Private Equity Flashcards
What are 7 control mechanisms utilized by PE firms
Compensation tied to performance Tag-along, drag-along clauses Board representation Noncompete clauses Priority in claims Required approvals Earn-outs
What are there ways PE firms can add value to portfolio firms?
- Re-engineer firm to improve operating efficiency
- Obtain debt financing on better terms
- Stronger alignment between management and PE ownership
What is tag along drag along clause
If acquirer acquires control of company, must extend the acquisition offer to all shareholders including firm management
What is noncompete clause
Founders disallowed to compete against firm for a specified period of time
What is involved with priority in claims
PE firms receive distributions before other owners (pref dividends) and have priority on firm assets if liquidated
What is an earn out
Used in VC - tie acquisition price paid by PE firm to portfolio company’s future performance over period
What are key differences in financial characteristics between VC and buyout
CF: low predictability vs. stable Asset base: weak vs. substantial Fin levg: low, equity vs. high sr debt Working cap: inc needs vs. low Grow w/+financing: low vs. high
What are key differences in operational characteristics between VC and buyout
Prod mkt: new, uncertain vs. strong niche
Products: new vs. established
Mgt: new w/individual record vs. strong experienced
Ops: High burn vs. dec inefficiencies
Goals: bus plan/strat vs. cf, strat plan
What are key differences in structure between VC and buyout
Risk: tough vs. easy to measure Exit: via IPO? Vs. predictable Due dil: tech/commercial vs. extensive Return: some high, some written off vs. rare failures Cap mkt: not active vs. active GP rev: carried int vs. car int, fees
Key valuation characteristics for buyout
Use DCF to est. equity value
Use relative value to check DCF
High debt use
Equity return via earnings growth, ^multiple on exit, v debt
Key valuation characteristics for VC
Tough to use DCF and relative value due to uncertain CF/no comparable
Low use of debt - high use of equity
Equity return via premoney valuation investment and subsequent dilution
What are 4 typical exit routes
IPOs
Secondary mkt sales
Mgt buyouts (MBOs)
Liquidations
What are PE risk factors
Liquidity Unquoted investments Competitive environment Agency Capital Regulatory Tax Valuation Diversification Market
What are costs of investing in PE
Higher than public; include
- transaction
- investment vehicle setup
- admin
- audit
- mgt and performance
- dilution
- placement
Know these terms for PE fund
Management Transaction fees Carried interest Ratchet Hurdle rate Target fund size Vintage Term of fund
Know these corp governance terms
Key man clause Performance disclosure/confidentiality Clawback Distribution waterfall Tag along drag along Removal for cause No fault divorce Investment restrictions Coinvestment
What is paid-in capital
% of committed funds utilized to date by GP
What is distributed to paid-in capital
Cumulative distributions paid to the LPs / cumulative invested capital
(Net of fees/carried int)
What is residual value to paid-in capital
Unrealized return
= value of LPs holdings in fund / cumulative invested capital
What is total value of paid-in capital
Realized and unrealized return
= DPI + RVPI
How to calc portion of firm VC investor must own post investment
NPV: f = new investment / PV firm value at exit
IRR: f = FV new investment at exit / FV entire firm value at exit
Equal with same discount rate
PE steps to calc a deal
- Post = V / (1+r)^t
- Pre = Post - I
- F = I / Post
- y = x(F/(1-F)
- Price = I / y
VC method to valuing companies with IRRs
- W = I / (1+r)^t (wealth)
- F = W/V
- y = x(F/(1-F)
- price = I/y
- Post = 1/F = price*(x+y)
- Pre = post - I = price* x
Steps for multi-round financing price
- Define rate (multiply each years rate)
- Post2 = V/(1+R2)
- Pre2 = Post2 - I2
- Post1 = Pre2/(1+R1)
- Pre1 = Post1 - I1
- F2 = I2/Post2
- F1 = I1/Post1
- y1 = x1*(F1/(1-F1)) (num new shares)
- p1 = I1/y1
- x2 = x1 + y1 (existing mshares)
- y2 = x2 * (F2/(1-F2))
- p2 = I2/y2
