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VC test 1(questions with correct answers)graded A+
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VC test 1(questions with correct answers)graded A+
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VC test 1general themes of private equity (5) - correct answer ✔✔illiquid market, asymmetric info, incentives,
cyclical, reputation capital
illiquid market - correct answer ✔✔long-term relationship; hard to enter/exit
asymmetric info - correct answer ✔✔1 party has more info than another unlike public equity
incentives - correct answer ✔✔(contracts) how do we make it so that party A is not taking advantage of
party B-->different goals
cyclical - correct answer ✔✔can't really time it
reputation capital - correct answer ✔✔how you have dealt with clients/investors/companies; funds
you've gone through
what falls under the private equity umbrella? - correct answer ✔✔venture capital and buyout (LBO)
venture capital - correct answer ✔✔find the next best company
buyout (LBO) - correct answer ✔✔publicly traded established firms that are mismanaged and put
themselves up for sale; (leveraged: debt involved to buy something out)
General partner (8) - correct answer ✔✔management company for the fund; has discretion over fund
investments; legal entity usually made up of several professionals; typically incorporated (as opposed to
unlimited liability); establishes the objective of the fund; has expertise in fund's investment focus; may
invest "own" money in fund along with Limited Partners (reduces agency problems but what if they are
constantly using own money for best deals); not regulated like mutual fund
, limited partners - correct answer ✔✔institutional investors with a long-term investment horizon (don't
need the money tomorrow)
examples of limited partners (7) - correct answer ✔✔endowment fund; pension fund; insurance
companies (but might be highly regulated and have to have enough liquid assets); wealthy individuals;
corporations; gov't; foundations
examples of target/portfolio companies (4) - correct answer ✔✔startup (needs financing); mismanaged
company (sometimes LBO's are an employee initiative); poorly capitalized firm (how company is
structured-->cash to debt-->have a lot of cash on hand); public now but wish to go private
why do GPs need LPs? - correct answer ✔✔money
why do LPs need GPs? - correct answer ✔✔avoid having to manage the fund; less liability (least cited
answer); no knowledge
why do target companies need GPs? - correct answer ✔✔*they have expertise*; banks are risk averse +
laws against equity investment; banks would charge too high of interest rates
what contracts are needed? - correct answer ✔✔LP-GP contract; GP (fund)- target company contract
(term sheet); equity issuance (common stock? preferred, convertible, participating convertible?)
what is the first thing hammered out in LP-GP contract - correct answer ✔✔compensation (fees-
management, and *carries*); transparency
what does 2 + 20 (20/80) mean? - correct answer ✔✔carried interest; most common fee structure:
2=management fee (GP will charge 2% of managed fund part goes to salaries); company gives away 20%
of all its profits; 20% of that goes to GP and 80% goes to LP
clawback provisions - correct answer ✔✔times when fund has lots of early successes and firms sold off
and rest of stuff tanks in value (market changes) you as LP want to take back fees previously paid to GP if
they took more than 20% if early profits
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