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Venture Cap/Private Equity Test 1 questions n answers rated A+
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Venture Cap/Private Equity Test 1 questions n answers rated A+
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Venture Cap/Private Equity Test 1General themes of PE - correct answer ✔✔1- Illiquid
2- Asymmetric Info
3- Incentives (contracts)
4- Cyclical
5- Reputational Capital (repeat funds I, II, III etc.)- hard to break into the industry
What falls under "Private Equity" umbrella? - correct answer ✔✔Venture Capital
LBOs- debt focused usually public co. that has failed that should private
General Partner - correct answer ✔✔- runs fund
- needs LP money
- management company for the fund
- has discretion over fund investments
- usually made up of several professionals
- typically incorporated
- establishes the objective of the fund
- has expertise in fund's investment focus
- may invest own money in fund along with LPs
day to day management of fund
Limited Partners - correct answer ✔✔- investors, need GP because doesn't have time, resources, or
expertise
- Institutional investors with a long-term investment horizon such as foundations, pension funds,
endowments, wealthy family trust., wealthy individuals (rarer) and corporations
,Target/Portfolio Companies - correct answer ✔✔- startups needing financing
- mismanaged firms that need a turnaround strategy
- undervalued firms/poorly capitalized
- firms that are public that wish to go private (LBOs)
LP - GP contract - correct answer ✔✔compensation (mgmt fees, % of profit)
GP (fund) - company contract (term sheet) - correct answer ✔✔Preliminary agreement between GP and
the portfolio company. Details the ownership stake being made, seats on the board, equity stake.
Equity Issuance - correct answer ✔✔Common stock, preferred, convertible
Carried interest "the carry" - correct answer ✔✔profit for GP
Hurdle rates - correct answer ✔✔rate you must meet then start 80/20 split
- min rate that will trigger LP getting paid
Clawback provision - correct answer ✔✔requires the manager to return any periodic incentive fees to
investors that would result in investors receiving less than 80% of the profits generated by portfolio
investments as a whole
How does the PE fund manage their investment risk? - correct answer ✔✔- due diligence (pre-
investment): the better your team is at doing this, the better
- large ownership stake (@ time of investment transaction)
- active monitoring role: board membership (post investment) , advising management, contracts in
industry
Vintage Year - correct answer ✔✔When fund closes and makes its first investment
Benefits of PE Investment - correct answer ✔✔- low positive correlation with traditional returns
, - if they need to beat market, you need to make more than other players
- diversification for LP from everybody else
Why little competition from banks? - correct answer ✔✔banks don't have expertise in valuing intangible
assets
Typical fund life - correct answer ✔✔typically 10 year lives (sometimes 2 year extension)
Portfolio companies exit through... - correct answer ✔✔IPOs or Sale (or liquidation- sell at loss)
At end of life what do investors get? - correct answer ✔✔Investors get distributions of cash or shares of
remaining portfolio companies at end of life.
Pre WW2 - correct answer ✔✔- very wealthy families made money on different things
- concentration of wealth
- coal was dirty
- wailing industry became huge- cleaner burning fuel than coal especially for lights
Post WW2 - correct answer ✔✔- GI Bill: people began going to college, becoming educated and
economy got better as well as tech
ERISA (Employee Retirement Income Security Act) - correct answer ✔✔pensions can now invest in PE
- diversification for endowments- % in high risk and lower risk by diversifying
Prudent Man Rule - correct answer ✔✔if you can invest prudently, then you can invest in PE, allowed to
diversify now PFs in all 50 states can invest in PE
VC as a cyclical industry - correct answer ✔✔- when VC is hot and savvy investors come first then less
savvy investors come in then bubble, over-invested - now they will deploy money to crappier companies
because best companies were taken ("bad investments")
- b/c of obligation to invest
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