Tutorial 8 Flashcards
Strategic Asset Allocation
Long-term targets of the portfolio concerning risk and return.
Tactical asset allocation
Stipulates the degree of liberty to divert from the strategic asset allocation to capitalize on temporary market inefficiencies or account for relevant changes in the overall context.
What is the ex-post problem in PE?
We obtain relevant information only when the fund is mature and the market is not liquid anymore.
Systematic risk
- arises from the effects of the market or economy. Cannot be reduced through diversification.
Unsystematic risk
- arises from firm or industry-specific conditions. Can be reduced by diversification.
What is a co-investment?
Syndication of a financing round between a private equity fund and one or more of its limited partners.
Pros of co-investment
- unites complementary capabilities (financial resources and technology knowledge) –> reduced information asymmetry
- LPs do not have to pay carried interest and management fees –> enhanced return profile
- Allows for faster investments where fund raising is difficult
When is there outperformance of co-investments over fund returns?
If LP builds portfolios of co-investments to regain benefit from diversification and negotiate favorable terms to gain fee advantage. Otherwise not.
When do GPs offer co-investment opportunities
- deals are too large for the fund
- GPs want to gain favor with LP before raising a follow-on fund
- GPs are less experienced in established PE industry
Is there adverse selection of co-investments?
No. The assets that GPs offer to LP for direct investing are not different from other investments in the same fund.
Does previous relationship determine relative performance of co-investmetns?
No
Is a large syndication size good for the performance of fund?
No. It has a negative effect.
