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EQUITY OF THE PRIVAT KIND > SESSION 1 > Flashcards

SESSION 1 Flashcards

1
Q

the 2 forms of compensation that GPs receive

A

management fees + carried interest (carry)

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2
Q

paid based on committed capital because at the beginning of a fund’s life, the main workload is for the GPs to search and identify potential investments

A

management fees

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3
Q

a profit sharing arrangement that serves to align GP and LP interests

represents the share of profits generated by the fund that accrues to the GPs

A

carried interest (carry)

80% / 20 % structure is typical
20% goes to GPs

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4
Q

the maximum pledge of capital by LPs to a PE fund

A

committed capital

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5
Q

the amt of capital called by the GPs as investments are identified and funding is required for them

A

contributed capital

also known as: capital call, takedown, or drawdown

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6
Q
  • contributed capital less management fees

- the amt of capital that is actually invested by the fund that can grow and produce returns

A

invested capital

( bc mgmt fees are used to pay the GPs salaries and admin Exp, those monies accrue to the GP and are not invested in portfolio companies )

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7
Q

the cumulative amt of contributed capital since fund inception

A

paid in capital

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8
Q

defines the priority of payments between GPs and LPs

A

waterfall agreement

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9
Q

GPs to not receive any carried interest until the LPs have been paid back the entirety of their capital contributed to the fund

A

make-whole (whole fund)

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10
Q

determines the amt of carry based on the amount of capital contributed to a specific deal

A

deal-by-deal

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11
Q

LPs are primarily interested in the fund performance net-of-fee-and-carry basis

A

net-of-fee

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12
Q

net ____ and net _____ are calculated based on cash flows to LPs

A

IRR ; TVPI

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13
Q

time weighted return that acocunts for the timing of the amount of capital calls

A

net IRR (internal rate of return)

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14
Q

sum of distributions to date plus the remaining undistributed vaklue of the funds assets divided by paid-in capital

A

net TVPI (total value of paid in cap)

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15
Q
  • used to measure income to GPs
  • paid up front and carry from distributions arise later in the fund life
  • asseses the time weighting of the up front fees and the back end carry
  • requires a discount rate to complete the calculate (assume 15% per yr)
A

NPV (net present value)

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16
Q

commited capital, mgmt fees, LPs share of profits, GPs share of profits are all _______

A

assumptions

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17
Q

capital calls, payment of management fees are events that occur at the ____ of year

A

beginning

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18
Q

cash flows, distributions from exits, payment of preferred return are events that occur at the ____ of year

A

end

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19
Q

performance metrics are measured beginning w the year of the fund’s inception

A

SI (since inception)

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20
Q

the year of the fund’s inception is known as its _____ _____

A

VY (vintage year)

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21
Q

time weighted return that accounts for the timing of the amount of the capital calls

A

NPV (net present value)

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22
Q

used to measure income to GPs

A

IRR (internal rate of return)

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23
Q

an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange

*includes VC and buyout funds

A

private equity

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24
Q

_____ _____ is a critical component of modern finance

A

private equity

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25
Q

illiquid investments in equity of an operating company that is not publicly traded on a stock exchange

A

illiquid investments

26
Q

terminology used for companies are under direct ownership of a PE investment firm

A

portfolio company

27
Q

____ provide working capital to the portfolio company to nurture expansion, new product dev, or restructuring of the company’s operations, mgmt, or ownership

A

investments

28
Q

____ _____ rarely invest directly in portfolio companies. instead they place their capital with PE firms that act as appointed managers betw the _____ _____ and the portfolio companies

A

pension funds ; xx

29
Q

private equity funds are organized as ____ ______ are are formed and managed by management companies which are formed by the GPs of each limited partnership

also governed by the terms set forth in the LPA

A

limited partnerships

30
Q

2 advantages of structure

A
  • limited liability to investors (investors liability is limited in that they can lose no more than the sum of their total investments)
  • pass through taxation (income generated from the partnership is taxed only once as it flows to the partners)
31
Q

private investment vehicle that permits investors to pool their capital for investment in portfolio companies

A

PE fund

32
Q
  • managers of the day-to-day operations of the private equity fund
  • manage relationships w investors
  • manage portfolio companies
  • operate w advisory committees (AC)
  • report to LPs
  • typically invest 1% in the fund which provides tacit assurance that they have a significant stake in the fund
A

GPs

33
Q

investors in PE funds

  • they do not influence day to day ops of the fund as doing so would cause them to lose their limited liability status
  • they receive quarterly statements relating to portfolio companies receiving investment, capital deployed to date, investment returns + other matters
A

LPs

34
Q

monitors the fund’s activities

A

advisory committee

35
Q
  • have legally bound limited lifetime

- typical lifetime of PE fund is 8-10 yrs

A

life limited entities

36
Q

the period of time for which PE firms hold a portfolio company

A

holding period

37
Q

companies that are not publically traded; hence there is no liquid market (valuation is uncertain)

