Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Key Facts > Private Equity > Flashcards

Private Equity Flashcards

PE and VC

1
Q

Give 3 sources of value for Private Equity

A
  1. Re-engineer Portfolio Company to operate more efficiently
  2. Obtain more favourable debt finance
  3. Control mechanisms to align interests of management with Private equity owners
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Explain how private equity re-engineers a portfolio company

A
  1. Many private equity firms have experienced industry CEO’s and CFO’s
  2. They use expertise in reorganisation and consulting and contacts to improve portfolio company’s prospects
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Using MM explain how private equity firms get better access to debt markets than public companies?

A
  1. Using Modigliani-Miller - debt increases firm value (lowers WACC) due to after tax value of tax shield. If ROE > ROA
  2. Eventually increasing Leverage increases risk premiums and offsets value of interest tax shield.

PE firms reduce risk premiums of Leverage due to:

(A) Direct control over management
(B) Good reputation gained through previous transactions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Using Jensens FCF hypothesis explain how private equity firms get better access to debt markets than public companies?

A
  1. Firms with high FCF and large capital budgets tend to invest in projects that destroy value (negative NPV’s)
  2. Increased leverage means increased debt service costs
  3. Increased debt payments keep management on their toes and increases scrutiny of new projects
  4. Increased debt payments reduce discretionary use of funds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Which segments of debt markets help Private Equity obtain better terms for debt.

A
  1. Syndicated loans
  2. Debt issuance as CLO.
  3. High yield bonds risk transfer due to CDO’s
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Give 8 control mechanisms that better align management with owners.
How do these controls increase value?

A
  1. Board representation - at least for material events
  2. Required approvals - decisions of strategic importance
  3. Compensation of managers
  4. Non-compete clauses of founders and management
  5. Tag-along, drag along - new shares or acquirer offers made to all including management
  6. Earn-outs - ties equity valuation and price paid to future performance
  7. Priority in claims and distributions e. g. dividends
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a ratchet mechanism?

A

It enables the management to increase its equity allocation depending on the company’s performance.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Name 6 techniques to value private equity portfolio companies

A
  1. DCF Analysis - mature companies
  2. Relative Value or market approach - mature companies
  3. Real Option - immature companies with flexible strategies
  4. Replacement cost - not for mature companies with positive cash flow
  5. Venture capital method
  6. Leveraged buyout method
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Which valuation techniques are suitable for mature private equity portfolio companies?

A
  1. DCF Analysis - mature companies
  2. Relative Value or market approach - mature companies
  3. Leveraged buyout method
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Which valuation techniques are suitable for early stage private equity portfolio companies?

A
  1. Real Option - immature companies with flexible strategies
  2. Replacement cost - not for mature companies with positive cash flow
  3. Venture capital method
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Describe DCF Analysis for Private equity

A

1.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Describe relative value analysis in private equity

A

1.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Describe real option analysis in private equity

A

1.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Describe leveraged buyout method in private equity

A

1.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Describe replacement cost method in private equity

A

1.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Describe venture capital method in private equity

A

1.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How does use of debt magnify exit value for stockholders?

A
  1. ROE = ROA x Leverage (average assets / equity)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What are the Cash flow characteristics of Buyout and VC investments?

A
  1. Buyout - steady and Predictable cash flow, realistic projections
  2. VC - unpredictable, unrealistic projections
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the market position characteristics of Buyout and VC investments

A
  1. Buyout - attractive market position, proven niche

2. VC - low market history, new market, unproven niche

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Compare the asset base of a Buyout investment and a VC investment.

A

Buyout - significant possible collateral

VC - weak, not a collateral asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Compare the management team of a Buyout investment and a VC investment.

A

Buyout - strong and experienced management

VC - newly formed, entrepreneurial

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Compare the leverage of a Buyout investment and a VC investment.

A

Buyout - extensive use of senior, mezzanine and junior debt

VC - primarily equity, limited debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Compare the risk measurement of a Buyout investment and a VC investment.

