-than controlling interest in public companies that are looking for capital (through PIPE)

Question 7

[Exit Strat] Trade Sale

Answer 7

Sell portion of private company to strategic buyer
- Usually receive premium
- Faster than IPO with lower transaction costs

Question 8

[Exit Strat] Public listing

Answer 8

IPO / Direct listing / Special purpose acquisition company

• Direct listing: Stock is floated on public market without underwriters
• SPAC: Entity set up to raise capital to acquire unspecified company (must be done in set time)

Question 9

SPAC Adv / Disadv

Answer 9

Advantages
1) Flexible vs. IPO
2) Reduce uncertainty about valuation of portfolio company

Disadvantages
1) Dilutive effects from SPAC shares
2) Spread between SPAC and value of company
3) Stockholder overhang - SPAC holders selling after acquisition announced

Question 10

Recapitalization

Answer 10

Debt issued to fund dividend distribution

Question 11

Secondary sale

Answer 11

Sell to another PE group

Question 12

Write-off / Liquidation

Answer 12

Take losses from an unsuccessful investment in portfolio company

Question 13

Direct lending

Answer 13

Loands made directly to private companies without an intermediary

Question 14

Leveraged loan

Answer 14

Loan made by private debt fund using borrowed money

Question 15

Venture debt

Answer 15

VC backed start-up or early-stage firm debts (preferred by founders of younger companies)

Question 16

Mezzanine debt

Answer 16

Private debt subordinated to senior secured debt - may have conversion rights, warrants

Question 17

Distressed debt

Answer 17

Debt of mature companies in financial trouble
- Fund actively resturctures existing debt
- Usually identifies otherwise good companies with cash flow problems

Question 18

Unitrance debt

Answer 18

Combines different classes of debt into single loan with interest rate

Question 19

Interest rate of private debt

Answer 19

• Usually higher than traditional bonds
• Set relative to reference rate such as SOFR

Question 20

Benefits of private capital investments

Answer 20

• Low correlation with public market index: diversification
• Vintage year: year the fund made the first investment
• Diversifying vintage years is crucial as economic cycles decide gains from investments