A

illiquid

38
Q

an event through which investors exit an investment. the event could be an IPO, private sale or merger

A

liquidity event (harvest)

39
Q

desirable characteristics of an LP

A
  • has been w fund for a long time
  • understands PE cycles
  • understands PE time frame
  • responds quickly to capital calls
  • brings connections and contacts
  • brings a marquee name
40
Q

memorializes the relationship between the GPs and the LPs and the provisions govern

  • lifetime of the fund
  • management fees
  • expense reimbursements
  • split of profits from exits
  • sequence of distribution from exits
  • extensions
  • coinvestment
A

LPAs (limited partner agreements)

41
Q

investors in PE funds

A
  • pension funds
  • foundations
  • uni endowments
  • corps
  • banks
  • insurance companies
  • sovereign wealth funds
42
Q

4 stages of a funds lifetime

A
  • organization/fundraising (formulate fund strategy and promote funding) YEARS 0-1.5
  • investment (originate deals and acquire companies) YEARS 1-4
  • management (manage portfolio companies to increase value) YEARS 2-7
  • harvest (exit through IPO or direct sale or liquidation) YEARS 4-10
43
Q

fund promotions generally are accomplished through =

A

reputation, follow on investors, networking

44
Q

once GPs raise sufficient funding that reaches their minimum target level

A

fund closing

some funds have 2 closings: “first” and “second and final”

45
Q

3 models of deal sourcing

A
  • rolodex model
  • cold calling
  • hybrid marketing model
46
Q

investment teams are constantly in a fundraising mode

GPs will raise a fund on average every ___ to ___ years

A

2 1/2 ; 3

47
Q

fund raising for the next generation fund begins __ years after closing of prior fund

A

3

48
Q

most common investment strategies

A
  • LBOs (CASES: panera bread, hertz, toysrus)
  • VC
  • leveraged recapitalization (CASE: hertz)
  • growth capital (CASE: square)
  • mezzanine capital (CASE: robosoft)
  • secondaries (CASE: enfoca)
  • distressed investments
  • funds of funds
49
Q

refers to a strategy of making equity investments as part of a transaction in which a company, business unit, or business asset is acquired from the current shareholders typically w the use of financial leverage

  • companies involved in these transactions are typically mature and generate operating cash flows
  • different from VC in which those investors invest in young or emerging companies and rarely obtain majority control
A

LBO (leveraged buyout)

50
Q

a broad subcategory of PE that refers to equity investments made, typically in less mature companies, for the launch, early dev, or expansion of a business

  • most often found in the application of new technology, new marketing concepts, and new products that have yet to be proven
  • often subdivided by the stage of development of the company ranging from early stage cap (startups) to late stage + growth cap (used to expand existing business)
A

VC (venture capital)

51
Q

_______ ______ are done to refund the PE fund’s cap inv w the diff between the new and initial debt

*high risk

  • after LBO acquires a portfolio, it increases the initial lev of the acquisition
  • distributes the diff betw the new lev and existing lev
  • increase overall risk of LBO by reapplying lev during inv in portfolio co
  • distribution (payout) reduces GPs incentive to outperform the business plan
A

leveraged recapitalizations

52
Q

refers to equity investments, most often minority investments, in relatively mature companies that are looking for capital to expand/restructure ops or enter new markets or finance major acq w/o change of control of the business

  • companies that seek this will often do so in order to finance a transformational event in their life cycle
A

growth capital

53
Q

refers to subordinated debt or preferred equity securities that often represent the most junior portion of a company’s capital structure that is senior to the company’s common equity

*this form of financing is used by PE investors to reduce the amt of equity capital req to finance a LBO or major expansion

A

mezzanine

54
Q

often used by smaller companies that are unable to access the high yield market, allows such companies to borrow additional capital beyond the levels that traditional lenders are willing to provide through bank loans

A

mezzanine capital

55
Q

in compensation for the _____ ____, mezzanine debt holders req a higher return for their investment than secured or other more senior lenders

A

increased risk

56
Q
  • investments made in existing PE assets
  • provide institutional investors w the ability to improve diversification, particularly for investors that are new to the asset class
  • typically experience a diff cash flow profile
  • made through 3rd party fund vehicle, structured similar to a fund of funds
  • sellers of PE fund investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds
A

secondaries

57
Q

may be used by GPs to reach qualified investors

A

placement agents

58
Q

may be used by LPs to assist in allocating capital

A

gatekeepers

59
Q

capital available for investment

A

dry powder

60
Q

the amt, typically 1%, that GPs invest in funds in order to provide LPs tacit assurance that they have a significant stake in the fund

A

‘skin in the game’

61
Q

AUM

A

assets under management

EQUITY OF THE PRIVAT KIND (10 decks)

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