A

Buyout - mature, operating history, measurable risk

VC - lack of operating history, new markets, new products, new technology

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Compare the exit strategy of a Buyout investment and a VC investment.

A

Buyout - Predictable exits: secondary buyout, strategic sale, IPO

VC - Exit difficult to anticipate: IPO, trade sale, secondary venture sale

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Compare the cost reduction / control of a Buyout investment and a VC investment.

A

Buyout - potential to restructure etc

VC - significant cash burn rate required to establish business and product in the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Compare the working capital requirement of a Buyout investment and a VC investment.

A

Buyout - low working capital requirement

VC - increasing need for working capital when entering growth phase

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Compare the due diligence of a Buyout investment and a VC investment.

A

Buyout - full blown due diligence before investing (FLECTS)

VC - focuses on technology & commercial. Limited due to lack of operating history.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is the full blown (FLECTS) due diligence in buyout investments

A

FLECTS

Financial
Legal
Environmental
Commercials
Tax
Strategic
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Compare the goal setting and monitoring of a Buyout investment and a VC investment.

A

Buyout - monitor cash flow, strategy and planning

VC - monitor business plan milestones

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Compare the returns of a Buyout investment and a VC investment.

A

Buyout - lower variance, lower bankruptcies

VC - few very high returns and many write-offs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Compare the capital markets activity of a Buyout investment firm and a VC investment firm.

A

Buyout - investors typically have significant capital markets footprint

VC - investors less active in capital markets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Characterise transactions of a Buyout investment firm and a VC investment firm

A

Buyout - auctions, multiple acquirers

VC - proprietary and / or relationship based

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Compare the growth through subsequent fund raising of a Buyout investment firm and a VC investment firm

A

Buyout - well performing buyout firms attract large funds

VC - tend to be less scalable, grow less quickly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Compare the remuneration of a Buyout investment GP and a VC investment GP

A

Buyout - carried interest, management fee, monitoring fees

VC - carried interest is main fee, management and monitoring fees are rare

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Compare the products of a Buyout investment and a VC investment.

A

Buyout - established products

VC - uncertain, new technologies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Which two private equity valuation methods require market data?

A
  1. Relative valuation

2. Income approach (DCF)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

What are the 4 key valuation issues for Buyout vs. Venture capital

A
  1. Use of DCF method
  2. Use of Relative Value approach
  3. Use of Debt
  4. Drivers of Equity returns
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Are Buyouts of VC investments most suitable for DCF methods?

Why?

A

Buyouts are most suitable.

Buyouts are mature companies with Predictable cashflows.

VC investments are less mature and have uncertain cashflows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Is the relative value method more suitable for Buyout or VC investment?
Why

A

It is used in buyout vuations to check DCF method analysis

It is difficult to use for VC Investment because there may not be any comparable companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Which type of investment uses debt capital most, Buyout or VC Investment

A

Buyout - tend to be mature with developed capital stacks of senior, subordinated and mezz

VC investments tend to be early stage with mostly equity funding

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

What are the key drivers of Equity returns for Buyout investment

A

“Ged red me”

Growth Earnings

Debt RED

Multiples on Exit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

What are the key drivers of Equity returns for VC investment

A

VCs have PREMONitions and VALUE INternal DiLUSIONS

  1. Pre-MONEY VALUATION
  2. INVESTMENT
  3. SUBSEQUENT DILUTION
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

Los 41e - What are the Four exit routes for Private Equity Firms

A

“I Like S&M”

IPO

Liquidation (asset sale)

Secondary market sale

MBO

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Los 41e - explain private equity exit by IPO, how does it impact value?

A
  1. Taking a company public.
  2. Takes time, costly, lose flexibility
  3. Achieves highest value (highest multiple) because:
    a. Shares are more liquid
    b. Public companies attract better management
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Los 41e - explain private equity exit by Secondary Market, how does it impact value?

