The Environment Of Alternate Investments

Question 1

Good leaver clause

Answer 1

Allows LPs to liquidate a partnership under certain conditions

Question 2

Bad leaver clause

Answer 2

Allows GP to be replaced if certain bad predetermined metrics are meet

Question 3

Qualified majority

Answer 3

More than 75% of LPs voting to make a decision (ie to remove a GP)

Question 4

3 constraints against achieving alternative investment benefits through liquid products are:

Answer 4

1. Illiquidity restraints
2. Regulatory constraints on concentration
3. Leverage-mutual funds are limited to borrowing against no more than 33% of their assets

Question 5

Two roles PE firms play in a partnership are ___
Management fees line up with these 2 roles by ___

Answer 5

1. General partner (GP) to partnership
2. Investment advisor

Finding the day-to-day expenses of the general partner, while the incentive fee compensates them as an investment advisor on a performance basis

Question 6

___ are typically the least likely to be classified as an outside service provider to a fund.

Answer 6

Arbitrageurs

Question 7

Differences between typical PE fees and hedge fund fees include
1) hedge fund fees are ___ while PE fund fees are usually collected at the ____.
2) hedge fund fees are based on changes in net asset value whether the gains are ___. PE fund fees are based on realized values of ___.
3. Hedge fund incentive fees___.
4. Investor capital does not ___
5. Hedge funds often have no provisions __
6. Hedge funds rarely have a preferred __

Answer 7

1. Front loaded; termination of deals
2. Realized or unrealized; exited positions
3. Are collected on a regular basis, either quarterly or semiannually. PE fund incentive fees tend to be collected at the time of an event, such as an exit.
4. Need to be returned first to collect incentive fees in a hedge fund. PE funds typically do not distribute incentive fees until the original investor capital has been repaid.
5. For the clawback of management or incentive fees. PE funds typically have clawback provisions requiring the return of fees on prior profits when subsequent losses are experienced.
6. Rate (hurdle rate) of return (ie 6%) that must be exceeded before the hedge fund manager can collect an incentive fees on prior. Most PE funds have a hurdle rate.

Question 8

A VC fund manager’s management fee is based on the ___, not on the amount of raised capital that is actually invested in startups.

Answer 8

Commuted capital for their VC fund.

Question 9

3 alternative co-investing structures

Answer 9

1) LP invests directly into one or more of the portfolio companies of the main fund
2) 1 or more LPs use a GO-controller fund created apart from the main fund
3) making investments in co-investment programs in which the specific investments are identified and decisions of whether to co-invest are made on an ongoing and deal-by-deal basis

Question 10

Why might it benefit a GP to engage in a co-investing strategy?

Answer 10

1) can allow GP to make larger investments without dedicating too much of main fund’s capital to a single transaction
2) increase diversification benefits

Question 11

Research has found that ___ have significantly outperformed ___ and industry standard benchmarks. Co-investments may be associated with ___ -risk deals.

Answer 11

Direct investments; co-investments; higher

Question 12

Co-investments are viewed as leading to a reduction of the ___ and improved ___ and returns.

Answer 12

J-curve effect; deployment