Lecture 2

Question 1

What are the three main points while finding a deal ?

Answer 1

• Where to look – Specialization vs Diversification
• Attracting vs finding deals
• Entrepreneur’s perspective

Question 2

On what do early stage VC focus on ?

Answer 2

Areas undergoing structural change (e.g. IT, life sciences)

Question 3

What do LBOs target firms seek ?

Answer 3

Generational transition or major reorganization

Question 4

What do LPs like ?

Answer 4

Specialization because changing investment focus is a bad sign for them

Question 5

What do some think about diversification ?

Answer 5

It is good for reducing idiosyncratic risk, but it can be done by individual investors

Question 6

What do early stage VCs firms tend to do and why ?

Answer 6

Specialize in order to share info with other VCs

→ In order to form networks and pool information to better identify potentially good deals

Question 7

Where does specialization occur ?

Answer 7

Both in terms of sector of the funded firms and location

Question 8

What is key to attracting LPs and financing ?

Answer 8

Reputation building as a specialist in a sector or location

Question 9

Where does specialization allow economies of time?

Answer 9

In evaluating deals

Question 10

What is the scarcest resource in PE firms ?

Answer 10

Time because PE firms rely on limited personnel

Question 11

What is the drawback of specialization ?

Answer 11

Too much exposure to a sector makes a firm vulnerable to market flucturations

Question 12

Because deals come in waves, what should a PE look for ?

Answer 12

Look for opportunities in new areas, before investment in current sectors dries up
→ Larg VC firms prefer to diversify

Question 13

What are the differences between top PE firms and smaller PE firms in finding deals ?

Answer 13

• Top PE firms get contacted by top entrepreneurs
• Smaller firms can hope for deals in niche markets
• If not many entrepreneurs, it will have to find deals by itself

Question 14

What are the characteristics for proprietary deals ?

Answer 14

• Entrepreneur approaches directly GP
• To attract GP’s interest, entrepreneur more comfortable with releasing private information on firm’s prospects
• Such deals not contested and take less time for GP to process
• Often corporation between PE
• Reputation risk to GPs is higher

Question 15

What are the two deal format and their characteristics ?

Answer 15

• Auction
o Bidders compete to acquire the target firm
o Especially relevant for buyout funds
• Private deals
o Proprietary deals
o Proactive deal searching

Question 16

What are the effects of an auction for entrepreneurs ?

Answer 16

• Generate high price competition

* Make firm info available to competitors → solution = tiered auctions

Question 17

What is the effect of a proprietary private deal for an entrepreneur ?

Answer 17

It gives the entrepreneur the right to choose a specialist GP to lead the deal.

Question 18

What are the effects of an auction for GPs ?

Answer 18

• Easy deals to find and participate
• Time consuming
• Involve high price competition

Question 19

What are the effects of private deals for GPs ?

Answer 19

• Not often contested
• Facilitate reciprocal invitations to deals among GPs
• Protect GP’s due diligence investment
• Involve more reputational risk for GP

Question 20

What are the characteristics of a proprietary deal ?

Answer 20

• Easier disclosure of info to GP
• Vigilance against overconfident entrepreneurs
• Not always available to non-specialist PE firms

Question 21

What are the characteristics of a proactive searching ?

Answer 21

• Necessary tool to allocate portfolio

* Requires more time and money

Question 22

What are the different steps while making searchings for deals ?

Answer 22

•	Decide sectors and locations 
•	Make preliminary deal search
      o	Roadshows
      o	Industry journals
      o	Personal relationships
•	Active deal making
      o	Dial for deals
      o	intermediaries

Question 23

What are the different intermediaries for PE information ?

Answer 23

•	Friends
•	Angels
•	Commercial bankers
•	Investment bankers
•	Stock brokers
•	Accountants, lawyers
•	Business development officers 
! each has its own incentives to lie

Question 24

How should an entrepreneur approach a PE firm ?

Answer 24

• Select GP partner
• Attract preliminary interest
• Make a presentation of firm
• Negotiate a deal

Question 25

What are the characteristics of cycles ?

Answer 25

• = widespread phenomenon in PE investing
• Sometimes periods of easier fundraising
• Besides market wide cycles, some isolated to specific sectors or regions
• Not predictable how long it will last or if there is a new one coming

Question 26

Why do cycles happen ?

Answer 26

• Normally supply = demand for PE financing
• Often supply limited by regulatory reasons
• Takes time to build a reputation as good PE firm and find LPs
• Supply responds sluggishly to demand shocks → produces cycles

Question 27

What does a misjudging demand shock cause ?

Answer 27

An overshooting in PE supply

Question 28

What are the implications of cycles on fund policy ?

Answer 28

• Quality of financing differs over the cycle
• Usually, investment made at peak of financing cycles yield on average lower returns
→ financing is hard; PE firm only undertakes best PE projects available
→ Implication : PE often raise financing with view to invest later, at more favourable times