Lecture 18

Question 1

What’s the basic equation?

Answer 1

Capital + talents & ideas = venture

Question 2

who is a general partner in a PE firm?

Answer 2

The Private Equity Firm itself

Question 3

who’s the limited partners?

Answer 3

investors (pensions, sovereign wealth funds, FOF, insurance companies, endowments, foundations, high net worths

Question 4

Who makes up private equity fund itself?

Answer 4

PE firm and limited partners

Question 5

what are two aspects of VC?

Answer 5

Investments in early stage companies; account for a majority of investments by number of deals

Question 6

what is the committed capital of a fund?

Answer 6

total amount of capital promised by LP’s over lifetime of fund

Question 7

when is a fund said to be closed?

Answer 7

when the GP has raised the full amount of committed capital and is ready to start investing

Question 8

what is the investment period or commitment period?

Answer 8

typical fund will invest in portfolio companies and drawn down capital over its first five years; after investment period is over, can make follow-on investments in current portfolio companies

Question 9

what does a PE firm serve as to a fund?

Answer 9

General Partner to a PE fund(s)

Question 10

Define a VC fund more specifically?

Answer 10

limited partnership with a finite lifetime (usually ten years plus optional extensions of a few years) between GP and investors (limited partners)

Question 11

PE funds are structured as what legal entities and governed by what?

Answer 11

structured as a limited partnership and governed by the limited partnership agreement (LPA)

Question 12

what does the LPA specify?

Answer 12

key terms of partnership

Question 13

what is a management fee?

Answer 13

annual payment to GP for PE firms investment operations (usually 1-2% of committed capital per year)

Question 14

What is the formula for investment capital?

Answer 14

committed capital - total management fee

Question 15

what is carried interest?

Answer 15

share of profits of funds investments, paid to fund’s management company as performance incentive

Question 16

what is a hurdle rate or preferred return?

Answer 16

minimum rate of return, which must be achieved before fund manager can recieve any carried interest payments

Question 17

what is a catch up?

Answer 17

when there is a preferred return, GP can demand a catch up before the 80:20 split of profit

Question 18

are PE funds intended to be transferred or traded?

Answer 18

no - if LP wants to sell his stake, he needs the consent of GP and other LP’s

Question 19

what are some examples of covenants on GP?

Answer 19

restrictions on size of investment in any one firm; restrictions on debt use; restrictions on investments in other asset classes