L2 Private Equity Investments Quiz

In a buyout transaction, which of the following would likely decrease if there’s a market weakness in Collateralized Loan Obligations (CLOs) and Collateralized Debt Obligations (CDOs)?

In the context of private equity firms, which of the following statements most accurately describes the main sources of value creation?

In private equity arrangements, why are noncompete clauses often imposed on founders?

Considering the role of in-house staff in private equity firms, what major contribution do these industry experts provide?

A private equity firm is considering investing in a start-up tech company in the AI sector. Which of the following statements would be the least likely consideration for the firm when conducting its due diligence?

A mature biotech company is being auctioned off for a potential buyout. It has a substantial asset base and a high amount of debt. If a private equity firm is considering purchasing this company, which valuation method would likely be most suitable?

Which of the following is least likely to be a reason for the reduced scalability of Venture Capital (VC) firms compared to Buyout firms?

Petal Capital, a private equity firm, is looking into a possible LBO of Flora Inc., a company with a market cap of $150 million. The transaction will be financed by 60% senior debt, 30% preferred equity, and 10% common equity. The preferred equity is guaranteed an 8% compound annual return. The LBO is expected to be exited in 7 years at a projected multiple of 2x the initial cost. How much of the exit value would be attributable to preferred equity, assuming the promised compound annual return?

A company named BlueLine Enterprises was purchased through an LBO transaction. Below are the figures from the LBO Model.

Based on this data, what was the payoff multiple for the equity investors?

Assume that the LBO firm Bonanza Capital acquires a company called OrbTech for $300M. The financing structure comprises of $180M of debt, $90M of preferred shares and $30M of common equity. The preferred shares are guaranteed a 10% compound annual return payable at exit. The LBO firm expects to exit in 5 years at a projected multiple of 2 times the initial cost. How much value will be attributable to common stockholders at exit, given that the company is expected to pay down $20M of the original debt each year?

The PE firm Castleton Ventures is considering an LBO of a company, StoreCo, with a current market valuation of $150M. StoreCo has consistently generated annual cash flows of $20M and has $40M of unencumbered physical assets. StoreCo is an inefficiently managed company with a lot of potential for improvement. Based on these details, how likely is it that Castleton Ventures would consider StoreCo a good LBO target?

You are a financial analyst at a private equity firm and have been presented with three potential LBO targets. Each has the following characteristics:

• Firm A: High debt to equity ratio, inefficient management, stable cash flows
• Firm B: Low debt to equity ratio, efficient management, fluctuating cash flows
• Firm C: Medium debt to equity ratio, inefficient management, stable cash flows

Based on the LBO model characteristics, which firm would be the best target?

ABZ Tech, a high-tech startup, is seeking $20M in venture capital investment. The VC firm expects an exit value of $500M with an ROI multiple of 15 times. If there are currently 8M shares outstanding, what should be the price per new share issued to the VC firm?

Assume CleanTech Energy, a renewable energy startup, wants to raise $10M from VC investors. The firm anticipates an exit value of $250M and the VC investors expect an ROI of 20 times. CleanTech has issued employee stock options convertible into 1M shares. If the existing shareholders hold 6M shares, what is the fractional ownership of the VC investors after funding on a fully diluted basis?

Consider ABC Biotech, a bio-engineering start-up, that issued 2M shares (40% stake) to VC investors in series A for $10M. One year later, the company issued 3M new shares to series B investors for $25M. If there are no other dilution events (e.g. options, convertible notes), what is the fractional ownership of series A investors after series B funding?

A high-net-worth individual with a diverse portfolio of public equity investments is considering investing in a private equity fund. Which of the following risks unique to private equity investment is likely to have the greatest impact on this individual’s portfolio?

A private equity firm is deciding whether to sell a portfolio company through an IPO or a secondary market sale. Assuming all other factors are equal, which of the following could make a secondary market sale more attractive to the private equity firm?

Which of the following is NOT typically a cost incurred by a private equity firm?

A PE fund has a ratchet provision. How does this provision influence the allocation of equity between the stockholders and management of the portfolio company?

Consider a scenario where a PE fund has a committed capital of $50 million. The fund has made two investments: Investment A was $30 million and Investment B was $20 million. Investment A exited at $45 million and Investment B exited at $15 million. Given that the fund uses a European Waterfall distribution method, and the carried interest rate is 20%, what is the total amount of carried interest received by the GP?

A Limited Partner wants to leave the private equity fund before the specified redemption period. What would likely be the case?

A co-investment provision in the fund’s agreement:

An LP is considering an investment in a private equity fund that has a stated life of 10 years. However, the LP is only interested in a 7-year investment. What should the LP be aware of in this situation?

The net asset value (NAV) of a private equity fund does NOT take into account which of the following?

In evaluating private equity funds, why might it be misleading to compare the internal rate of return (IRR) of different funds based on their current values alone?

For a PE fund, what does a high DPI and a low RVPI typically indicate?

Which of the following issues is NOT a drawback of the Internal Rate of Return (IRR) when used as a performance measure for private equity (PE) funds?