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CAIA L2 > Reading 1.6 > Flashcards

Reading 1.6 Flashcards

1
Q

How do VALUE CREATION PLANS differ?

A

Deal Type, ownership, growth strategy and geographic focus

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2
Q

What is a key driver of investor returns (more than strategy selection)

A

Value creation plans and how strategies are combined

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3
Q

Value creation plans are ESPECIALLY more important that strategy selection for investor returns in what type of deals?

A

Growth, Buyout and Secondary Deals

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4
Q

Successful execution of Value Creation Plans is dependent on

A

Resource constraint, Economies of Specialization, Diminishing Returns

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5
Q

VCP

A

Value creation plan

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6
Q

Top 5 VCP strategies in order of popularity (% of sample)

A
  1. Operational improvements (84%)
  2. Top-line growth
    (in 74% of sample VCPs)
  3. Governance engineering
    (in 48% of sample VCPs)
  4. Financial engineering
    (in 35% of sample VCPs)
  5. Cash management
    (in 14% of sample VCPs)
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7
Q

A VCP often incorporates multiple strategies (____% in the sample). PE firms tend to choose from a concentrated set of favorite combinations. In this dataset, the average VCP spans ___ strategies.

A

1) 82%

2) 2.5

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8
Q

The ____ most popular strategy combinations account for ___% of the sample VCPs.

____ of the top ____ involve operational improvements and / or top-line growth.

A

1) 10

2) 80

3) 8

4) 10

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9
Q

The three most popular combinations involve both operational improvements and top-line growth; with no other strategy (___%), combined with governance engineering (___%) or with governance and financial engineering (___ %).

A

1) 18

2) 15

3) 11

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10
Q

What does the rise in popularity of the top 5 most popular VCP represent?

A

That PE Firms have become more hands on

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11
Q

Use of growth strategies in deals doubled (from 1992-1996 to 2012-2017), popularity of ______ tripled, popularity of_____ nearly quadrupled, and even popularity of _____ (the least popular strategy) more than doubled.

The already widespread operational improvement strategies also experienced further increase (____%) in popularity.

A

1) governance engineering

2) financial engineering

3) cash management

4) 5

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12
Q

5 types of deals and their description

A
  1. Early-stage deals (19% of sample deals) - Involve traditional venture capital deals, involving startups, pre-revenue companies, and pre-profit companies.
  2. Growth deals (59% of sample) - Typically involve external financing (but not outright acquisition) of companies with growing sales and profits.
  3. Buyouts (13% of sample - Typically involve acquisition (or at least majority control) of mature companies with fairly stable cash flows (eg., division of a large firm or a publicly listed company).
  4. Secondaries (6% of sample - Involve one PE firm acquiring the portfolio company of another
    PE firm, and are more common in growth equity or buyouts than in early-stage companies.
  5. Turnarounds (2% of sample) - Focus on underperforming or struggling companies.
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13
Q

In which deals are PE FIRMS more Hands on (implement VCPs more frequently)

A
  1. Involve buyouts (more so than early-stage deals).
  2. Are majority owners.
  3. Pursue inorganic growth (vs. organic growth).
  4. Invest in multiple countries (i.e., manage regional rather than country-focused funds
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14
Q

VCP strategies differ across deal types: while ____ are popular across all deal types, the frequency of implementation of top-line growth, governance engineering, and financial engineering varies significantly.

A

1) operational improvements

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15
Q

_____ and ______ become more popular as deal maturity increases, with ___/____ engineering strategies pursued in ___%/___% of buyout, ___%/___% of growth, and ___% /____% of early-stage deals, respectively.

A

1) Top-line growth

2) governance engineering

3) top line and gov

4) 88, 62

5) 77, 47

6) 56, 39

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16
Q

____ and ____ exhibit considerably stronger focus on financial engineering than the other strategies.

Secondaries, while generally similar to ____, pursue financial engineering less frequently.

This suggests that _____ and ____ are less important (have diminishing marginal returns) since buyout targets are sold to new PE investors.

A

1) Buyouts & turnarounds

2) buyouts

3) optimizing capital structure

4) incentive systems

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17
Q

Turnaround deals’ dominant strategy (___%) is _____, with the least focus on ____ (53%) and _____ (41%). This frequency of implementation of _____ is similar to that in early-stage deals (39%).

A

1) 59

2) financial engineering

3) top-line growth

4) governance engineering

5) governance engineering

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18
Q

_____ does not vary significantly in popularity across deal types.

A

Cash management

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19
Q

PE firms pursue growth, governance engineering, and financial engineering in ___% /___%, ___% /___% and __% /__% of their minority-/ majority-owned deals, respectively.

A

1) 72 , 78

2) 45, 56

3) 31, 43

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20
Q

The frequency of ____ and ____ does not vary significantly with ownership level.

A

1) operational improvement

2) cash management targeting

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21
Q

Examples of
1) organic growth
2) inorganic growth

A

1) increasing sales of existing/new products

2) acquiring other companies

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22
Q

Slightly more than ___ of sample deals are managed by single country funds and rest managed by “regional” funds that invest in multiple countries.

A

Half

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23
Q

____ funds pursue top-line growth and governance engineering strategies significantly more than ____ funds, often because they ________ of managers and board members.