A
  1. Sell the investors position to another investor where investment value is greater than market price or FV assets. Usually a sector specialist that can add value or grow the business.
  2. Results in the seconds highest valuation possible after IPO

Not common for VC’s

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Los 41e - explain private equity exit by Liquidation, how does it impact value?

A
  1. A sale of the company’s assets

2. Lowest value, since there is no value placed on the firm

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Los 41e - explain private equity exit by MBO, how does it impact value?

A
  1. The management by the firm with a leveraged finance package from investors.
  2. May add value in theong term through alignment of management interests. But leverage reduces flexibility. (Jensens theory).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

What type of market data does DCF (Income) approach use?

A

Comparable companies

  1. Discount rate
  2. Growth rate
  3. Target Betas
  4. Target Leverage ratios
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

What type of market data does Relative Value approach use?

A

Comparables

  1. Adjust ratios for stage in life-cycle of target company vis a vis comparable.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

What is committed capital

A

The amount promised by LP’ s available to be drawn down for investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

What is paid in capital

A

The amount of funds received for investment in portfolio companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

What is the NAV of a PE fund

A

NAV=
ASSETS (value of fund assets)
- ACCRUED Expenses (unpaid)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

Name 6 ways to value fund assets

A
  1. COST without adjustments until EXIT
  2. COST - adjustments for financing and revaluation
  3. Lowest of COST or MARKET
  4. Marked to MARKET (comparables) with adjustments for illiquidity
  5. Marked to Market with discount for restricted securities
  6. Re-value on new financing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

Describe the 8 Economic Terms of a PE fund

A

Management fees

Transaction fees

Carried interest

Ratchet

Hurdle rate

Target fund size

Vintage year

Term of fund

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

What is a limited partner

A
  1. Provides fund for investment
  2. No management responsibility
  3. Limited liability
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

Wha is a general partner

A
  1. Manages the fund

2. Jointly liable with other GP’s for the funds debts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

Which two types of documents describe a PE fund terms

A
  1. Prospectus

2. Limited partnership agreement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

What two categories of fund terms are there?

A
  1. Economic Terms

2. Corporate Governance Terms

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

What 3 fund values can management fee be based on?

A
  1. Committed capital
  2. Paid in capital
  3. NAV
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

Explain the importance of EXIT Timing for portfolio company value

A
  1. Flexible - do not sell in weak markets. Consider buying additional companies that can merge with portfolio companies.
  2. Long term forecasts of exit price are uncertain.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

What is the main purpose of PE valuation

A
  1. Provide a reference (benchmark) for negotiation of buy or sell
  2. Assess the future potential to generate cash flow and hence value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

What are the two forms of Private Equity fund structures

A
  1. LLP - Limited liability partnership

2. CLS - Company Limited by shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

Explain how PE fund structures limit redemptions

A

Most funds are closed end

(A) Redemption only allowed at specified periods
(B) New investors (LP’s) only allowed at:
specified times, or
at managers discretion

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

Who benefits from a company limited by shares

A

The GP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

What are the two main activities of a PE fund

A
  1. RAISING FUNDS

2. MANAGING FUNDS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
66
Q

Name the 5 stages of a PE Fund

A

MIRE

1. Marketing
2  investment
3. Realisations / return of capital and exits
4. Extension
5. Follow on Fund
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
67
Q

What is the usual duration term if a PE fund

A

10-12 Years

+ 2-3 years extension

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
68
Q

What are the four components of exit value

A

Ice Grid in Post Mortem

  1. Investment Cost
  2. Earnings Growth
  3. Reduction in debt
  4. Increase in Price Multiple
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
69
Q

Which components of the exit value can a PE firm improve

A

GEt RID in afternoon PM

Growth Earnings

Reduction in Debt

  • > Increase in Price Multiple
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
70
Q

How does a PE firm enhance the components of Exit Value

A

GEt RID in afternoon (PM)

  1. Operational improvements
  2. Better governance
  3. Financing

LEADS TO

  • increase Earnings GROWTH
  • Reduction In Debt
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
71
Q

What is forecast IRR for PE investments sensitive to?

