Private Equity

Question 1

Private equity

Answer 1

involves investing in privately held companies, either directly or indirectly through private equity funds.

not publicly traded on stock exchanges, and

the capital is typically provided by institutional investors and high-net-worth individuals.

firms pool funds from these investors to acquire equity stakes in private companies or make significant investments in existing private companies.

Question 2

Private equity investment strategies

Answer 2

Venture capital (riskiest)
Growth equity
Buyouts
Distressed.

Question 3

types of partners

Answer 3

General partner

Limited partners

Question 4

General partner

Answer 4

responsible for raising capital,

finding suitable investments,

and making decisions.

have unlimited personal liability for all the debts

Question 5

Limited partners

Answer 5

are investors who contribute capital to the partnership.

They are not involved in the selection and management of the investments.

have limited personal liability—that is, limited partners cannot lose

Question 6

Private Equity structure and Fees

Answer 6

Management fees- 1-3% of capital commitments per year (REDUCTION)

20% of profits to general partner (private equity firm), 80% to limited partners (investors)

Substantial entry costs ($100,000+)

Illiquid investment (10-12 years maturity)

Question 7

Cashflow pattern of investing in Private Equity

Answer 7

Years 1-3 returns are negative

Years 3-5 returns flatten out and gradually turn positive

Years 5-10 returns spike as assets are sold

All years combined leads to what has been termed the “J-Curve.”

Question 8

Private Equity Company life cycle

Answer 8

Fundraising (0 to 1.5 years)

Investing (1-6 years)

Harvesting (7-10 years)

Liquidating (10-12 years)

Question 9

Good investment

Answer 9

Precedent of 20% + annual returns over long horizon

Diversification resulting in improved risk and volatility characteristics

Imperfect correlation with other asset classes

Market inefficiency; transactions are negotiated

Question 10

Bad Investment

Answer 10

High risk, particularly on an individual transaction basis

Illiquidity

Lack of transparency

Valuations somewhat judgmental

Question 11

Private equity characteristics

Answer 11

Low liquidity

long investment horizon

high active involvement

low market efficiency

no published information

low regulatory oversight

Question 12

Listed Equity characteristics

Answer 12

Strong liquidity

short or long term

little active involvement

higher market efficiency

published information

highly regulated