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Private Equity > Lecture 1 > Flashcards

Lecture 1 Flashcards

1
Q

What is private equity ?

A

Equity capital that is not quoted on a public exchange

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2
Q

What is a venture capital fund ?

A

Financial intermediary = take investors’ capital and invest it directly in portfolio companies.

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3
Q

What are the 4 types of PE funds ?

A
  • Venture Capital
  • Mezzanine
  • Buyout
  • Distress
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4
Q

What is the maturity difference between PE and Hedge funds ?

A

PE has longer maturities (6 yrs vs few months)

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5
Q

What is the venture capital flow of funds ?

A
  1. Limited Partners (investors or LPs)
  2. VC Funds managed by general partners
  3. Portfolio companies
  4. Exits = Sale of portfolio companies to public markets (IPOs) or to other companies
    → back to 1.
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6
Q

What does it mean when a Venture Capital fund takes an active role ?

A

It monitors and helps the companies in his portfolio

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7
Q

What does it mean when a Venture capital fund only invests in private companies ?

A

This means that once the investments are made, the companies cannot be immediately traded on a public exchange:
• No simple market to market
• No liquidity

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8
Q

What is a Venture capital fund primary goal ?

A

Maximize his financial return by exiting investments through a sale or an initial public offering

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9
Q

Depending on expected time to exit, a venture capital fund investment can be classified in three categories, which ones ?

A
  • Early stage
  • Mid-stage
  • Late stage
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10
Q

What are buyout funds ?

A
  • They raise money from investors and acquire public companies with the purpose of making them private
  • Deals are partially funded by debt = leveraged buyouts
  • Buyout funds = largest category of private equity
  • Operate internationally and not locally like venture capital funds
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11
Q

Who uses a buy-and-build strategy and what is it ?

A

Buyout funds

Acquire and integrate businesses in a fragmented sector.

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12
Q

What are mezzanine funds ?

A

Participate to the financing of late stage venture capital investments or buyouts. Often financing comes in form of subordinated debt.

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13
Q

What are distress funds ?

A

Buyout firms that specialize in buyout of firms that have trouble meeting debt obligations

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14
Q

How do most PE firms organize their activity ?

A

Set up PE funds which assume the legal form of limited partnerships. The same PE firm typically runs multiple PE funds at the same time

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15
Q

What role do those PE firms assume ?

A

General Partners, responsible for making and managing the investments into private firms, which form the fund’s portfolio

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16
Q

What is the role of investors ?

A

Finance the PE funds and are the limited partners, because their liability is limited to the amount invested.

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17
Q

Who are the LP’s ?

A
  • Angel investors
  • Endowments
  • Pension funds
  • Corporations
  • Sovereign wealth funds
  • Intermediaries
18
Q

How is a PE partnership structured ?

A
  • When fund is raised, LP’s promise to provide a certain amounts of capital at given dates or at the GP’s discretion
  • Once committed capital has been raised, the fund has been closed
  • Fund invests capital into portfolio companies within the investment or commitment period
  • The fund can then make only follow-on investments in current portfolio companies
  • Some investments will prove fruitful through IPO or buyout exit
19
Q

How are the capital provisions called ?

A

Capital provisions = capital calls, drawdowns or takedowns

20
Q

How is the total promised capital called ?

A

Total promised capital = committed capital

21
Q

What are the two annual management fees ?

A
  • Level = amount/yr

* Basis = % of investment of committed capital or net invested capital

22
Q

What are lifetime fees ?

A

Total amount of fees paid over the lifetime of a fund

23
Q

What is an investment capital ?

A

= committed capital - lifetime fees

24
Q

What is an invested capital ?

A

= cost basis for investment capital of the fund that has already been deployed at a given point
or
part already paid from investment capital

25
Q

What is the net invested capital ?

A

= invested capital - cost basis of all exited and written-off investments
or
amount of money still under management

26
Q

What are carried interest ?

A

% of the realized fund profit, defined as cumulative distributions in excess of carry basis, that gets paid to GPs.

27
Q

What are the key terms in PE partnerships ?

A 
1. Compensation structure
       •	Management fees 
       •	Carried interest
2. Covenants
       •	Activities of the fund
       •	Activities of individual GPs
28
Q

What are contributed capital ?

A

= invested capital + management fees that have been paid to date

29
Q

What is a fully-invested and completed fund ?

A

Contributed capital = investment capital + lifetime fees = committed capital

30
Q

What are priority return ?

A

For some funds, some minimum rate of return must be achieved by LPs before GPs receive carreid interest
! More common among late-stage funds than early-stage funds

31
Q

What ar catch-ups ?

A

Once priority return threshold achieved, catch-up period during which GPs receive disproportionately high ratio of profit until the aggregate profit is split according to the carry rule.

32
Q

What are the differences between priority with catch-up and without catch-up ?

A
  • Priority with catch-up affects timing of CFs but not eventual aggregate profit split if sufficient exits (more common)
  • Priority without catch-up permanently affects eventual aggregate profit split
33
Q

What are the covenants on fund activities ?

A
  • Investment focus
  • Investment size
  • Co-investments across funds
  • Reinvestments of profit (often permitted but restricted
34
Q

What does investment focus mean ?

A 
The LPs want Gps to focus on their area of expertise
       •	Limits investment in asset class other than private portfolio companies
       •	Limits investment in sector/stage other than fund’s defined specialization
35
Q

What does investment size mean ?

A

GPs have incentive to place big bets and increase variance in fund returns → solution = limit size of a single investment

36
Q

What does co-investments across funds mean ?

A

• Later funds may be used to salvage investment gone away in earlier funds
• GPs may do this when raising another fund
→ Solution = require approval by LPs, co-investment y earlier fund, or by third party

37
Q

What are the covenants on GPs ?

A
  • No co-investment by GPs themselves

* Devotion to the fund

38
Q

What does it mean by co-investment by GPs themselves ?

A

LPs don’t want GPs to spend time on companies they’re personally invested with
→ Solution =? Require LPs’ approval, restrict investment size, timing and terms.

39
Q

What does the devotion to the fund mean ?

A

LPs want GPs to ve devoted to their fund
• Future fundraising activities are not allowed till sufficient amount of investment is made for current fund
• Sale of GPs’ interests not easily allowed
• Inclusion of new GP’s = restricted

40
Q

Can invested capital be higher than committed capital ?

A

Yes, it can by reinvesting the profit

Private Equity (10 decks)

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