A

Time to Exit

Exit Year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
72
Q

Outline the steps to compute payoff and IRR for PE investments

A
  1. Calculate exit value
  2. Calculate claimants profits
    A. PE provided Debt (less paid down debt)
    B. PE preference shares
    C. PE & MEP share of Residual profit
73
Q

What two valuation figures are relevant for PE and VC

A

Pre-MONEY valuation

Post Money valuation

74
Q

Describe post money valuation

A

Post money valuation = (Pre money valuation) + (new investment)

75
Q

What is the calculation of VC share after its investment

A

Post money share = Investment / (Post money value)

= (Investment) /(investment + pre money value)

76
Q

How does a VC investor estimate Pre-MONEY valuation?

A

Estimate or value the following

  1. IP - e.g. Patents
  2. other Intangibles - e.g. Knowhow
  3. Product potential
  4. Potential markets
  5. Financial assets e.g. capital
  6. Replacement cost of other assets
77
Q

Describe LBO model

A
  1. Not a valuation model
  2. Incorporates the capital structure in determining expected returns for a PE investor.
  3. Gives a reference price for negotiation
78
Q

What are the 3 main inputs of a LBO model

A
  1. Forecast of future cash flows
  2. Expected return for each provider of capital
  3. Total amount of financing
79
Q

How is the LBO model used

A
  1. Determine the maximum price to pay to acquire the target company
  2. Estimate EXIT value at various EXIT YEARS
80
Q

What is EVEBITDA

A
  1. EXIT VALUE obtained from comparables - relative value (Market multiple) approach
  2. For various EXIT YEAR scenarios
81
Q

What is a buyout

A

When a buyer acquires a CONTROLLING Stake in a target company

82
Q

Give 3 examples of private equity buyout types

A

MBO - management buyouts

LBO - leveraged buyouts

Takeovers

83
Q

Give 4 components of an LBO’s finance stack

A

“Mesh”

Mezzanine
EQUITY
SENIOR debt
HIGH YIELD

84
Q

What is the largest component of a LBO finance stack

A

Senior debt (amortised over time)

85
Q

What is mezzanine finance

A

Tailored for each transaction

Bridge between Equity and debt

86
Q

In LBO’s what type of debt is amortized

87
Q

What are the two types of PE Fund waterfall

A

Deal by deal

Total Return

88
Q

Describe a deal by deal waterfall

A
  1. GP gets carried interest after each deal

2. Results in earlier distribution to GP

89
Q

Describe a total return waterfall

A
  1. Carried interest is calculated on the entire portfolio value
  2. This results in earlier profit distribution to LP
90
Q

Which type of waterfall favours GP

A

Deal by deal

91
Q

Which type of waterfall favours LP

A

Total return

92
Q

What are the two types of total return waterfall called

A
  1. Committed capital

2. Invested capital

93
Q

How does a total return committed capital waterfall work

A
  1. GP receives carried interest after committed capital has been returned to LPs
94
Q

How does a total return invested capital waterfall work

A

The fund must return some threshold above invested capital to LPs before the GP receives carried interest

95
Q

Describe the PE term “Transaction fees”

A
  1. Amount paid to GPs for transactions (deals)

2. This cost is in management fees so is split between LPs and GPs

96
Q

What is carried interest? How is it usually calculated

A
  1. GP share of the fund profits

2. Typically 20% of net fund profits (after management fees)

97
Q

What is a ratchet. How is it calculated.

A

A mechanism to allocate equity from the PE fund to the management of the Target Company.

Based on actual future performance of portfolio company and its return to the PE fund

98
Q

Describe the term, Hurdle rate.

How is it calculated.

A
  1. The IRR that must be achieved before the GP receives carried interest.
  2. Aligns GP with LP
  3. Usually 7-10% of profit
  4. Can be deal by deal (portfolio company) or
  5. Total return (entire fund)
99
Q

Describe the term “target fund size”. What does it show?