A

1) regional
2) single country
3) consolidate companies across countries and and utilize wider networks

24
Q

Operational improvement Strategy action items (7)

A

1) Buy/ upgrade assets (most used in initial VCPs)

2) Sell assets

3) Divest/spin off companies

4) Improve IT systems

5) Reduce costs (most used in revised VCPs)

6) Improve distribution or logistics

7) Improve organizational structure

25
Q

Top line growth Strategy action items (7)

A
  1. Target market share
  2. Pursue add-on acquisitions
  3. Change mix of products/ services
  4. Pursue international expansion
  5. Change pricing strategy
  6. Improve marketing and promotion
  7. Improve quality
26
Q

Governance Engineering Strategy action items (3)

A
      1. Change CEO, CFO, and other management
  2. Change board/ shareholder structure
  3. Improve corporate governance
27
Q

Financial engineering Strategy action items (2)

A
  1. Optimize capital structure
  2. Improve incentive systems
28
Q

Cash management Strategy action items (2)

A
  1. Improve receivables/ payables
  2. Improve inventory management
29
Q

PE firms typically aim to implement ___ actions items. The average VCP in the sample includes ___ action items. The three most popular planned action items are:

The least frequent action item is (__%).

A

1) 2-5
2) 4.5

  1. Buying new or upgrading existing physical assets (66% of deals).
  2. Changing the mix of products and/ or services (37%).
  3. Pursuing add-on acquisitions [i.e., M&A deals] (33%).

improving inventory management 4%

30
Q

Most VCPs are ____ to the deal

A

Unique

31
Q

Most popular combination of VCP action items is

A

Asset purchases & Planned optimization of portfolio companies’ capital structure

32
Q

VCP Action items depend on deal types:

• ___ typically focus on optimizing capital structure, pursuing inorganic growth, changing the mix of products or services, and replacing senior or middle management.

• ____ and ____ focus primarily on capital expenditures and pursue other action items opportunistically.

A

1) Buyouts

2) Early-stage and growth deals

33
Q

How does resource constraint impact the likelihood that an ACTION ITEM FROM VCPs is achieved?

A

The less action items the higher probability that they are completed

34
Q

Operating partners - definition and responsibility

A

Team of experts that help portfolio companies with implementation

35
Q

When are action items of a VCP more likely to be achieved?

A

• Longer holding periods (i.e., the longer the deal is in a PE firm’s portfolio).
• Larger size (possibly due to increased focus on these deals)
• Majority ownership.
- More focused strategies with fewer action items

36
Q

Focus on _____ has a negative effect on the likelihood of achievement; i.e., it reduces the chance that an action item is successfully implemented.

A

inorganic growth

37
Q

How does economies of specialization impact VCP implementation

A

When a company has experience implementing action items => they are more likely to be implemented in other deals

38
Q

Fund fixed effects explain more of the ____ achievement than other variables

A

Deal level

39
Q

PE FIRM fixed effects explain the largest and second largest fraction of variation of the _______ achievement and ____ achievement

A

Action item

Strategy

40
Q

What does a U shaped relationship between detail level in a VCP and successful implementation signal?

A

Details for a VCP are beneficial up to a certain point after which they become counter productive

41
Q

Vintage year

A

Year when first round of investment capital is delivered to the company

42
Q

Fund focus is important for successful implementation, as funds’ VCP achievement rates improve when their portfolio deals are more ____ in size and when they focus on ____ deal types.

______, on the other hand, does not seem to matter.

A

1) homogeneous
2) fewer
3) Sector specialization

43
Q

_______ is the only fund strategy that significantly affects successful implementation: funds with predominantly _____ positions are more successful at implementing their VCPs.

Why is it so?

A

1) Minority ownership

2) minority

3) Possible explanation for this may be that funds with minority positions involve less ambitious, thus more achievable goals.

44
Q

Vintage-year effects are significant, underscoring the importance of the _____ in successful VCP implementation and thus the role of ____ in VCP implementation.

At the PE firm-level, successful implementation also correlates significantly with _____ and ____

A

macro environment

luck

fund focus

minority ownership.

45
Q

Plan revisions

A

Introduction of a new action item after holding period’s first year

46
Q

What percentage of sample deals experience plan revisions?

What is the most common action item (% of deals)

Other common elements

A

77%

Cost reduction 31%

Capital structure optimization and CEO change

47
Q

What is key for achieving high returns for investors?

Why is that?

A

Successful Implementation of Strategies.

Because it is more important to see ex post (achieved) than ex ante (planned) strategy

48
Q

Is there a certain strategy that is most associated with higher/lower returns?

Or is there a certain number of strategies best to implement?

Or on what do returns depend on?

A

1) no

2) no, broad and focused strategies work

3) how the strategies are combined

49
Q

When is successful implementation of action items of the VCP more effective and less effective in delivering good returns?

Why?

A

1) most - growth, buyout and secondary deals

2) least - early stage deals because risks are more idiosyncratic

50
Q

MOIC and what does it measure?

A

Multiple on Invested Capital => returns on invested capital (with multiples more than 1 indicating profitable investment)

51
Q

____out of the planned (ex-ante) 32 strategy combinations have predictive power for PMEs: ___ predict higher than average returns and ___ predict lower than average returns.

What are they?

A

1) four

2) two and two

  • The highest returns (PMEs) are predicted by VCPs that plan to combine top-line growth, governance engineering, and financial engineering.
  • The lowest returns (PMEs) are predicted by VCPs combining operational improvements and governance engineering
52
Q

Why strategic reporting is unlikely to be an issue for PE?

A

1) quarterly reporting

2) monitoring by the EBRD

53
Q

What company level changes positively correlate with investor returns

A

Increase in Sales, EBITDA, Employment and Capital Intensity

54
Q

What changes are not associated with higher returns?

A

Governance Engineering, Financial Engineering, Cash Management

55
Q

Most popular action items in a VCP

A

• Buying/upgrading assets
- Changing product/ service mix
• Pursuing M&A deals

CAIA L2 (24 decks)

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