Module 50.1: Private Equity and Real Estate

Question 1

What are the 9 differences between alternative and traditional investments?

Answer 1

1) Less liquidity of asset sheld
2) more specialization by managers
3) less regulation and transparency
4) more problematic and available historical data
5) different legal isses
6) low correlations of returns
7) high fees
8) restrictions on redemptions
9) relatively more concentrated portfolios

Question 2

What is an LBO?

Answer 2

leveraged buy out - acquisition funded primarily through debt.

Question 3

What is management buyouts and management buy in’s related to LBO’s

Answer 3

management buy outs - existing management is involved

management buy in - external management team will replace the existing

Question 4

What is it called when a public company receives a private investment?

Answer 4

private investment in public equities (PIPEs).

Question 5

What are the three phases of formative stage investing for venture capitalists?

Answer 5

1) angel investing - very early in firm life “idea” stage.
2) seed stage - investments made for product development, marketing, research.
3) early stage - fund initial commercial production and sales

Question 6

What is the later stage investing for venture capitalists?

Answer 6

company has already started production and sales and is operating as a commercial entity.

Question 7

What is mezzanine-stage financing?

Answer 7

refers to capital provided to prepare the firm for IPO.

Question 8

For private equity, are the management fees based on committed capital or invested capital?

Answer 8

management fees are based off of committed capital

Question 9

What is the incentive fee structure? what is the clawback provision?

Answer 9

20% of profits typically, clawback is a provision that returns capital to the investors if the incentive fees end up being greater than 20%, which typically happens when returns are high and decline later.

Question 10

What are the five potential exit plans for portfolio companies?

Answer 10

1) trade sale - sell company to a competitor or strategic buyer
2) IPO - sell all or some shares to the market
3) recap - issue debt to dividend to equity, or vice versa
4) secondary sale - sell to another PE firm
5) write-off / liquidation - reassess and adjust losses