A
  1. The fund size stated in the prospectus or PPM

2. The fund size the GP is comfortable in managing

100
Q

How do investors view a failure to raise to full amount of target fund size

A

Questions the GP abilities

101
Q

What is “Vintage Year”

A

The Launch year of the fund

102
Q

List 9 key Corporate Governance terms for a PE fund

A
  1. Key man
  2. Disclosure & Confidentiality
  3. Distribution Waterfall
  4. Tag along, drag along
  5. No fault divorce
  6. Removal for cause
  7. Investment restrictions
  8. Co-investment
  9. Clawback
103
Q

Give two examples of investment restrictions

A
  1. Max Leverage

2. Min Diversification

104
Q

What are Co-investment rights

A
  1. LPs have first right to invest in other funds managed by GPs
  2. Prohibition of using two funds managed by the same GP in the same portfolio company at different times
105
Q

Give an example where a GP of two fubds is conflicted

A
  1. Investing in the same portfolio company at two different times and later when it’s struggling
106
Q

Give 5 reasons why due diligence in PE Funds is important

A
  1. Difference in returns between top performers and poor performers is very high
  2. Performance is persistent
  3. Historical analysis of performance has information
  4. PE is illiquid but
  5. Good performance leads to interim exits, returning capital and improving liquidity
107
Q

What is the risk of calculating NAV of a PE fund only when new financing rounds?

A

If financing is infrequent the NAV will be stale

108
Q

What is the risk for NAV with portfolio company valuations

A
  1. No active market for Private companies

2. Portfolio companies cannot be valued with certainty before EXIT

109
Q

What are the issues for committed capital with NAV calculations and performance measurement

A
  1. LP’s are obliged to satisfy calls for committed capital - held in liquid low return instruments
  2. Committed capital is not included in NAV calcs but is an effective liability for the LPs
  3. GIPS methods are based on PIC:
    DPI
    +RVPI
    =TVPI
110
Q

How do different strategies affect PE Fund NAV methods

A
  1. Different strategies have different maturities e.g. Early stage VC vs buyout
  2. Early stage are valued at cost
  3. Mature companies are valued at relative (market comparables)
111
Q

What valuer does LP prefer

A
  1. Third party
112
Q

What type of portfolio company is most affected by asset price bubbles

A

Inflate mature companies close to exit

113
Q

Describe two-features of a key man clause

A
  1. Names key executives in the PE Fund management (GP)

2. New investments may be prohibited if a key person leaves and is not replaced

114
Q

Describe two disclosure and confidentiality terms

A
  1. Only permitted fund performance information may be disclosed by investors
  2. Disclosure by investors of portfolio company information is generally prohibited
115
Q

Describe 3 elements of a claw back provision

A
  1. Maintains the profit share ratio between GP and LP
  2. True up, periodically reconciles for lower future performance and over payment of carry
  3. GP is required to return fees, expenses and capital contributions so that performance sharing is as initially agreed.
116
Q

When are claw backs usually executed

A
  1. Fund Termination

2. Periodic true ups e.g. Annual reconciliations

117
Q

What are Tag-along, drag-along rights

A
  1. Acquisition offers are extended to all shareholders of PE fund
  2. Acquisition offers are not limited to only controlling shareholders
118
Q

What is a no-fault divorce clause? What is usually required.

A
  1. The right to remove a GP without cause

2. A supermajority vote of 75%

119
Q

What is removal for cause

A
  1. Removal variety of reasons, or

2. Termination of fund

120
Q

Give five issues that provide “cause” for termination

A
  1. Gross negligence
  2. Key person events
  3. Felony
  4. Bankruptcy of GP
  5. Material breach of fund terms
121
Q

Give two differences between private and public equity funds

A
  1. Drawdown of committed capital

2. J - curve returns patterns

122
Q

How is committed capital used differently in private equity than in public equity

