Lecture 18 Flashcards
What’s the basic equation?
Capital + talents & ideas = venture
who is a general partner in a PE firm?
The Private Equity Firm itself
who’s the limited partners?
investors (pensions, sovereign wealth funds, FOF, insurance companies, endowments, foundations, high net worths
Who makes up private equity fund itself?
PE firm and limited partners
what are two aspects of VC?
Investments in early stage companies; account for a majority of investments by number of deals
what is the committed capital of a fund?
total amount of capital promised by LP’s over lifetime of fund
when is a fund said to be closed?
when the GP has raised the full amount of committed capital and is ready to start investing
what is the investment period or commitment period?
typical fund will invest in portfolio companies and drawn down capital over its first five years; after investment period is over, can make follow-on investments in current portfolio companies
what does a PE firm serve as to a fund?
General Partner to a PE fund(s)
Define a VC fund more specifically?
limited partnership with a finite lifetime (usually ten years plus optional extensions of a few years) between GP and investors (limited partners)
PE funds are structured as what legal entities and governed by what?
structured as a limited partnership and governed by the limited partnership agreement (LPA)
what does the LPA specify?
key terms of partnership
what is a management fee?
annual payment to GP for PE firms investment operations (usually 1-2% of committed capital per year)
What is the formula for investment capital?
committed capital - total management fee
what is carried interest?
share of profits of funds investments, paid to fund’s management company as performance incentive
what is a hurdle rate or preferred return?
minimum rate of return, which must be achieved before fund manager can recieve any carried interest payments
what is a catch up?
when there is a preferred return, GP can demand a catch up before the 80:20 split of profit
are PE funds intended to be transferred or traded?
no - if LP wants to sell his stake, he needs the consent of GP and other LP’s
what are some examples of covenants on GP?
restrictions on size of investment in any one firm; restrictions on debt use; restrictions on investments in other asset classes
