PE, VC, M&A

Question 1

Private Equity

Answer 1

Asset class of equity investment in private firms.

Question 2

Private capital

Answer 2

Capital supporting any long-term illiquid investment strategy.

Question 3

Venture capital

Answer 3

Minority investing in early and development-stage firms.

Question 4

PIPE transaction

Answer 4

Private Equity in Public Equity

Question 5

Buyout

Answer 5

Controlling interest in firms with an eye towards later selling them or taking them public.

Question 6

SPV

Answer 6

Special Purpose Vehicle

Question 7

LPA

Answer 7

Limited Partnership Agreement

Question 8

LPAC

Answer 8

LP Advisory Committee

Question 9

LBO

Answer 9

Leveraged Buyout

Question 10

MBO

Answer 10

Management Buyout

Question 11

MBI

Answer 11

Management Buy-In

Question 12

IBO

Answer 12

International Buyout

Question 13

NDA

Answer 13

Non-Disclosure Agreement
Allows exchange on private info

Question 14

CIM

Answer 14

Confidential Information Memorandum

Question 15

FIM

Answer 15

Final Investment Memorandum

Question 16

VDD

Answer 16

Vendor Due Diligence

Question 17

IPO

Answer 17

Initial Public Offering
Stock exchange listing of the portfolio firm
* Initial offering often used to fund the business or repay LBO debt
* Full exit through follow-up offerings after a lock-up period of 3-12 months

Question 18

Safeguards of operating control

Answer 18

Voting, Approval & Information Rights

Question 19

Safeguards of company culture

Answer 19

Management Incentives (ESOP)

Question 20

Safeguards of Exit Timing

Answer 20

Buyback mechanism, drag-along rights

Question 21

Operating control

Answer 21

Board seat, additional voting rights, veto/approval
- To control divergence from strategic plans, operating and capital budgets,
debt and equity issuance, M&As and divestments, executive changes etc.
- Information rights to oversee accounts, important corporate actions

Question 22

Company culture

Answer 22

Executive stock ownership plan (ESOP), with shares
and options vesting on the PE firm’s exit
- To ensure the alignment of interests and investment time horizon
- To attract high-caliber talent to professionalize, drive next phase of growth

Question 23

ESOP

Answer 23

Executive Stock Ownership Plan

Question 24

Exit Timing

Answer 24

To allow the PE firm to exit if things go wrong
- Put option to sell equity stake back to the owners at a predetermined price
- Option to initiate a liquidity event such as an IPO
- Drag-along rights to force owners to participate in sale of the business

Question 25

Benefits of IPO

Answer 25

• Highest returns historically, allows further appreciation on retained equity
• Management support due to dispersed ownership, independence
• High-profile deals help PE firm reputation, follow-on fundraising
• IPO announcement can prompt bids from strategic and financial buyers

Question 26

IPO drawbacks

Answer 26

• failure at any stage has serious reputational consequences
• IPO underpricing , fixed costs 5-15% of capital raised, listing time and effort
• IPO market is notoriously cyclical, subject to market and macro shocks
• selecting the right exchange / geography can be complex

Question 27

Growth Equity

Answer 27

Later-stage, Pre-IPO firms. Private investment in public equity (PIPE) transaction with public firms. Minority interests. Like VC it’s collaborative.

Question 28

Alternative strategy

Answer 28

Distressed (rescue/turnaround, distressed debt), real Assets (real estate, infrastructure, natural resources).

Question 29

Limited Partner

Answer 29

Just bring money and they don’t want to deal with the management of the firm (250k to 25 m). Institutional investors, high net worth individual. Contributing to most of the capital of a firm. Provide capital when it is called (drawn down). Pension funds, banks, companies, family office, fund and funds, insurance. Receive capital distribution incl profit share upon successful exits.

Question 30

Minimal condition to protect the investors interests

Answer 30

• Cooperative creditor for ST financing solution,
• Voluntary bankruptcy to gain time and restructure,
• Capital injection to fund working capital requirements,
• Replace management.

Question 31

What is EBITDA a proxy for?

Answer 31

Operating cash flow.

Question 32

Pre-money valuation
A. is always higher than post-money valuation.
B. is always lower than post-money valuation.
C. is lower than post-money valuation if the venture makes progress after the
investment.
D. is lower than post-money valuation if entrepreneurs manage to negotiate a good
deal.

Answer 32

B. is always lower than post-money valuation.

Question 33

The key inputs of the venture capital valuation model are
A. investment amount, time-to-exit, exit value, hurdle rate.
B. investment amount, time-to-exit, exit value, riskless rate of return, financial risk
premium.
C. investment amount, number of rounds, exit value, hurdle rate.
D. investment amount, number of rounds, exit value, riskless rate of return, financial
risk premium.

Answer 33

A. investment amount, time-to-exit, exit value, hurdle rate.

Question 34

Startup investors include ‘no shop’ clauses in term sheets when they want to …

Answer 34

Prevent competition on the deal.

Question 35

Palooka Products negotiates a venture capital investment contract, receiving $5 million
today. The firm will seek an IPO in 5 years with an expected value of $50 million. If the
venture capital investor requires a 40% expected return, what share of Palooka Products’
equity does it accept in exchange for its $5 million investment?

Answer 35

54%

Question 36

Which of the following characteristics would represent an attractive LBO candidate?

Answer 36

Predictable cash flow and substantial assets.