A
  1. In public equity committed capital is deployed immediately
  2. In private equity committed capital is called and drawn down as it is invested.
123
Q

What is the j-curve pattern of returns

A
  1. For some Private equity and VC
  2. Starts off negative but turns positive
  3. High risk of loss until loss making period ends
124
Q

Give 5 kinds of risk in private equity

A
  1. General PE risk
  2. Strategy risk
  3. Industry
  4. Geographical
  5. Investment vehicle/structure
125
Q

List 10 general private equity risks

A
  1. Agency
  2. Capital
  3. Competition
  4. Diversification
  5. Liquidity
  6. Market
  7. Regulation
  8. Tax
  9. Unquoted
  10. Valuation
126
Q

Describe agency risk in PE

A
  1. Managers of portfolio companies not aligned with the PE fund
  2. High in early stage deals or where management has a controlling stake
127
Q

Describe capital risk in PE

A
  1. Investors may withdraw capital in regimes of higher risk

2. Subsequent rounds for portfolio companies more difficult than expected.

128
Q

Explain liquidity risk with PE investments

A
  1. PE investments do not have a public market
  2. No active secondary market
  3. Difficult to liquidate a position
129
Q

Describe diversification risk in PE

A
  1. Single funds may be poorly diversified

2. Investors should diversify across stage, strategy and vintage

130
Q

Describe competition risk in PE

A

Competition for reasonably priced portfolio investments may be high

131
Q

Describe regulatory risk in PE funds

A

Government regulations may affect the goods and services of portfolio companies

132
Q

Explain tax risk for PE

A

Fund returns may be taxed differently at some point in the future

133
Q

Explain valuation risk in PE

A

Valuation of portfolio companies may have significant subjective not independent and objective judgement

134
Q

Explain unquoted risk in PE

A

Private companies are not quoted on public markets and may be riskier than public companies

135
Q

Explain market risk

A

Private equity is subject to long term changes in market risks such as interest rates and fx

136
Q

List 7 PE fund costs

A

“Mat’s Pad”

  1. Management (and performance)
  2. Administrative
  3. Transaction
  4. Setup
  5. Placement
  6. Audit
  7. Dilution costs
137
Q

Explain PE fund management fee costs

A
  1. Typically higher than other investments

2. 2 and 20

138
Q

Explain Administrative cost in PE. How often charged?

A
  1. Custodian
  2. Transfer agent
  3. Accounting

Charged annually.

139
Q

Explain transaction costs in PE Funds

A

Purchase costs of Portfolio companies

  1. Due diligence
  2. Bank financing
  3. Legal

Sales costs for exits

140
Q

Explain setup costs of PE funds

A
  1. Legal, regulatory, listing costs

2. Amortised over fund life

141
Q

Explain placement fees in PE funds

A

Placement agents charge

  1. Often 2% up front, or
  2. Annual trail fees
142
Q

Explain audit costs for PE funds

A

Fixed costs

Charged annually

143
Q

Explain Dilution costs in PE funds

A
  1. Where portfolio companies require additional rounds of finance
  2. Where additional options are granted
144
Q

What is the GIPS return metric for PE?

A

IRR calculated gross or net of fees

145
Q

Which IRR measures cash flow between PE Fund and Portfolio companies

146
Q

What two things does Gross IRR show

A
  1. Ability of PE fund to generate returns

2. Cashflows between fund and portfolio

147
Q

What type of IRR is most relevant to LPs

148
Q

How is Net IRR different to Gross IRR. What does it represent

A

Net of

  1. Management fees
  2. Carried interest (performance)
  3. Other compensation

Represents cash flow between PE Fund and LPs

149
Q

Explain the use of Multiples to evaluate PE Funds. Give 3 benefits and 1 issue with Multiples for PE fund performance evaluation

A

The ratio of (total return to investors) / (total amount invested)

Total return to investors is Net of fees, carry etc

Multiples are therefore a net measure of PE fund performance

  1. Simple to calculate
  2. Easy to use
  3. Differentiate for realised and unrealised returns

Does not incorporate time value of money

150
Q

Give two ways of evaluating PE fund performance

A
  1. IRR

2. Multiples

151
Q

What is the main issue assumed with IRR of private equity

A

All interim cashflows are reinvested at the IRR

152
Q

What is PIC in absolute

A

Cummulative (total capital drawn down)

153
Q

What is PIC%

A

=(total capital drawn down) / (committed capital)

154
Q

Define DPI. Is it gross or net? What is it net of?

