Private Equity

Question 1

A private equity fund invests in what type of companies?

Answer 1

Private companies which are not traded in an open market.

Question 2

Mezzanine

Answer 2

The round of financing that is designed to help a company have enough resources to reach an IPO.

Question 3

What is the usual term length for private equity funds?

Answer 3

Usually a fixed term of ten years (often with annual extensions).

Question 4

Capital Call:

Answer 4

When a private equity fund manager requests that an investor in the fund provide additional capital.

Usually investors will agree to a max investment and the manager will make a series of cap calls over time to the investors as opportunities arise to finance startups and buy-outs

Question 5

Capital Commitment:

Answer 5

Every investor in a PE fund commits to investing a specified sum of money in the fund over a specified period of time. The fund records this as the investor’s capital commitment.

Question 6

The sum of capital commitments is equal to?

Answer 6

The size of the PE fund.

Question 7

Limited Partner:

Answer 7

Investor

Question 8

General Partner:

Answer 8

Fund Manager

Question 9

$10,000,000 is called from an investor with a commitment of $30,000,000.

What entry would be made to record the call?

Answer 9

Dr Capital Commitments Receivable (Asset) $10,000,000

  Cr     Investor Contributions (Capital)                    $10,000,000

Question 10

When the cash for the call is received, another entry would be made; what is it?

Answer 10

Dr Cash Received (Asset)

  Cr     Cap Commits Receivable (Asset)

Question 11

Are capital commitments recorded on the books when received?

Answer 11

YES!

Question 12

What is a waterfall?

Answer 12

The fund’s distribution hierarchy, which is specifically defined by partnership agreements.

Question 13

Deemed Capital Call:

Answer 13

When a fund decides to net a capital call and distribution in the same transaction. Example: The fund decides to call 5% of commitments and distribute 3% of commitments for a net deemed call of 2%.

Question 14

When the value of an underlying investment is changed, an entry to record the change will be entered on a fund’s books.
An entry to record a positive change would be as follows:

Answer 14

Dr Adjust Carry Value Up (Asset) $XXX

        Cr    Unrealized Gains (P&L)                   $XXX

Question 15

When the value of an underlying investment is changed, an entry to record the change will be entered on a fund’s books.
An entry to record a negitive change would be as follows:

Answer 15

Dr Unrealized Loss (P&L) $XXX

        Cr   Adjust Carry Value Down (Asset)       $XXX

Question 16

When distributions are made by an underlying fund back to the private equity fund of funds, the following entry is recorded for the amount of the distribution:

Answer 16

Dr Cash Received (Asset) $XXX

        Cr   Return of Capital (Asset)                   $XXX

Question 17

What is the JE if all or part of a distribution requires the recognition of realized income and a corresponding change in unrealized appreciation/depreciation?

Answer 17

Dr Cash Received (Asset) $XXX

        Cr   Capital Gain (P&L)                                 $XXX

  Dr   Unrealized Gain/Loss (P&L)                    $XXX

        Cr   Adjust Carry Value Up/Down (Asset)        $XXX