4 Private Securities Flashcards
annual compounded return for an LBO
rate that equates the compounded initial equity investment to the amount of total cash flow after all debt has been repaid
Merchant banking:
Merchant banking involves the purchase of non-financial institutions by financial companies (as opposed to acquiring or merging with other banks). It is closely related to buyouts.
Buy out vs Buy in
Management buyouts (MBOs) are led by the target firm’s existing management.
Management buy-in (MBI) since an external management team will be replacing the existing management team and running the company.
What are the principal considerations in redemption rights?
Principal considerations in redemption rights are -
1. Redemption triggers
2. Default remedies (i.e., III in the list in the question)
3. Redemption value
4. Sources of funds
What is a typical underwriting fee for listing a special purpose acquisition corporation (SPAC) as percentage of IPO proceeds?
5.5%
What is a replacement capital strategy?
A replacement capital strategy (also called secondary purchase capital) involves acquiring a company’s shares from another private equity organization.
The time-based redemption trigger used by growth equity investors is typically set at how many months after the original issuance date?
60-66 months
SPACs must deposit at least ___% of their IPO gross proceeds in an escrow account (III), and they must complete acquisitions with an aggregate fair market value of at least ___% of the IPO account value (II).
SPACs must deposit at least 90% of their IPO gross proceeds in an escrow account (III), and they must complete acquisitions with an aggregate fair market value of at least 80% of the IPO account value (II).
Which of the following are the typical SPAC unit price, warrant strike price and warrant term, respectively?
$10, $11.50, 5 years
What is the kind of fee that GP and Investment Advisor receives?
GP - Incentive Fee
Investment Advisor - Management Fee
3 stages of the PE fund manager-investor life cycle:
1) entry & establish; 2) build & harvest; and 3) decline, exit, or transition.
When are management fees charged?
Once limited partners (LPs) sign the subscription agreement to invest in the fund (which is typically before the LPs have contributed capital to the fund).
Management fee based on invested or committed capital?
Based on committed capital during the investment period (and based on invested capital after the investment period).
What are the two perverse incentives for GPs when it comes to the preferred return (hurdle rate)?
- Excessive risk-taking - GPs may take on undue risk to try to exceed the preferred return.
- Gaming timing of investment realizations - GPs may optimize the fund’s long-term multiple or optimize the spread of the (short-term) IRR over the hurdle rate.
Diller and Herger (2009) use the number of vintage years and annual private equity fund commitments to show that the loss of invested capital in private equity funds can be reduced to zero by diversifying across:
15 funds over 3-5 vintage years.