A

DPI=(all realised distributed returns)/(PIC)

It is net of all fees and carried interest.

It is cash on cash return. COC.

155
Q

What is RVPI? Is it gross or net?

A

RVPI = residual unrealised (undistributed) returns / (PIC)

It is net of management fees and carried interest

156
Q

What is TVPI? Is it gross or net?

A

DPI + RVPI

Net

157
Q

What are the line items to calculate NAV after distributions

A

NAV before distribution
- Carried Interest
- Distributions
= NAV after distributions

158
Q

What is the purpose of scenario analysis for adjusting Terminal Value

A
  1. Place bounds around company valuation

2. Aid negotiation and bargaining power

159
Q

Compare Private Equity IRR vs Benchmark index returns

A
  1. PE IRR is cash flow weighted return

2. Index returns are time-weighted

160
Q

What 3 criteria are important to compare PE funds

A

Use

  1. Comparable Peer Group
  2. Median returns
  3. Vintage year (cyclicality and common start)
161
Q

What is POST using NPV

A

Post money value = PV(exit value)

162
Q

Define Pre Money value (NPV and IRR)

A

Pre money value=post money value - investment

163
Q

What is f VC using NPV method

A

f = INV / POST

164
Q

Describe Post in terms of VC ownership

A

POST = INV / f

165
Q

Describe Post money value for a future exit value (IRR and NPV)

A

Post = (Exit n) / ( 1+R) ^ n

166
Q

What is VC required wealth using desired IRR

A

Required wealth = INV x (1+IRR)^n

167
Q

What is f of VC ownership using desired IRR

A

f = Required wealth / Exit

f = FV (INV) / Exit

f = INV x (1+IRR)^n / Exit

168
Q

What is #shares VC given f

A

shares VC = #shares Founder x f / (1-f)

169
Q

Describe the price per new share issued to VC investors

A

PRICE VC = INV / #shares vc

170
Q

Give 4 line items to calculate NAV before distributions

A

Beg NAV (last NAV after distributions)
+ capital calls
- fees
+/- Operating Results

171
Q

Give 4 line items for calculating CARRIED Interest payable

A

NAV before distribution
- hurdle
x CI %
- previous CI paid

= CI payable

172
Q

What is the VC fraction, f. What is the founder % post?

A

f = INV / POST

Founder Post % = (1-f)

173
Q

What is # new shares to issue to VC given f

A

shares VC = #shares Founder x f / (1-f)

174
Q

What is price per share to VC

A

Price per share VC = INV / (#share VC)

175
Q

Describe r* for VC return

A

(1+r*) = (1+r) / (1-q)

176
Q

What are the two ways of adjusting for probability of failure

A
  1. ADJUST R upwards => R*

2. Reduces Terminal Value

177
Q

Give 3 problems with estimating Terminal Value for VC investors

A

Usual valuation is based on forecast cash flow and earnings-multiples

  1. Cash flow is uncertain, earnings are uncertain
  2. Price multipliers are volatile
  3. Forecast Terminal value is sensitive to both earnings and multiplier uncertainty
178
Q

What are the first 5 phases for calculating multiple VC rounds

A
  1. Discount rates
  2. Calculate POST & Pre for second round
  3. Calculate POST & Pre for first round
  4. Calc f for second round
  5. Calc f for first round
179
Q

What is the number of second round shares given f2

A

shares VC_2 = ( #shares VC_1 + #shares Founders) x [ f2 / (1- f2)]

Key Facts (19 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions