class 7 powerpoint

Question 1

what drives the magnitude of risk (beta) estimate among acquisitions?

Answer 1

Returns

the correlation of the frequency of observed new financing with market returns

not greater frequency of acquisitions

Question 2

Selection bias

Answer 2

occurs when an empirical study limits itself to survivors and rules out the firms that ceased to exist

Question 3

the Heckman correction

Answer 3

a procedure that addresses selection bias

Question 4

what could a survival clause indicate?

Answer 4

that the representations made by the seller survives for a short period of time after the deal

Question 5

what does the Delaware Chancery Court rule about the survival clause?

Answer 5

rules that the survival clause poses limitations on the ability of buyers to take legal action on the grounds of breach of contract

Question 6

A representation and warranties insurance stands for what?

Answer 6

stands for a product that protects from losses stemming from survival clause (note: PE buyers may need to syndicate larger policies across several insurance firms)

Question 7

Reverse breakup fees

Answer 7

could exist in a contract between a private seller and a PE buyer

the latter is induced to secure debt so as to complete the deal

Question 8

PE funds are normally run by whom

Answer 8

by a general partner, the PE firm, and a number of investors and or limited partners

Question 9

Most favoured nation agreements

Answer 9

special rights of information, larger funding, or kickstart initial investment

Question 10

Committed capital

Answer 10

composed by lifetime fees and investment capital, is the money provided by the limited partners

Question 11

Carried interest

Answer 11

earned from gains on the transactions conducted by the GP

Question 12

A hurdle rate

Answer 12

stands for a threshold rate of return applied to the committed capital that must be met prior to any compensation paid to the GP (e.g., a typical 6% hurdle rate on a $100m investment entails $106m paid back to the limited partners)

Question 13

Carry level

Answer 13

the percentage of the applicable profits (i.e., the post-hurdle rate profits) used to compute the GP’s earnings

(e.g., 2/20 is a 2% fixed rate and a 20% variable component of a 20% carry level)

Question 14

Carry timing

Answer 14

GPs get some early profits

Question 15

Clawback provisions

Answer 15

enable limited partners to recover from GPs part of losses stemming from poor performance via repayment of early paid profits to GPs

Question 16

Monitoring and transaction fees

Answer 16

complete the variable compensation to GPs

Question 17

Club deals or consortium deals

Answer 17

the stock acquisition by a PE fund of a target firm individually or via a combination with other PE firms

losing ground because a participating PE firm has to deal with the other owners

Question 18

what does a joint bidding by PE consortiums cause?

Answer 18

fosters competition, not collusion

Question 19

Strategic buyers

Answer 19

corporations which perceive a target firm as complementary to their overall business strategy

Question 20

A sponsor-to-sponsor deal

Answer 20

takes place when one PE firm sells a previous acquisition to another PE firm

Question 21

when does a public offering occur?

what does this depend on?

Answer 21

when a PE firm sponsors a public offering for its shares

such a path depends on the IPO market and equity market conditions

Question 22

Dividend recapitalization

Answer 22

happens when newly acquired firms issue debt that serves as dividends to the PE fund investors

Question 23

buyout leverage ratios have been trending upwards or downwards for the past years?

Answer 23

upwards

Question 24

Private Equity Return

Characteristics

Answer 24

From the viewpoints of competition and maturity, performance persists during low competition periods,

–> this is hardly apparent in periods of high competition

Question 25

what caused a performance persistence reduction for buyout fund GPs?

Answer 25

the market growing maturity and competition

Question 26

Challenges of measuring PE fund performance

Answer 26

Low liquidity for the assets of PE funds, which entails volatility in the net asset value (NAV)

The precise performance of assets can only be known ex post (i.e., after the sale of all assets, which could be known in the long run only)

Question 27

GPs with strong interim performance ranks tend to do what?

Answer 27

raise a follow-on fund and a larger fund

Question 28

the effect of interim performance on fundraising ability is stronger for high or low reputation GPs?

Answer 28

low reputation GPs

i.e., investors more strongly update their priors about ability

Question 29

By using interim performance as unbiased reference, how do limited partners punish GPs for overstated performance?

Answer 29

by not providing capital to subsequent funds

Question 30

how to find the value of the investment at the end of timespan (VE) formula

Answer 30

VE = (VB * (1 + rIRR)^(TD/365)) + E(CFi * (1 + rIRR)^(ti/365))

VE: Value of the investment at the end of timespan

VB: Value of the investment at the beginning of timespan

CFi: cash flow at the end of period I

i: number of periods since the beginning of timespan

IRR: annualized internal rate of return

ti: number of days from CFi to the end of timespan

TD: number of days covered by the whole timespan

Question 31

formula to find RIRR

Answer 31

RIRR = (1+rIRR)^(TD?365) - 1

RIRR: non-annualized internal rate of return

TD: Number of days covered by the whole timespan

rIRR: annualized internal rate of return